Novan, Inc.
Q3 2008 Earnings Call Transcript

Published: 24 Nov 2008

[Operator:]

Greetings, ladies and gentlemen, and welcome to Noven Pharmaceuticals Third Quarter 2008 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator instructions). And as a reminder, this conference is being recorded. It is now my pleasure to introduce your host Mr. Joseph Jones, Vice President of Corporate Affairs for Noven Pharmaceuticals. Thank you. Mr. Jones, you may begin.

[Joseph Jones:]

Thank you, operator. Good morning, everyone, and thanks for joining us. First let me begin by apologizing for the – starting off a few minutes late. We had technical difficulties with the phone lines and I wanted get that resolved before starting. Earlier today, we announced our financial results for the quarter ended September 30, 2008. On the line to discuss our results and answer your questions are Peter Brandt, Noven's President and CEO; Mike Price, our Chief Financial Officer and others from the Noven's senior management team. Before we begin, let me remind you that some statements today, including our guidance will be forward-looking. Those statements will be made pursuant to the Safe Harbor provisions of Private Securities Litigation Reform Act. Many factors may cause our actual results to differ significantly from the guidance and other forward-looking statements provided today. Please consider the risks and uncertainties and cautionary factors discussed in our press release and in our SEC filings. During the course of this call, we'll refer to certain non-GAAP financial measures, including adjusted net income and adjusted earnings per share. Please see our earnings release available at noven.com in the Investor Relations section for a reconciliation of these measures to their comparable GAAP measures and for an explanation of why we consider these measures useful. Before turning the call over to Peter Brandt, I would like to ask the operator if our signal is coming through load and clear.

[Operator:]

Yes.

[Joseph Jones:]

Very good. Thank you. Without further ado, I’ll introduce Peter Brandt, President and CEO.

[Peter Brandt:]

Thank you, Joe, and good morning everyone. Let's review the ground we plan to cover today. I will begin with an assessment of the third quarter and progress we've made since our last earnings call. Mike will then review third quarter results and will update our financial guidance. Then as we committed to on our last earnings call, we will review Noven's product development pipeline and we'll end the call with questions. So, let's get started. For the third quarter of 2008, we reported GAAP earnings of $0.21 per share compared to a GAAP loss of $2.38 per share in the third quarter of 2007. That wide disparity is due to special charges and other items that impacted the third quarters of both the years. Mike will detail these later in the call. Excluding these special items, we would have reported earnings of $0.24 per share in the third quarter of 2008 versus earnings of $0.30 per share in the third quarter of last year. Looking beyond the special items for a moment, let's review the performance of our core operations and the progress we've made in addressing our challenges and advancing our opportunities. Novogyne once again reported outstanding results and demonstrated solid growth for the quarter. As we've seen in recent quarters, substantial costs related to the Daytrana peel force issue including a $1.7 million charge for Shire's previously announced third quarter recall reduced our overall profitability. What is markedly different about this quarter, however, is that we've positioned the company to move forward with lower risk and less exposure on the Daytrana issue. In Q3, we established a $4.3 million reserve that we believe will cover all existing Daytrana products that may develop the peel force issue during its shelf life. We've also developed and are putting in place a new product release test that should screen out any new products that may be at risk of developing issues. These actions should substantially reduce our future product recall exposure as we work toward resolution of this issue in mid 2009. In other areas of our business, there has been no shortage of activity in progress. In the third quarter, we substantially improved our cash position, launched a new product Stavzor at Noven Therapeutics, signed a global license and supply agreements with P&G Pharmaceuticals, and made a key hire to lead our quality function. This quarter end, we began patient recruitment for our Phase II Mesafem study. And most recently, we have a new development to report regarding the future of our products in our pipeline, more on that shortly. On balance, we’re making progress in advancing our opportunities for growth and addressing the challenges that have constrained our profitability. Let's review our third quarter performance and recent activities in more detail. In Q3, the joint venture continued to demonstrate impressive growth in the key areas of its business. Compared to the third quarter of last year, the joint venture's net revenues increased 18%, its net income increased 25%, and Noven's equity and earnings of Novogyne increased 26%. Year-to-date, the JV's net revenues increased 20%, its net income increased 33% and Noven's equity and earnings of Novogyne increased 38%. An outstanding product is driving this growth. Total prescriptions for Vivelle-Dot increased 7% compared to the same quarter last year while total prescriptions in the overall hormone therapy market decreased 5%. Vivelle-Dot's share of total prescriptions in the transdermal estrogen market has grown from 54% in September of 2007 to 60% in September of this year. For the same period, Vivelle-Dot share of the much larger overall estrogen therapy market increased from 9% to 10%. Based on trends we see in Novogyne's business, we will be increasing our full year guidance for the joint venture later in the call. Now let's turn to our number one challenge, resolving the Daytrana peel force issue. As you know, this issue relates to the difficulties the consumers have experienced in peeling the release liner from certain Daytrana patches. Peel force refers to the force needed in the physical act of peeling the release liner off the patch, so the caregiver can then apply the patch to the patient's skin. This issue resulted in voluntary product recall by Shire in the second and third quarters of this year and in the third quarter of last year. As you know from prior updates, Noven and Shire believe we have definitively identified the root cause and the drivers that contribute to the peel force issue. We have also identified and are aggressively testing potential solutions designed to resolve the peel force issue. As we said on our last call, if our testing is successful, and we expect it to be successful, we would expect to produce commercial products incorporating a solution in mid 2009. Today, we are reporting a new very positive development in this area that should help mitigate our risk, clarify the expected financial impact and bridge us to the resolution of this issue. With Shire, we have developed and are implementing a predictive test intended to identify which lots of newly manufactured products will remain within the peel force specification over the product shelf life. Application of this test should substantially reduce the likelihood that newly manufactured products will be recalled in the future. With this new information, we established a $4.3 million reserve that we believe is sufficient to address our future cost associated with previously manufactured product that is at risk of recall. Although application of this new test will increase our cost of production, it should substantially reduce our exposure between now and the time we begin shipping new products in the mid 2009 timeframe. And most importantly, it should increase the likelihood that consumers will have a positive experience when opening and applying the product. And to that point, I would like emphasize that the peel force issue has not affected the availability of Daytrana at the pharmacy and it is not expected to affect availability going forward. So the patients who benefit from the flexibility offered by Daytrana should be able to continue therapy without interruption. There is another important development I wanted to make you aware of in our pipeline. As you know, under an agreement with Shire, we've been working to develop a patch that would address the amphetamine segment of the ADHD market. Amphetamine products such as Adderall XR, Vyvanse and others represent about a half of the large market for stimulant products used in treating ADHD. Methylphenidate products like Daytrana, Concerta and Ritalin represent the other half. There are currently no transdermal product serving the amphetamine segment but in fact – and in fact Daytrana is the only non-oral product in the entire stimulant category. Like Daytrana, an amphetamine patch would bring the benefits of flexible dosing and transdermal delivery to patients who need it. Noven's last update on this project was last year when we successfully completed a Phase 1 study and received an amphetamine development milestone payment from Shire. Since then, Shire has been considering its strategy for the progress. For some time now, we at Noven have judged this as a win-win situation for our company and our shareholders. If Shire were to proceed with development, an outstanding partner would be advancing Noven's product in their area of strength. If they choose not to proceed, product rights would revert to Noven and we would have the opportunity to develop and commercialize the product ourselves or sign up another partner. Yesterday, we've reached an agreement with Shire for the termination of the development agreement and the return of the product rights to Noven. We now have control of the project and the commercial opportunity and we couldn't be happier about it. Dr. Joel Lippman and Anthony Venditti are developing our strategy to advance this project and we look forward to updating you on this project on future calls. And there's also a notable financial component to this development. To date in keeping with our revenue recognition policy, we've deferred recognition of milestones and other payments received from Shire for the amphetamine project. With the Shire agreement terminated, the accounting rules require us to now recognize these amounts as revenue. Accordingly, we expect to recognize $7.2 million in additional license and contract revenues in the fourth quarter of this year. I couldn't ask for a better segue to Mike to give our financial review. Mike?

[Mike Price:]

Good morning. As Peter noted, there were a number of unusual items in the 2008 third quarter. We're really talking about three main items impacting Q3, all of which were excluded from non-GAAP EPS presented in our press release and described by Peter. The first item is the $5 million benefit to third quarter operating income. This represents the reversal of an accrual that was established last year with the future achievement of our Pexeva sales milestone. Management previously considered Noven's payment of this milestone to be probable resulting in as accrual at the time JDS was acquired in 2007. By its term, this milestone payment would be triggered if Pexeva annual net sales reached $30 million by 2017. Given current circumstances, including prescription trends, our sales alignment and strategies following the Stavzor launch, we no longer consider payment of this milestone to be probable. So in accordance with accounting rules, we reversed this accrual in the third quarter. Second item impacting Q3 is the $1.7 million charge related to Shire's recall of two lots of Daytrana that was initiated in the third quarter of this year. We announced that recall in an August 2008 press release. So, a charge for this recall is expected. What can be confusing is the fact that there was also a two-lot recall initiated in Q2 with a related charge of $1.95 million in the first half of the year. So, if you look at our nine months results, you'll see more than $3.6 million in charges related to historical Daytrana product recall, included primarily in G&A expenses. The third, and we think the most important item going forward, is a $4.3 million reserve established in Q3 intended to address our future costs for existing Daytrana product, which is at risk of future recall. As Peter noted, we believe this amount is sufficient to cover our exposure on this front. To analyze our Q3 results, you need to know how the aggregate $6 million in Daytrana charges is distributed on our third quarter income statement. So, here is the break out. $1.3 million was recorded as revenue reduction. $1.6 million is reflected in cost of product sold and the balance of $3.1 million is reflected in G&A expenses. Now on to third quarter highlights. Peter reviewed our earnings per share, both GAAP and non-GAAP adjusted, earlier in the call. Net revenues for the third quarter were $25.7 million representing an 18% increase over the third quarter of 2007. Working this down further, net sales of Pexeva and Lithobid for the quarter were $3.5 million and $1.4 million respectively. Stavzor net sales for the launched quarter were minimal as we indicated they would be with $1.4 million in gross sales being deferred in accordance with our revenue recognition policy. Gross sales of Daytrana for the quarter, up $3.1 million were impacted by the $1.3 million reduction related to the Daytrana charges resulting in quarterly Daytrana net revenues of $1.8 million. Gross margin as a percentage of total net product revenues was 23% in the third quarter of 2008 compared to 41% in same quarter last year. As noted, cost of product sold in Q3 included $1.6 million of the Daytrana charges as well as increased quality assurance cost, mostly related to Daytrana production. Without these, gross margin for Q3 would have been more than 40%. It’s important to note that future production cost of Daytrana will increase upon implementation of the new release test that Peter described. Product that has not passed the test will not be shipped substantially reducing our yield until we put the peel force issue behind us. Research and development expenses in the 2008 third quarter increased about $400,000 to $4 million. Of course, the third quarter of 2007, the $100.2 million IP R&D charge related to the JDS transaction. Selling and marketing expenses in the third quarter of 2008 increased to $7.3 million from $3.1 million in the third quarter of last year, reflecting a full quarter expenses of at Noven Therapeutics as well as the launch of Stavzor. G&A expenses increased $2.4 million or 27% reflecting $3.1 million of the Daytrana charges that I mentioned earlier. As Peter noted, Novogyne had an outstanding quarter permitting us to recognize $13.8 million in earnings of Novogyne in Q3, an increase of 26% over the same quarter last year. Novogyne's net income increased 25% to $28.3 million and net revenues increased 18% to 45.8 million, both of these are record results for the joint venture. Novogyne gross margin for the 2008 third quarter increased slightly to 81% and its selling general and administrative expenses increased 9% to $9 million. We strengthened our balance sheet substantially in the third quarter. In August 2008, we received the third and final $25 million milestone payment on sales of Daytrana by Shire. Also in the third quarter, Novogyne distributed $11.7 million cash to Noven bringing Noven's year-to-date cash distribution from the joint venture to $29 million. Even excluding the $25 million Daytrana milestone, Noven generated positive cash flow in Q3. At September 30, 2008, our cash and cash equivalents and investments in option rate securities had increased to $80.7 million. We have no long-term debt nor have we borrowed against our $15 million credit facility that we established earlier this year. During the third quarter, we liquidated an additional $2.1 million in an option rate securities all at par value, bringing total year-to-date liquidation for these investments to $39 million, all at par value. Now turning to financial guidance, there are a few components of prior guidance that we're updating today and others that we are affirming. Let's begin with net revenue. Our prior net revenue guidance for full year 2008 was $100 million to $105 million. We are adjusting our guidance to reflect among other things, the expected fourth quarter recognition of $7.2 million of deferred license revenue associated with the termination of the Shire amphetamine agreement, partially offset by the $1.3 million Daytrana revenue reduction that we reported in Q3. Our revised range for full year 2008 net revenues is $106 million to $109 million. We're reducing our gross margin expectations for full year 2008 from our previous guidance of the low 30% range to full year gross margin in the mid to upper 20% range primarily due to the Daytrana-related charged and higher production cost that we described. If we were to exclude the cost and charges incurred or that we expect to incur in 2008 for Daytrana and HD equipment malfunction, our overall gross margin for 2008 would be over 40%. This underscores the importance of addressing the Tight Release Issue, and looked at another way, is a significant margin opportunity that may present itself in the later part of 2009 and beyond. We are narrowing our guidance for full year R&D spending for 2008 from the mid-to-upper teens as expressed in millions of dollars to approximately $16 million. And we now expect our consolidated SG&A expense for 2008 to be approximately $60 million, up from our prior guidance of the upper $50 million range reflecting the $3.1 million in Daytrana-related costs that were charged to G&A in the third quarter of this year. As Peter mentioned earlier, we are increasing our expectation for growth in our equity and earnings of Novogyne. Based on prescription trends and other factors, we now expect to increase the Novogyne's contribution to be about 30% for full year 2008 compared to 2007. Our prior guidance reflected year-over-year growth in the low 20% range. That concludes our guidance for 2008 and we plan to provide financial guidance for 2009 by the time we announce our 2008 full year results. And with that, I will turn the call back over to Peter.

[Peter Brandt:]

Thanks Mike. I would like to take a minute and expand on one of the important points that Mike just made. While the application of the new Daytrana screening test will reduce our exposure on the Daytrana issue between now and when we ship the new product, it will also increase our production cost. It is clear from our revised gross margin guidance that we think these costs could be significant. We will be doing everything possible on operations to control these costs and improve efficiencies in Daytrana production as we address this challenge. The takeaway for 2009 however is that our core business has substantially higher margins than current results reflect. We have definitive plan and aggressive programs underway to address the issue weighing on our P&L. And once new product is shipping, scheduled for mid 2009, the P&L release and positive impact on our profitability should begin. Now let's begin the review of our product development pipeline that we committed to provide on our last earnings call. Noven continues to have valuable assets in its oral and transdermal development programs. These assets and the related opportunities are among the main reason that I and many other members of our management team joined this company. That said no one here, whether they joined ten days ago or ten years ago is satisfied with the historical productivity and success rate of Noven's pipeline, and we've taken aggressive action to improve on both fronts in this critical area. We've made major changes to the company's product development organization and processes that we expect will improve efficiency and productivity. First, we've changed personnel and organizational structure, including the appointments of Steven Dinh and Dr. Lippman to leadership roles in the R&D and clinical and regulatory areas. Second, we've improved focus through more effective project screening and evaluation. And third, we've implemented development process changes designed to give us earlier and more reliable data on our transdermal formulations without increasing overall cost. In my assessment, Noven's historical development process suffered from a lack of focus but that has changed. We've narrowed our focus to drive carefully screened projects across the goal line as opposed to diluting our resources across a large number of programs with none advancing at a satisfactory pace. A team comprised of Joel, Steven, Anthony Venditti and others have recently completed an objective pipeline screening process. As a result, we have placed a high priority on some projects and discontinued or de-prioritized others, all with the goal of enhancing shareholder value. Now let's begin a project-by-project pipeline review starting with our oral products. The first product in our review recently moved from the pipeline to the marketplace. As you are aware, the NDA for our Stavzor product was approved by the FDA in July of this year and was launched in August. Stavzor is indicated for the treatment of bipolar disorders, seizures and migraine headaches. It is therapeutically similar to Depakote but it is not AB rated to or substitutable for Depakote, nor are the available Depakote generic substitutable for Stavzor. How is Stavzor differentiated? Well, it’s 40% smaller than the highest and most commonly prescribed doses of Depakote and Depakote ER. Its small size and gel cap formulation make it easy to swallow with the potential to help patient compliance in a therapeutic category where compliance is critical. We’ve only had two months of data since launched, so it’s too early reach conclusions about the uptake of the product. But I can say that the launch took place as planned and on schedule and early market research indicates that our target positions are hearing and recalling the Stavzor message. As we have said before, 2008 is an investment year for the launch of Stavzor and 2008 revenues are expected to be minimal given launch timing and revenue recognition rules. Stavzor should become a more significant contributor to our business in 2009 and it represents a major step towards standalone profitability at Noven Therapeutics, excluding R&D investments during 2009. Next is Mesafem, our low dose oral paroxetine mesylate product in development for vasomotor symptoms associated with menopause or VMS. The pipeline screening process mentioned earlier identified Mesafem, which is no surprise, is our highest priority development project. Our market research confirms there is a significant need for a non-hormonal product like low dose Mesafem to help the millions of women who suffer from VMS but who are not candidates for or who have concerns about hormonal therapy. As we discussed on our last earnings call, Dr. Lippman and our clinical team have modified Noven's development strategy from the prior plan of moving directly into Phase III studies. Under the new lower cost, lower risk strategy, we're conducting a Phase II randomized placebo-controlled study evaluating Mesafem for VMS at doses lower than those currently approved for other paroxetine indications. While we believe that existing Phase II data are compelling and suggest that lower doses will be efficacious, there has been no clinical work to date done at doses below 10 milligrams. The purposes of our Phase II study are to demonstrate efficacy below 10 milligrams with possibly better tolerability than the higher doses. Patient screening for the Phase II study started in late October and enrollment activities are underway. We expect to complete the study by the end of 2009. If the study is successful, good Phase II data on a low dose product should put us in an excellent position to partner with another company for Phase III if we so choose. Moving on in the pipeline, Noven's project screening and evaluation team recently completed an objective and thorough evaluation of Lithium QD in the Stavzor ER projects. On the team’s recommendation, we no longer plan to fund additional development of either project. Recall that a pivotal Phase III study of Lithium QD initiated prior to our acquisition of JDS did not meet its primary end point and study results announced in Q4 of last year. The primary reason for failure was the insufficient Lithium blood levels. Our analysis indicates that product reformulation would be required in order to move forward with reasonable confidence of success. We are not prepared to address the cost and then to add the cost and introduce the risk associated with that reformulation, nor do we think it’s in the best interest of shareholders, particularly when other projects with better prospects are competing for finance resources. Stavzor ER is a product intended to be an extended release version of our recently launched Stavzor product. Just as Stavzor is therapeutically similar to Depakote, so would Stavzor ER would be therapeutically similar to Depakote ER. We have discontinued this early stage project because our current assessment of the risk of patent litigation outweighs our view of the commercial opportunity, particularly in light of the expected emergence of a generic equivalent to Depakote ER in the relatively near-term. The discontinuation of these two programs reflects the new commitment in Noven towards greater focus and more effective prioritization. Going forward, we will evaluate an opportunity quickly, thoroughly and objectively. If it meets our standards, we'll drive forward expeditiously with specific strategies, objectives, metrics and timeline. If it does not, we'll move on to the next opportunity assessing it with the same discipline and sense of urgency. Now before turning to the projects at our transdermal pipeline, let me address the question that I received several times since joining the company. What is the status of the three undisclosed partner compounds that Noven spoke of over the past several years? The short answer is of those three undisclosed compounds, two are continuing in development and one has been discontinued due primarily to market circumstances. Here are a few more specifics. Development of the first project continues with the same development partner as before having been delayed due to technical challenges. Development of the second project continues as well but with a new partner, due to technical challenges we faced in meeting a unique formulation requirement imposed by the initial partner. The third project has been discontinued, primarily due to significant challenges and the commercial opportunities for that product. As I'll cover shortly since that continuation, we've added a new collaboration so that company continues to have three undisclosed partner projects. Now let's review the current project in our transdermal pipeline. Currently, we're working to advance 12 to 16 transdermal projects. All are active projects but not all are assigned the same priority. Five of them are partnered projects. Two are in development with Procter & Gamble Pharmaceuticals. The first of these you know about, it is a low dose testosterone patch for hypoactive sexual desire disorder. And the second is a follow-on product for the same indication. Noven's role in the transdermal formulation and development of the testosterone patch is complete. In August, we announced the execution of a global license and supply agreement with P&G Pharmaceuticals for products in this category. Our agreements prevent us from going into more detail about the status of these projects but the selection of Noven by P&G certainly serves to confirm the value of our transdermal technology. Two of the five projects are the continuing programs mentioned earlier from the undisclosed programs that Noven has described in the past. One of these is a prescription product and the other is an OTC product representing the only OTC product currently in our development pipeline. For the reasons I mentioned earlier, both of these programs remain in relatively early stages of development. We continue to be constrained regarding what we can say on this programs due to continuing competitive and confidentiality concerns. The fifth partner project is a relatively new collaboration with the originator of our proprietary prescription compound. As so often is the case our partner is limited what we can say on this project. We can say that we believe our formulation is ready to enter initial PK studies and that if it is successful and advances, we'd expect our partners to pursue a 505(b)(2) development program. I'll also point out that one of the partner projects is in studies that could support registration. We have a number of internal unpartnered projects in our transdermal development pipeline all of which are in Phase I or earlier. Our areas of therapeutic focus include women health and CNS including psychiatric indications and given the amphetamine patch program ADHD. Our internal pipeline includes a life cycle extension program for Vivelle-Dot. I say program because we're investigating several different strategies in this area. The patents underlying Vivelle-Dot expire in 2014 and our target is to have a follow-on product available in advance of that event. We're not able to offer more at this time due to competitive concerns. Our internal pipeline also includes preclinical patch products in the CNS area that could be commercialized through Noven Therapeutics and/or a partner. As we have said in the past, we do not expect the product to be commercialized from our pipeline in the rest of 2008 or throughout 2009. At this point, we're not providing information on commercialization timelines beyond that period but I will say that we expect 2009 and 2010 to be years of high activity with respect to our partnered and internal products advancing into and through the clinic. Mesafem is expected to complete Phase II during 2009 and other products are scheduled to enter Phase I, Phase II and registration studies during that time period. As you know, our DOT Matrix patents are set to expire in 2014. DOT Matrix, however, is not the only delivery platform in our pipeline. We have submitted patent applications for leading to the next generation passive delivery based platforms that may extend the exclusivity of certain developmental products through 2020. We also have submitted formulation and compound specific applications that may meaningfully extend exclusivity for some products beyond 2020. As you may recall Noven did this successfully with Daytrana, gaining a compound-specific patent that extends through 2018. Also, we continue to challenge ourselves to develop or gain access to technologies and Intellectual Property that would extend our delivery capabilities beyond our current systems. In all, we have substantial resources and aggressive programs directed at extending Noven's delivery technology, patents and other Intellectual Property. So in summary, following our pipeline screening and approval of Stavzor, we have one oral product, Mesafem, and a range of transdermal projects in our pipeline. Five of our transdermal projects are partnered and the remainder are in development by Noven for future collaboration or self-commercialization. About two-thirds of our pipeline products are in preclinical development with the rest in Phase I, Mesafem in Phase II, and one partnered product in studies that if successful would support registration. That concludes our pipeline review. We've tried to provide additional information to help you value our developmental pipeline. I'm sure we haven't offered everything that you would like to know but we will continue to work to help you better understand our pipeline so you can fairly value or judge our prospects. I would characterize the pipeline in most instances as early stage but highly promising and I'm confident that our organizational and process challenges and a heightened sense of urgency, discipline and execution across the organization will work to improve our success rates and productivity. Now I'll ask the operator to begin the Q&A section of the call. Thank you.

[Operator:]

Certainly. Ladies and gentlemen, at this time, we'll be conducting the question-and-answer session. (Operator instructions). Our first question will come from Patti Bank with Pacific Growth Equities.

[Patti Bank:]

Thanks for the update information, it was very helpful. Just two questions, one on the amphetamine patch, can you give us any more detail as to what went into Shire's decision to give that back? And then also on the Noven Therapeutics side, as you walk through the update there, it seems like Mesafem and Stavzor are really only things alive there, can you talk about, I guess, the process there in terms of when these products were first bought? I know that was done before you, and kind of how you got to this point, and then also whether there is anything else as part of that Noven Therapeutics that's earlier on that still may be alive?

[Peter Brandt:]

Patti, it’s Peter. I'll take your second question first and then I'll ask Jeff Eisenberg to address your question on amphetamine. In terms of what we have at Noven Therapeutics, we have – we currently have Pexeva, we are still commercializing Lithobid, we have Stavzor and we are obviously aggressively pushing forward on Mesafem. That is the extent of the portfolio that Noven acquired in the JDS acquisition. We are, as you know, quite excited about what we hope to be able to accomplish and prove with Mesafem, and we are also equally excited about being able to prove and gain profitability in Noven Therapeutics as we get into 2009 based in large part on the expected growth in Stavzor. Other activities, so you are absolutely correct, that is what is in our pipeline at this point in time. We continue to scour the rest of the industry and try to be as active as we can in screening other compounds or other activities out there by way of either licensing and development activities or potentially product acquisition activities. So with that Jeff, if I can ask you to comment on amphetamine?

[Jeff Eisenberg:]

Patti, thanks for the question. First I just I guess would like to comment that we here in Noven do believe that amphetamine patch opportunity is an extremely attractive one. We think it can bring real value to the ADHD market and that is why we're so excited to get the product back, we'll be able to advance it. Of course, I wouldn't presume to speak for Shire but I would note that Shire, as you are aware, has a very broad and deep portfolio as well as a pipeline of ADHD product. So, they're absolutely in a position where they need to make portfolio calls on time. We're not in that same position with that extent and depth of a pipeline, and so we don't have to make that choice. I would point out as you may know that this is a project, this amphetamine patch is a project that we were pursuing even before we did the Daytrana deal with Shire. We always believe there's tremendous potential here and we continue to maintain that belief.

[Patti Bank:]

Thanks. And then just one quick follow-up if I could, on Novogyne, is there any update there? I know in past you've always looked to, may be buy that back or put more products in there and it’s been kind of ongoing discussions with not much, I guess, positive feedback from Novartis. Is there any update on that side that you can give us?

[Jeff Eisenberg:]

Patti, this is Jeff again. On the first question on the buyback, I think as we said consistently and Peter has said, it is something we're always interested in, but historically Novartis had an interest in selling their interest in that business. As far as working to look to add products to the Novogyne sales effort, that is something that we're always looking to do, working with our colleagues at Novartis. We're not going to – we're not in a position to tell you that something is imminently going to happen, but that is something that's always on our radar screen.

[Peter Brandt:]

And Patti, that's also a large part of the Vivelle-Dot life cycle management plan as well.

[Patti Bank:]

Great. Thank you.

[Operator:]

Thank you. Our next call will be coming from Larry Neibor of Robert W. Baird.

[Larry Neibor:]

Thank you. Good morning.

[Peter Brandt:]

Good morning, Larry.

[Larry Neibor:]

It looked like your sales through the joint venture were only up about 2.5%, did that reflect the joint venture pulling down the inventories of Vivelle-Dot, and if so has that inventory level reached a stable level or what should we expect in the fourth quarter?

[Jeff Eisenberg:]

Hi, Larry. It is Jeff Eisenberg. I mean – we think we have always said our sales through the joint venture don’t – from a timing perspective don’t match the sales that go out from the joint venture into the market. So, we haven’t seen a huge shift in inventory at Novogyne and Peter talked about the prescription trends in the market which are all quite positive.

[Larry Neibor:]

Okay, so what is the inventory level at the joint venture in terms of weeks of inventory?

[Peter Brandt:]

I don’t know that we have ever really discussed that. I’m not sure that – it is at a level that we and Novartis consider to be within our acceptable range. But I don’t know if I will be prepared to discuss that inventory level because it might be Novartis’s proprietary information.

[Larry Neibor:]

Okay, thank you.

[Operator:]

Our next question will come from Scott Henry of Roth Capital.

[Scott Henry:]

Thank you. And I certainly commend Peter for a much greater focus on the company that we have seen in some time at Noven. I did have a couple of questions. First, with regards to Shire walking away, the only thing that I find kind of odd is that they did the pay the roughly $6 million fee. If I recall it might even be less than a year ago did they see anything between the time they made that payment and today that might have impacted their decision?

[Jeff Eisenberg:]

This is Jeff again. Again, penetrating into dangerous (inaudible) I can’t really can’t speak for Shire. Yes they paid that milestone. Under our agreement they had to pay that milestone to maintain their ability to make this choice. And under our contract they had certain time periods they had to operate on making this decision. So you are correct that they paid the milestone, did maintain access to, limited access to the project at some period of time. But reached the point where the call had to be made and ultimately as we have all heard here we have got the project back.

[Peter Brandt:]

If I can Scott I will just repeat a little bit of what Jeff said earlier. But at least it is our impression a large part of this and again Jeff is right, we can’t speak for Shire, but if you compare their portfolio relative to ours and it is crowding out issue on theirs and it is a welcome addition to ours. And I think if I’m understanding at least what I think is part behind your question two, certainly on the Noven side from the program itself, around the amphetamine patch, we’re very excited about the program. So it is not if there is has been anything in the program to date that has is of any concern to us at Noven.

[Scott Henry:]

I guess they would have thought about it a year earlier they would have saved themselves $6 million, but moving on I guess and Peter I think you’ve done a very good job of independently assessing the situation you were put in front of and you know, the JDS deal in retrospect that looks even more – even more of a head scratcher. The question I have is when do you think you can make that selling of those products cash flow neutral? I mean how long can that happen. I mean we see the Pexeva in sales coming down, Lithium QD is no longer in the equation. I mean, at some point is it worth selling these products at all prior to Mesafem.

[Peter Brandt:]

I think again, our let me for both a P&L and cash flow point of view, our objective that we’re building our plans toward is to be cash flow P&L neutral from a profit point of view/positive in 2009. So a number of activities that have been lead by Anthony Venditti in terms of taking a different look at the promotional spend, the promotion vehicles, the field force alignment, the field force structure, the field force incentives as well as obviously the launch of Stavzor have us in a position now that we still believe that we can turn Noven Therapeutics into a breakeven or profit making situation in 2009. As we’ve said in previous calls I mean it is dependent on the curve if you will of the uptake of Stavzor. To continue in the spirit of just being very open with all of our investors none of us are going to know whether that is really on the right curve for another 2 or 3 months. Early indications are that our messages are being well received, well heard, and again agreed to as opposed to being disputed by the physician community that we have targeted. So in two a three months we’re going to be – I don’t know on the next call we’re going to be in a much better position to say is Stavzor reaching the levels that we think it needs to reach to make us comfortable with that goal of being profitable in Noven Therapeutics in 2009. Now as always you know, as any good management team you do begin to think of contingencies. So, you know you’re – we’re not going to be blind of the fact that if we get into a certain point of time where we have a better handle on Stavzor and we don’t see a way of getting to profitability in Noven Therapeutics it would not be making good business sense to continue just putting good money down the drain. And we would adjust accordingly at that point.

[Scott Henry:]

Okay, and I guess just another question on the pipeline. When I look at your pipeline the most important product to me even beyond Mesafem is really the next generation Vivelle-Dot patch. I’m curious if you agree with that statement and how much – what priority are you putting on that product just to make sure that you build a wide enough margin of error around that 2014 date?

[Peter Brandt:]

We’re exactly in the same position as you are. It is an extremely high priority if not exactly, it if it is not second priority it is perhaps even 1a or 1b. There – Vivelle-Dot obviously is an absolutely critical driver of our current financial performance and we expect it to remain such after 2014. With that said, you know we would not look forward to a bit of a cliff. So therefore that is a higher priority as you can imagine in our pipeline. I will say beyond that and it does not dilute our efforts beyond the life cycle management strategies with Vivelle-Dot. We are, as Jeff just said, we are quiet excited about the opportunity just given back to us on the amphetamine patch and a there are two or three other compounds unfortunately some of which are partnered but some of which are not. Some of which are internal that we’re also putting a high priority in our pipeline, but you know that is absolutely correct. The lifecycle development plans for Vivelle-Dot are critical to us.

[Scott Henry:]

Okay, well thank you very much for taking the questions.

[Peter Brandt:]

Thank you Scott.

[Operator:]

Our next question will come from David Steinberg of Deutsche Bank.

[Peter Brandt:]

Good morning David.

[Operator:]

David your line is live. I am sorry his line disconnected. We will take our next question from Dave Windley of Jefferies & Company.

[Dave Windley:]

Hi, good morning. Thanks for taking the questions. Wanted to follow up on the amphetamine patch and given the timing of when that development program was started presume that that is – that has been developed on the existing or older technology. So I was wondering kind of stage of development of that drug candidate. The technology plans, how would you anticipate that maybe some of your patent applications could be applied to that to make it a longer life commercial opportunity and I will stop there and then I’ve got a follow-up.

[Peter Brandt:]

It is a great question. I am going to ask Jeff to begin then I think we are also going to also engage Dr. Joel Lippman on that one.

[Jeff Eisenberg:]

David it is a good question. As you noted, we have started a project some time ago. I don’t think it is necessarily a current assumption that there wouldn’t be any IP attached to that project even in its current form beyond 2014. As we have mentioned in the past, we in every development project look to build new IP into our formulations and the potential uses of those products in patch form. We are optimistic that even on the current formulation of the amphetamine patch and as we are thinking about it moving forward that we will able to build IP that goes well beyond 2014 obviously to the extent that when it comes to fruition we can share more detail at that time. But I don’t think that the implication behind the question that there would be a product that would only be protected until 2014. It is not necessarily an accurate one.

[Dave Windley:]

Okay.

[Peter Brandt:]

(inaudible) I will turn it over to Dr. Lippman. We do view the opportunity to get this product back as an opportunity to take a fresh look at this program. Because of all the reasons that I and Peter have mentioned about Shire’s pipeline and their activities in ADHD they were looking at this opportunity in a certain way. We don’t necessarily have to look at it in the same way. And I will stop with that and turning it over to Joe.

[Joel Lippman:]

And to follow up with what Jeff is saying I think that key here is that we really do want to provide as best as we can a differentiated product based upon a target product portfolio that is going to bring some type of benefit in clinical differentiation. To directly answer your question, we will most probably in 2009 be doing some additional Phase I PK work and the intent is really to try to get into Phase 2 at the end of 2009 or shortly thereafter.

[Dave Windley:]

Okay, and does the technology that you would anticipate being able to build into this project in particular does that dovetail with your efforts around next generation platform or should I view those as independent.

[Jeff Eisenberg:]

I think the answer is – Jeff again. The answer is a really both. Yes they do revolve and walk around next generation platforms but again as we have noted that doesn’t mean that would be the only IP protection with the platform on the formulation. There is always the opportunity as we develop projects for patentable inventions that could become protected by IP.

[Dave Windley:]

Okay, and then in terms of this decision obviously you have gone through a lot of discussions about your efforts around field force and things of that nature and hoping to get new products launched by mid next year. But this decision around amphetamine patch forebode anything from Shire regarding Daytrana.

[Jeff Eisenberg:]

It is Jeff again. It does not. They are unrelated. This is in early stage. You could say is like all the data that we have generated has been shared with Shire. We don’t have a similar issue on this project. So it is not related.

[Peter Brandt:]

I think it is also, I mean it is a better question obviously for Shire but everything that we understand is still assuming success with our new manufacturing process on the Daytrana line up than they are still quite excited about the European launch.

[Dave Windley:]

Okay, all right. Thank you.

[Operator:]

Thank you. Our next question will come from Tim Chiang of FTN Midwest Securities.

[Tim Chiang:]

Hi, thanks. With the amphetamine patch now in your control, what sort of advantages have these, and I know it’s very early stage, do you think you’ll have with this dispatch relative to let’s say an Adderall XR oral formulation, which is going to go generic next year. I mean can you describe a little bit of what you see so far with the patch?

[Peter Brandt:]

I will ask Anthony Venditti, our Head our Marketing and Sales to handle that one.

[Anthony Venditti:]

Good morning and this is Anthony Venditti. Actually having worked in this market prior at Novartis, many of these different drugs truly provide pharmacokinetic benefits escalate as it relates to the time of the drug it delivers and the effects and the longevity. And so we will be looking at different compounds that are out there in the marketplace with the pharmacokinetic parameters in assessing the weaknesses of Adderall or the liquidity in the areas where we can develop a better form of amphetamine and try to address that pharmacokinetically in a patch as we develop it. With that we actually have a development team in place that will be developing a target product profile that will determine how we go forward to make a product that will be differentiated in the marketplace.

[Tim Chiang:]

Okay, and Peter I had a follow up question for you, you know I get to around – your SG&A expense I estimate probably half of that is tied to marketing expense, I might be off but that is sort of what I come to. Is that something around the ballpark for marketing expenses for your sales force and I know you sort of highlighted the fact that everything is sort of being evaluated here. Is that something – assuming Stavzor does grow, would you consider using some of the cash on your balance sheet to bring in some additional marketed products to sort of augment that.

[Peter Brandt:]

I – there is absolutely no doubt that we’re – it would be absolutely wonderful if we could take advantage of the cash position we have to sponsor an intellectual property inherited in some products that could be put into the Noven Therapeutics sales bag. So that is the very active initiative at Noven.

[Tim Chiang:]

And I guess how big is the sales force right now?

[Anthony Venditti:]

This will be Anthony Venditti again. We have 73 field representatives and 8 managers.

[Tim Chiang:]

Okay, great. Thanks.

[Operator:]

Our next question will come from Francis Clay [ph] of Summer Street Research.

[Lei Huang:]

Hi, it is actually Lei Huang with Summer Street. Thanks for the review of the pipeline that was a very helpful start. I just want to clarify that I think you said in your transdermal pipeline there was one project that is in Phase 3 development. Is that correct?

[Joel Lippman:]

Lei this is Joel. We said it is in registration studies. Studies that we took for registration.

[Lei Huang:]

Okay, can you disclose anything regarding when you might see an update on that?

[Joel Lippman:]

No, not beyond the review we went through, that is as a partnered product it is in that category competitive and confidentiality we have to respect.

[Lei Huang:]

Okay, fair enough. Other question around the kind of test that you kind of talked about, earlier in your call, is that a test that will be – at what point is that test applied. Do you manufacture the product and test it as soon as it is produced or is it at a later stage or earlier stage?

[Jeff Eisenberg:]

Lei this is Jeff Eisenberg. To answer to your question is it is a release test. So, it is applied before the product is shipped out into the marketplace after it is manufactured.

[Lei Huang:]

So, it is something like the QA, QC process.

[Jeff Eisenberg:]

Yes, that is a – it is a QC that is a release test. So that is correct.

[Lei Huang:]

Okay, and how is this different from what you have been doing in the past or was there no test in place whatsoever.

[Jeff Eisenberg:]

Yes basically how it is different is we have over that time since I think it was just the new enhanced release letter was introduced back earlier. We have been able to build up a large database of data that we have been then been able to combine for statistical trends. And effectively what we have done is through that effort we have identified that we can test newly manufactured products at early time points and identify which lots will remain within the (inaudible). It took us until now really to have enough data to constantly to be able to do that. So that is what is different about where we are now versus where we had been last year or so.

[Lei Huang:]

Okay, great. And then just last question in terms of your business development effort, I think you just mentioned that you are actively looking for products that you may be to bring into Noven Therapeutics. Is that also in the same area as what you’re doing in the pipeline in terms of CNS when it is held along those lines?

[Peter Brandt:]

It is certainly – that certainly are focused on our starting point. We’re – you know we are and we intend to remain if you will a specialty pharmaceutical company. So you know, we’re more than willing and able to expand into other specialties. I think one of the key drivers for us is we do not have a strategic intent to build a large infrastructure in particular you know at the large kind of field forces required to get into the primary care setting. So – but that does not mean that we’re constricted or restricted in terms of only staying within the women’s health and the CNS areas. So, a large part of what is kind of driving that are strategic search, is how defined is the target position population is for the entity that we will be looking to bring into Noven.

[Lei Huang:]

Okay and just a follow on to that question. I don’t know how far you are along in terms of reviewing opportunities in that area. But can you talk at all about what are the opportunities available, how competitive it is? Seems like – it just seems like CNS is an area that everyone is looking at.

[Peter Brandt:]

I – you make a great point. I mean – I at least in my experience when the days are long gone when it being, you know any kind of a bidding process where there was only one or two companies involved. I think it has become highly competitive. You know what would fit beautifully for Noven is the same thing that would fit beautifully for any number of other companies out there i.e. an opportunity that could bring with it both short term revenue and income potential. You know, we’re getting more and more excited about our own internal pipeline but it is not as we said earlier particularly near term are late stage pipeline. So our needs are more acute if you will in the near term from a business development point of view and that is exactly the same type of thing that a number of other companies are looking for as well. So it is a very competitive environment out there. I would completely agree with that comment.

[Lei Huang:]

Okay. Thank you.

[Operator:]

Thank you. Our next question will be coming from Ken Trbovich of RBC.

[Ken Trbovich:]

Hi, gentlemen. It is Ken Trbovich. I apologize I was a few minutes late in getting on. I just wanted to go back to a comment I heard earlier about the amphetamine program. Did you say that there were no field force problems that you see with that program?

[Jeff Eisenberg:]

Ken this is Jeff Eisenberg. That is what I said. It is correct.

[Ken Trbovich:]

And I guess for those of us who aren’t as experienced to understand how the product is formulated and how it differs, why would it be – it just seems like the technology would have started at the same place?

[Peter Brandt:]

Ken I mean it is – the issues we’re seeing with the methylphenidate patch are unique to that patch and that formulation. You know as you are well aware we have got a product in Vivelle-Dot and combination products that still bodes. A kind of patch is sold in the US and the same version is sold outside the US. Those products, none of them have field force issues. They all have the MethyPatch technology that obviously are coming out of Noven. None of them have that issue. So, the product issues that we are seeing on Daytrana are unique to by the methylphenidate formulation.

[Ken Trbovich:]

Okay, and then it sounds like because you can’t identify the field force problem at the time it is manufactured that it is a problem that occurs as the product ages?

[Peter Brandt:]

Yes we have been consistent on that. The product does get worse over time which is until now (inaudible) and very difficult. It is not possible to identify as it is kind of manufactured, which lines are going to best.

[Ken Trbovich:]

Okay I guess in that regard what I am trying to figure out is that as it relates to the gross margin assumption. I mean I understand that you can continue to produce patches and early on those patches don’t become a problem. Is this an issue where you are yet to change on dating on the package and that is a simple solution and therefore the product has shorter shelf life and you have got higher costs going forward? I guess what I’m really trying to understand is when you guys talk about a solution does that mean that the costs are permanently higher as you can continue to do the process as it exists today or do you see it as eliminating the field force problem and therefore the costs get back to a more normalized rate.

[Jeff Eisenberg:]

Ken it is Jeff again, it is what you said at the end there. The idea of the ideal solution is to permanently eliminate the field force issues and that is what we are looking to do in amphetamine (inaudible) there are no guarantees. That is our plan and we are confident that is it going to work. That is the intent to eliminate the field force issue with the product.

[Ken Trbovich:]

Okay, and –

[Peter Brandt:]

Therefore as a result of that margins would improve on a sustainable basis.

[Ken Trbovich:]

Sure and I apologize, I didn’t hear any comments about the margins. I missed all of the commentary at the start. Did you specifically indicate whether the margins would remain positive going forward as you continue to deal with the higher costs for Daytrana?

[Jeff Eisenberg:]

Ken what we have done is we charged $4.3 million with respect to future costs that we expect to incur regarding the Daytrana product. We have indicated that on a going forward basis we are going to incur higher costs with respect to a higher scrap factor and other costs with respect to the field force test. Consequently, it is going to have an impact of margins. We have not indicated exactly what those – what the impact on margins will be. But I think you can go through the guidance we have given and determine what the impact should be for full year 2008.

[Peter Brandt:]

And that will be the case until we have the products with the new solution in mid 2009 as our per target date.

[Ken Trbovich:]

Okay and I guess just to make sure that I understand than does that mean in future periods we won’t see these one-time charges also excluded from the current quarters?

[Peter Brandt:]

We don’t expect one-time charges but we do expect to be charging to cross to builds, the higher scrap factor and the cost for the API with respect to these lots that won’t be shipped out.

[Ken Trbovich:]

Okay, and then just specifically back to the auction rate security issue, are any of your auction rate securities covered under the UBS settlement agreement that would give you rights to put them back?

[Peter Brandt:]

No unfortunately they are not, but I think we have good news with respect to our auction rate securities. Ken we liquidated another $2.1 million worth of auction rate securities during the period all at par value. And so year-to-date we have liquidated 39 million of them and we have less than 60 million of them left. And now we have more than $80 million in cash and auction rate securities. And we generated positive cash flow in the quarter.

[Ken Trbovich:]

And I guess that was my last question was just in terms of positive cash flow in the third quarter, it seems like it was driven by the milestone payment and if I back that out you actually used cash. Could you give us a sense as to where that cash was put to use in the quarter?

[Peter Brandt:]

No actually Ken. We generated positive cash flow whether you consider to milestone payment or not. We actually generated positive cash flow from operations of about $31 million in the quarter. So if you back out the $25 million, we still have positive cash flow of $6 million. I did see a note earlier and I think perhaps you are looking at the cash balances at the end of the year as opposed to June 30. We had about $52 million or $53 million in cash at June 30 and $80 million at the end of September.

[Ken Trbovich:]

And I guess that is where I’m not having a complete balance sheet, it creates some challenges for us and looking at the numbers. I’m looking at the quarter I guess what I believe to be the quarter from the June quarter and I guess I guess I am looking at the cash and equivalents at the time were maybe $48 million and then I sort of add back to that some of the auction rate exposure. I guess the other way to put it is – are there specific cash payments that have been made outside of sort of normal operations that would result in adjustments to your cash balance. I’m just trying to tie back to you guys bringing the revolver on and what the sort of cash needs in business are going forward?

[Jeff Eisenberg:]

Okay, I appreciate your question. I’m happy to walk you through the cash flow. We did make a payment of $1.5 million during the quarter with respect to the approval of Stavzor. That is the only payment that I would consider to be not typical. We did make some investments in (inaudible) during the quarter and I think the total was around maybe $1.5 million, $1.8 million. So beyond that there were no other atypical payments. But I will happy to walk you through the cash flows. And certainly when we file the 10-Q, you will have the full balance sheet in the next couple of days and certainly I will be happy I answer any questions.

[Ken Trbovich:]

No, I just took the auction rate balances of $17 million from the last quarter and on cash and equivalents of $48 million, I was up at 65. I added 25 to that to get to 90 and that would have assumed your cash flow was breakeven, that is where I guess the confusion lies?

[Peter Brandt:]

We will walk through this with you off line. Ken no problem and –

[Ken Trbovich:]

Not a problem, I appreciate it.

[Peter Brandt:]

You got it.

[Operator:]

(Operator instructions) Our next question will come from David Steinberg of Deutsche Bank.

[David Steinberg:]

Yes, thanks. And I appreciate the transparency on the pipeline. I had a couple of questions on the pipeline. First, of your three undisclosed products that you discussed, are they prescription, over-the-counter, or both and then I know Shire has indicated they are going to launch Daytrana in the next year or two in Europe. I am just wondering is the or the economics you received exactly the same from Europe as they are currently in the US market?

[Peter Brandt:]

I will take the first one David and then I will ask Jeff to handle the second one. The three undisclosed one is OTC, two are prescription.

[Anthony Venditti:]

David that is only OTC product in our pipeline.

[Jeff Eisenberg:]

David, it is deaf. On the second question on the compliance of European products. The answer that we would expect it to be comparable to the European supply price it is not part of the originally U.S. supply agreement. We still have to work that out with Shire but we would expect it be a modest margin on the manufacturing and supply.

[David Steinberg:]

Okay, and then just a final clarifying question. It sounds like as you’ve discussed the rationalization of your pipeline that you are going to be working on less control, you know oral control release products and more on transdermal products. And I’m just wondering are there IP issues with your controlled release technology issues just because people have worked on hundreds of transdermals over the years and at the end of the day there has only been 9 or 10 that have actually been approved. Whereas on the controlled release side of things the products have generated much bigger and there has been many more approved that have had successful clinical trials. So, I was wondering is there something about your transdermal technology versus your new oral technology that sways you to shift the R&D focus?

[Peter Brandt:]

I think Jeff and I are going to double deal with this one. Just to lead in, I think prior to the acquisition of JDS there really wasn’t an oral pipeline at Noven. And so where we are standing today is giving an update in terms of okay what was brought in via the acquisition of JDS and being very transparent about okay, which programs have we departnerized or cancelled (inaudible) and which one in the case of Mesafem is highly important to us and we are quite excited about that should not be taken as a signal that we don’t intend through business development activities continue to see if we can bring more compounds into the non transdermal side, if you will, of our pipeline. It is not a – it is in order fact of the programs that came in through the acquisition as opposed to a strategic decision not to be in orals and to focus on the transdermals. In terms of the IP Jeff can add.

[Jeff Eisenberg:]

Sure. David in terms of IP on the transdermal side, I think you may have dropped of the call a little bit earlier, when we talked about this a little bit, but we believe there is plenty of opportunity and room for additional IP protection both in terms of new platform technology that we are working on as well as project specific or product specific IP that can protect products coming out of our transdermal pipeline. So, we continue to see opportunities for IP projection, meaningful IP protection coming out of our transdermal pipeline as well.

[David Steinberg:]

Okay, just a final question on the P&L, so in just looking at the model reducing the two products taking the two products out of the pipeline which you discussed, Stavzor ER and lithium QD eclipsed revenue outlook in ’11 by maybe 18% to 20%, thinking about balancing your revenues and your costs I know you alluded to much higher gross margins next year but could you give us some help with R&D spend going forward. Should we see any kind of incremental growth rate ’08 to ’09 to ’10 or how should we think about it as a percentage of sales in modeling R&D.

[Mike Price:]

This is Mike. We have given guidance with respect to all of 2008. And we will provide guidance for 2009 before or at the same time we will release earnings for the full year 2008. But we haven’t really said anything about R&D spend beyond that.

[David Steinberg:]

Okay, thanks.

[Mike Price:]

Thank you.

[Operator:]

Ladies and gentlemen there are no further questions in queue at this time. I would like to turn the call back over to management for closing remarks.

[Joseph Jones:]

This is Joe. If any of you have additional questions during the day we will be available. And in the days ahead as Mike mentioned we will be filing our third quarter 10-Q over the next few days. So we will be happy to review that with you as well. And thank you all for joining us and for continuing to track our progress. Operator, would you please provide the replay information.

[Operator:]

Certainly, just one moment. Ladies and gentlemen, if you would like to access the replay for this conference please dial 1877-660-6853, you will be asked for an account number you may enter 286 for the account number and the replay ID number will be 299-214. It will be available for 2 days until November 08, 2008.

[Joseph Jones:]

Thank you all once again and goodbye.

[Operator:]

Ladies and gentlemen, that does conclude today's teleconference. You may all disconnect your lines at this time and have a wonderful day. Thank you.