Salix Pharmaceuticals (SLXP) Earnings Report: Q3 2014 ...s.t.st/media/xtranscript/2014/Q4/12946120.pdf · 2014 Conference Call Transcript The following Salix Pharmaceuticals conference

CompanyName:SalixPharmaceut icalsLtdCompanyTicker:SLXPSector:HealthCare

Industry:DrugsEventDescription:Q32014 EarningsCall

©2014TheStreet,Inc.AllRightsReserved Page1of 25

SalixPharmaceuticals(SLXP)EarningsReport:Q32014ConferenceCallTranscriptThefollowingSalixPharmaceuticalsconferencecalltookplaceonNovember6,2014,04:30PMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

MichaelFreeman;SalixPharmaceuticals;AssociateVPofInvestorRelations&CorporateCommunicationsCarolynLogan;SalixPharmaceuticals;CEO,PresidentandDirectorTimothyCreech;SalixPharmaceuticals;SVP,FinanceandAdministration,andActingCFOWilliamForbes;SalixPharmaceuticals;ChiefDevelopmentOfficer,CMOandEVPofResearch&DevelopmentRickScruggs;SalixPharmaceuticals;EVPofBusinessDevelopment

OtherPart icipants

DavidAmsellem;PiperJaffray;AnalystCoreyDavis;CanaccordGenuity;AnalystMarioCorso;MizuhoSecurities;AnalystMichaelFaerm;WellsFargoSecurities;AnalystAndrewFinkelstein;SusquehannaFinancialGroup;AnalystGaryNachman;GoldmanSachsGroup;AnalystJasonGerberry;LeerinkSwann;AnalystGregoryGilbert;DeutscheBank;AnalystShibaniMalhotra;SterneAgee&Leach;AnalystTimLugo;WilliamBlair;AnalystIrinaKofflerRivkind;CantorFitzgerald;AnalystRonakShah;CreditSuisse;AnalystOrenLivnat;JMPSecurities;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator:

Goodday,andwelcometotheSalixPharmaceuticalsThirdQuarterEarningscall.Today'sconferenceisbeingrecorded.

Atthistime,I'dliketoturntheconferenceovertoMichaelFreeman.Pleasegoahead,sir.

MichaelFreeman(AssociateVPofInvestorRelations&CorporateCommunications):

Goodafternoon.ThisisMikeFreeman,AssociateVicePresidentofInvestorRelationsandCorporateCommunicationsforSalixPharmaceuticals.Thankyouforjoiningustoday.

WithmeareCarolynLogan,PresidentandChiefExecutiveOfficer;TimCreech,SeniorVicePresident,FinanceandAdministration,andasweannouncedearlierthisafternoon,ournewactingChiefFinancialOfficer;andBillForbes,ExecutiveVicePresident,MedicalandResearchandDevelopmentandChiefDevelopmentOfficer.AfterremarksfromCarolyn,Timwillbeginthepresentationwithareviewoffinancial




resultsforthethirdquarterof2014.CarolynandBillwillthenreviewoperationsandkeyhighlightsforthequarter,andthenwewillopenupthecallforappropriatequestions.

BeforeIturnthecallovertoCarolyn,letmeremindyouthatvariousremarksthatmanagementmightmakeduringthisconferencecallaboutfutureexpectations,plans,andprospectsfortheCompanyconstituteforward-lookingstatementsforpurposesofSafeHarborprovisionsunderthePrivateSecuritiesLitigationReformActof1995.Actualresultsmightdiffermateriallyfromthoseindicatedbytheseforward-lookingstatements,asaresultofvariousimportantfactors,includingthosediscussedinourpressreleasesandSECfilings,includingourform10-Kfor2013andform10-Qforthethirdquarterof2014.Specifically,informationinthisconferencecallrelatedtoprojections,developmentplans,andotherforward-lookingstatementsissubjecttothisSafeHarbor.

Additionally,today,wewill,asusual,usebothGAAPandnon-GAAPmeasures.Webelievethesenon-GAAPmeasuresmightprovideinvestorsadditionalrelevantinformation,inpartforpurposesofhistoricalcomparison.Inaddition,weusethesenon-GAAPmeasurestoanalyzeourperformanceinmoredetailandwithbetterhistoricalcompatibility.

However,youshouldbeawarethatnon-GAAPmeasuresarenotsuperiortonorasubstituteforthecomparableGAAPmeasures.Andthesenon-GAAPmeasuresmightnotbecomparabletosimilarlynamedmeasuresdisclosedbyothercompanies.

PleasenotethatEBITDAisearningsbeforeinterest,taxes,depreciation,stock-basedcompensationexpense,andamortization,thenon-cashchangeinacquisition-relatedcontingentconsideration,one-timelicenseandsales-basedmilestonepayments,thecostofgoodsstepupforSantarusproducts,andexcludingtransactioncostsrelatedtoSantarusacquisitionandtheterminatedmergerwithCosmoTechnologiesLimited.Non-GAAPnetincomeiscomprisedofEBITDAadjustedforcashinterestexpenseandinterestincomeandaprovisionforincometaxes,basedonnon-GAAPincomebeforetax.Non-GAAPEPS,ornon-GAAPincomepersharefullydiluted,isnon-GAAPnetincomedividedbyoutstandingsharesonadilutedbasis.

Withthat,letmeturnthecallovertoCarolynLogan.

CarolynLogan(CEO,PresidentandDirector):

Thankyou,Mike.

IwanttotakethisopportunitytointroduceTimothyCreech,ouractingChiefFinancialOfficer.TimjoinedtheCompanyin2007andhasmostrecentlybeenservingastheCompany'sSeniorVicePresident,FinanceandAdministrativeServices.

Hehasover30yearsofaccountingandfinancialexperience,includingapproximately10yearsatKPMG.SowelookforwardtoworkingwithTiminhisnewroleasactingChiefFinancialOfficer.

Inourearningspressreleaseissuedearlierthisafternoon,weprovideddisclosureregardingourestimateofthewholesalerinventorylevelsofourmajorproductsatSeptember30.TheauditcommitteeofourBoardofDirectors,whichiscomprisedsolelyofindependentdirectors,hasretainedoutsidecounselandisconductingareviewofissuesrelatedtomanagement'spriorcharacterizationsofwholesalerinventorylevels.

ThereviewwillbeconductedbyauditcommitteeinathoroughmannerandwillbeindependentofCompanymanagement.Management'sexpectation,however,isthattheauditcommitteewilladvisemanagementwhenthereviewiscomplete.AndtheCompanyexpectstomakeanappropriateannouncementatthattime.

Wethinkit'simportanttomakeonethingveryclear.ManagementbelievesthattheCompany'saccountingwithrespecttosalestowholesalershas,atalltimes,beenappropriate.Moreover,ourauditor,Ernst&




Young,hasconducteditsquarterlyreviewsforeachofthethreequartersof2014.AndEMYhasalsoinformedusthatitstandsbyitsunqualifiedopiniononour2013auditedfinancialstatements.

Wealsoannouncedinourearningspressreleasethatwearecurrentlynegotiatingwithourprincipalwholesalerstoenterintodistributionservicesagreements,sometimesreferredtoasDSAs,foreachofourproducts.Webelievetheseagreementswillimproveourvisibilityintowholesalerinventorylevelsandourinventorymanagementandplanning.Webelievetheywillprovidevaluableinventoryandsalesdataandensureproperservicelevelstopharmaciesandotherindirectcustomersandenableustobetterforecastrevenueandexpenses.

Inaddition,webelieveenteringintodistributionserviceagreementswillenhanceourprofitabilityoverthelongterm,becauseservicefeesundertheagreementsareexpectedtobelessintheaggregatethantheaggregatediscountsgiventowholesalersinrecentperiods.Wealsoexpectthattheseagreements,whenfinalized,willenableustoachieveourobjectiveofpredictablyanddeliberatelyreducingwholesaleinventorylevelsofXIFAXAN550,APRISO,andUceristoapproximatelythreemonthsatorbeforetheendof2016,dependingonfuturedemandfortheseproducts.

Webelievethisisanappropriatelevelofinventoryforourkeyproductsunderadistributionservicesagreementstructure,giventheprescriptiongrowthratesofourproductsandtheexpectedservicelevelsthatwillberequiredofthewholesalersundertheagreement.Weexpectthesedistributionservicesagreementstobefinalizedandbecomeeffectiveinthefirstquarterof2015.

Finally,weexpectthatwewillworkwithourwholesalerstoreducetheirinventorylevelsofGlumetzaduring2015.OurexpectationisthatwholesaleinventorylevelsofGlumetzawillfalltoapproximatelyonemonthorless,asagenericcompetitortoGlumetzaentersthemarketinearly2016.

Withthat,letmeturnthecallovernowtoTimtodiscussourfinancialresults.

TimothyCreech(SVP,FinanceandAdministration,andActingCFO):

Thankyou,Carolyn.

IwillstartwiththefinancialresultsforthethirdquarterendedSeptember30th,2014.Asareminder,prior-periodresultsdonotreflecttheSantarusacquisition.

Totalnetproductrevenuewas$354.7millionforthethirdquarterof2014,comparedto$238.2millionforthethirdquarterof2013.Ofcourse,the2014numbersincludetheSantarusacquisition.Totalnetproductrevenueforthethirdquarterwaslowerthanexpected,primarilybecauseprescriptiongrowthforsomeofourkeyproducts,whilestrong,waslessthananticipated.

FollowingtheacquisitionofSantarus,weexperiencedahigher-than-anticipatedrateofturnoveroftheSantarusInventivesalesforces,whichrequiredhiringandtrainingnewsalesrepresentatives.Inaddition,wholesalerdiscountswerehigherthanbudgeted.Finally,revenueforthequarterwasimpactedbyhigherthanexpectedrebatesattributabletoproductsacquiredfromSantarus.

Grossmargin--excludingamortizationofproductrightsandintangibleassets,a$2.6millionstepupinthevalueofSantarusinventoryunderfairvalueaccountinginconnectionwiththeacquisition,and$17.5millioninsales-basedmilestones--was81.3%forquarterof2014,comparedto82%forthethirdquarterof2013.Thelowergrowthmargininthethirdquarterof2014wasdueprimarilytotheinclusionofsalesofGlumetza,whichcarrylowergrossmarginsthanotherproducts.Weexpectgrossmarginofapproximately79%forthefullyear.

Researchanddevelopmentexpenseswere$50.8millionforthirdquarterof2014,comparedto$38.2millionforthesameperiodlastyear.Asapercentageoftotalnetproductrevenues,R&Dexpensesdeclinedto




14.3%forthethirdquarterof2014,from16%forthesameperiodayearagoasapercentageofrevenue.

Includingapproximately$45.5millionofSantarus-relatedtransactionandintegrationcostsselling,general,andadministrativeexpenseswere$120.1millionforthirdquarterof2014,comparedto$67.2millionforthesameperiodlastyear.Theincreasewasmainlyduetohigherpersonnelcosts,asaresultofthedoublingofoursalesforceinconnectionwiththeSantarusacquisition.Asapercentageoftotalnetproductrevenues,SG&Aexpenseincreasedto33.9%forthethirdquarterof2014,from28.2%inthethirdquarterof2013.

EBITDAforthethirdquarterof2014was$161.2million,comparedtoourguidanceof$155millionand$98.6millioninthesameperiodlastyear.Forthethirdquarter2014,non-GAAPnetincomewas$122.2million,whichwasin-linewithourguidance.

Asaresultoftheriseinourstockpricebetweentheannouncementofoursecond-quarterresultsandthecloseofthethirdquarter,thefullydilutedsharecountincreasedto79.9millionshares,ascomparedtoguidanceof79millionshares.Consequently,adjustedEPSforthethirdquarterwas$1.53,comparedto$0.89perdilutedshareforthesameperiodayearago.GAAPnetlossforthethirdquarterof2013was$88.6million,or$1.39perdilutedshare,comparedtoGAAPnetincomeof$47.3million,or$0.71perdilutedshareforthirdquarterof2013.

Turningtothebalancesheet,cashandcashequivalentswere$422.6millionatSeptember30,2014.Let'sreviewouroutlookforthefourthquarterandthefullyearof2014.

Weexpecttotalnetproductrevenueforfourthquarterof2014tobeapproximately$325million.EBITDA,excludingtransactionandintegrationexpensesassociatedwithacquisitionofSantarusandtheterminatedmergerwithCosmoTechnology,isanticipatedtobeapproximately$120million.Wealsoexpectnon-GAAPnetincometobeapproximately$92million,or$1.16perdilutedshare,whichassumesacashincometaxrateofapproximately1%andafullydilutedsharecountof79millionshares.

Fortheremainderof2014,weexpectprescriptiontrendsforourkeyproductstocontinuetodemonstratehealthygrowth,astheproductivityofourdigestivedisease,speciality,andexpandedgastroenterologysalesforcescontinuetoramp.Accountingfordrawdownandinventory,webelieveournettotalproductrevenueforthefullyearshouldbeapproximately$1.4billion.

Forthefullyear,wealsoexpectEBITDAofapproximately$573million,excludingtransactionandintegrationexpensesassociatedwiththeacquisitionofSantarusandterminatedmergerwithCosmoTechnologies.Wealsoexpectnetincomeonanon-GAAPbasisfor2014tobeapproximately$400million.Ournon-GAAPEPSforthefullyearisexpectedtobeapproximately$5.20perdilutedshare,asweassumeafullydilutedsharecountof77millionshares.

Ourfullyearguidanceassumesacashincometaxrateofapproximately13%.Thecurrentlyannualizedrunrate,basedondollarizingourSeptember2014prescriptiondata,areapproximately$750millionforXIFAXAN,$144millionforUceris,$154millionforAPRISO,$255millionforGlumetza,$109millionforZegerid,$86millionMoviPrepandOsmoPrep,and$49millionforRelistor,and$78millionforSalix'sotherproducts.

LetmenowturnthecallbacktoCarolyn.


Whileourtop-lineresultsforthethirdquarterweresofterthanweanticipatedforreasonsthatTimdescribedearlier,wetakecomfortinthefactthatprescriptiondemandforourkeyproductsremainedrobustinthequarter,withXIFAXAN550,APRISO,Relistor,andUcerisachievingstrongyearoveryeargrowthof23%,15%,24%,and76%respectively.Thesenumbersmakeclearthatthehealthofourbusinessremainsingreatshape,andthatthetrajectoryofprescriptiongrowthforourmajorproductscontinuestobestrong,which




shouldhelpreducetheimpactonfuturenetproductrevenuescausedbyworkingdownwholesalerinventorylevels.

Newproductapprovalsandlauncheswillhelptofurthermitigatethiseffect.Withinan84-dayperiodspanningmid-JulytoearlyOctober,threenewproducts,Ruconest,Relistorsubcutaneousinjectionforchronicnon-cancerpain,andUcerisrectalfoamweregrantedmarketingapprovalbytheFDA.

ThislevelofsuccessisnoteworthyforanypharmaceuticalCompanyandprovidesadditionalevidenceofSalix'sexceptionaltrackrecordofin-licensing,developing,andbringingtomarketimportantdrugsforpatientswhoneedthem.Ourexpectationisthatthesenewproductswillimproveourcompetitivepositionandexpandourmarketopportunities.

Goingforward,weexpectcontinuedstrongprescriptiongrowthdrivenbytherecentlycompletedexpansionofoursalesforcewithanadditional274representatives.Wenowhave524specialityrepresentativescallingontargetedgastroenterologists,hepatologists,primarycarephysicians,otherspecialties,andinstitutionalandgovernmentcustomers.WeanticipatethatthetherapeuticadvantagesRuconest,Relistorsubcutaneousinjection,andUcerisrectalfoam,togetherwiththeCompany'sstrongcorporatebrandequityandourestablishedpresenceinprescribers'offices,shouldfacilitatephysiciantrialandusageofthesenewproductofferings.

LetmenowaskWilliamForbes,whoisherewithus,toprovideanupdateonsomeofourkeyproductandpipelinedevelopments.

WilliamForbes (ChiefDevelopmentOfficer,CMOandEVPofResearch&Development):

Thankyou,Carolyn.Goodafternoon,everyone.

LetmebeginwiththeXIFAXANdevelopmentactivitiesandspecifically,withIBS.TheFDAhasassignedFebruary28,2015,astheuserfeegoaldateforcompletionofitsreviewoftheCompany'sre-submissionofitssupplementalnewdrugapplicationforXIFAXAN550-milligramtabletsfortheproposedindicationofthetreatmentofirritablebowelsyndromewithdiarrhea,orIBSD.

Weareoftenaskedifwebelievethiscompletere-submissionmightresultinanadvisorycommittee.Atthistime,therehasbeennomentionineitherthewrittencorrespondencereceivedfromthedivisionorphonediscussionswiththedivisionaboutthepossibilityofapublicadvisorycommitteemeeting.

Inregardstoourchronicliverdiseaseprogram,theCompanycontinuedpatientenrollmentforitsPhase2dose-rangingstudyforRifaximinSSD,whichisbeinginvestigatedforthepreventionofcomplicationsoflivercirrhosisinsubjectswithearlydecompensatedliverdisease.Currently,theenrollmentphaseisgoingverywell,andwehopetomeettheoriginalenrollmentobjectivewithinthenearfuture.However,wedoanticipateleavingenrollmentopenuntiltheendof2014,aspreviouslydescribed,inordertoallowforafewadditionalpatientstoenterintothatPhase2study.

InregardstoourinflammatoryboweldiseaseorCrohn'sprogram,theCompanycontinuedpatientenrollmentforthetwoPhase3studiesforRifaximindelayedrelease,whichisbeinginvestigatedfortreatmentofactive,moderateCrohn'sdisease.These52-weekstudieswillassessefficacyandsafetyofRifaximindelayedreleaseforinductionofclinicalremission,withendoscopicresponseat16weeksfollowedbyclinicalandendoscopicremissionat52weeks.

TurningourattentiontotheoralRelistorprogram.FollowinginteractionswiththeFDA,theCompanyexpectstofiletheoralRelistorNDAbytheendofthesecondquarterof2015.Duringtheseinteractions,weemphasizedthattheCompanyisproposingchangeinformulationanddose,fromthecurrentlyapprovedandmarketedsubcutaneousformulation,totheproposedoralformulationinpatientssufferingfromopioid-




inducedconstipationwithchronic,non-cancerpain.

TheFDAhasindicatedthatitwillconsider,duringitsreviewoftheNDA,therobustnessoftheefficacydatafororalRelistorinPhase3testingaswellasitstolerabilitycomparedtothatoftherecentlyapprovedsubcutaneousRelistorinthechronicpainsetting.Priortofiling,theCompanyisplanningonconductingsomeveryspecificpre-clinicalandpharmacokineticstudiesdesignedtoprovideclarityinregardtopotentialdrug-druginteractionsinspecialpopulationdosing,whichwasintended--orwillbeintended--tobeincludedinfinalproductlabelingfororalRelistor.

AsCarolynpreviouslymentioned,we'vealsorecentlyhadthreeproductsapprovedbytheFDA.OnSeptember29,2014,theFDAapprovedRelistorsubcutaneousinjectionfortreatmentofopioid-inducedconstipationinpatientstakingopioidsforchronic,non-cancerpain.

OnJuly16,2014,theFDAapprovedRuconestforthetreatmentofacuteangioedemaattacksinadultsandadolescentpatientswithhereditaryangioedema,orHAE.AndonOctober7,2014,theFDAapprovedUcerisrectalfoamfortheinductionofremissioninpatientswithactivemildtomoderatedistalulcerativecolitisextendingupto40centimetersfromtheanalverge.

Withthat,letmeturnthisbackovertoCarolyn.


Thanks,Bill.

IwouldalsoliketomentionthatthreeadditionalpatentsforRifaximinwerealsoissuedduringOctober.Salixnowhas12OrangeBooklistedpatentswithprotectionthroughOctober2029forXIFAXAN550-milligramand11OrangeBooklistedpatentswithprotectionthroughJuly2029forXIFAXAN200-milligram.Additionally,Salixhas15OrangeBookeligiblepatentsfortheIBSDindicationcurrentlyunderreview.

Duringthequarter,wealsosecuredexclusiverightsundercertainpatentapplicationsintheRifaximinComplexespatentfamily,controlledbyCipla.TheserightsprovideadditionalprotectionsrelatedtoourSSDRifaximinformulation.

Lookingahead,weremainfocusedoncapitalizingonourdiversifiedproductbaseandpromisingpipelineofnewproductstorealizeevengreatervaluefromourbusiness.Coupledwithourexperienceandresults-drivenresearchanddevelopmentorganizationandprovenbusinessdevelopmentcapabilities,thiscreatesaformidablebaseforcontinuedfuturesuccess.

ThelaunchofRelistorsubcutaneousinjectionforchronic,non-cancerpain,Ruconest,andUcerisrectalfoamwillprovideadditionalproductsalesasthesenewdrugsareintroducedoverthenextthreemonths.ThepotentialavailabilityofXIFAXAN550-milligramforIBSDinthefirstquarterof2015willjustfurtherthismomentum.WealsocontinueoureffortstocompletedevelopmentandsecuremarketingapprovalforRelistororalforchronic,non-cancerpain,aswellasRifaximinSSDforpreventionoflivercirrhosisandRifaximindelayedreleaseforCrohn'sdisease.

Aswereflectonthelong-termopportunitiesforourproducts,ourconvictionregardingtheirmarketpotentialisevengreaterthanitwaswhenwediscussedthisatourInvestorDayinJuly.Asaresult,webelieveourdiversifiedportfolioofcurrent,near-term,andmid-termopportunitiescreatesastrongplatformforfuturegrowth.

BeforewemovetoQ&A,IwanttosaythatIunderstandthatsomeofyoumayhavequestionsabouttheauditcommitteereview.Butpleaseunderstandthattheintegrityoftheauditcommittee'sprocessisimportant,anduntilthatprocessiscomplete,we'renotgoingtobeabletoanswerquestionsabouttherevieworitssubjectmatter.




Andwiththat,IamgoingtoturnitbackovertoMikebeforewegotoQ&A.

MichaelFreeman(AssociateVPofInvestorRelations&CorporateCommunications):

ThankyouCarolyn,Tim,andBill.Sincewehavesomanyanalystsonthecalltoday,asacourtesy,weaskthatyoulimityourselftoonequestionwithonefollowup.Ifyouhaveadditionalquestions,youarewelcometogetbackinthequeue.

Operator,pleaseopenthelinesforquestions.Thankyou.

QUESTIONS&ANSWERS

Operator:

(OperatorInstructions)

We'lltakeourfirstquestionfromDavidAmsellemwithPiperJaffray.

DavidAmsellem(Analyst-PiperJaffray):

Soyou'vesaidhistoricallythattherewere10to12weeksofXIFAXANinventoryonhand.Now,we'rebeingtoldninemonthsonhand.Howdoyousquarethat?

AndIguess,theotherwayofaskingthatis,givenyourcommentsoninventoryonthelastcoupleofcalls,howcanwenowsaythatthosecommentswerenotmisleading?Thanks.


David,unfortunately,wereallycan'tcommentonthat,asImentionedearlier.Theauditcommitteehasretainedoutsidecounsel,andtheyareconductingareviewofthis.Andtopreservetheintegrityofthatprocess,it'sjustnotappropriateformetocomment.

However,Idowanttosay--andIthinkIsaiditinthescript--butmanagementbelievesthattheCompany'saccountinginrelationtosalestowholesalershasbeenappropriate.Andthatanyquestionsrelatedtothathaveallbeenvetted.

Ourauditor,Ernst&Young,hasconductedquarterlyreviewsforeachofthethreequarters.They'vealsoinformedusthattheystandbytheirunqualifiedopinioninrespecttotheir2013auditedfinancialstatements.Sowedonotthinkthereareanyissuesthere.


Letmetellyouwhywedohaveconfidenceinthenumberswe'vegivenyoutoday.Aswedisclosed,webegantheprocessofnegotiatingDSAs.Andwehavegottensomeinventorydatafromourmajorwholesalersandcomparedthattoourestimate,whichwasbasedontotalinventoryestimatesbasedoninternalshipments.Andthosenumbersareconsistentwiththat--numberswereceivedfromthewholesalers.

DavidAmsellem(Analyst-PiperJaffray):

Okay.Iguessthecommentis,Idon'tknowhowyousquare10to12weeks--waswhatyousaidhistorically--versuswhatwe'rebeingtoldtodayof9months.

ButIguessI' lljustjumpbackinthequeue.Thanks.

Operator:

We'lltakeournextquestionfromCoreyDaviswithCanaccord.



©2014TheStreet,Inc.AllRightsReserved Page8 of 25

CoreyDavis (Analyst-CanaccordGenuity):

Thanks.Thisquestionmightbealittleoff-topic,giveneverythingthat'shappened,butIwantedtoaskaboutTARGET3,forBill.IfIremembercorrectly,backinJuly,whenyoupresentedattheAnalystDay,yousaidandpresentedthatyouhadeverythingexceptwhatyoureferredtoasthe18-weekdata.

Iwasn'tatACG,butIlookedatthepresentation.Anditwasn'tclearwhetherornotitwasactuallypresentedthere.IthinkIrecallyousayingthatwasakeysecondaryendpointforthetrial.Canyouputitintocontextforus--howimportantthat18weekendpointdataisforultimateapprovalofXIFAXAN,andif,indeed,itdidhaveapositiveoutcome?


Thanks,Corey.

Infact,wedidactuallypresentthatdataatACG.Andyes,itispositive.Ithinkifyouweretolookatthatparticulardata--andoneofthethingsthatwefeltwasimportantaboutitisthefactthat,forthosepatientsiftheyreceivedascheduledre-treatmentat12-weeks,thattheywouldcontinuetooutperformtheplacebopatientsthroughthe18weeks.

Andofcourse,itwasthetwoweeksoftreatment.Andthen,whentheyfollowedupthatdouble-blindperiod,whichwasafour-weekprimaryevaluationperiodfollowedbysixweeks.Thenthescheduledre-treatmentanddoubleblind.Andthatwastwoweeksoftreatmentplusfourweeksoffollow-up,there.Sothatwasatotalof18.

Ithinkinmanyrespects,ifyoulookatthedataandresponserates,coupledwiththefactthat36%ofthepatientsfromopenlabelthatrespondedneverrelapsed,thetotalityofthedatashowsthatthedurableresponsethatweseewithRifaximinisquiteimpressive.Evenwhenyoucompareitagainstotherdataouttherefrompotentialcompetitors,suchasFuriaxproduct--ifyoutakealookatwhattheirresponseratesareusingsameendpointaswe'reusinginTARGET3.Ifyoutakealookatoverallresponseandourabilitytomaintainthatresponseforthat18weekperiod,Ithink,isveryimpressive.

Ithinkitisimportant.Wealwaysfeltlikeitwas.That'swhywemadeitakeysecondaryendpoint.Hopefullytheagencywillallowforus--ifwegettothispoint--toputitinourlabel.


Okay.Second,ifIcan--I'mnotsureexactlywhattoaskaboutinventories.Butthishasalwaysbeensomethingyouguyshavestruggledwithovertheyears.

Itisjustinventory,butmyquestionis,ifyou'venowclearlyidentifiedit,whynotjustgetitalloutofthewayrightupfront?IfIreadcorrectly,that--it'sgoingtotaketotheendof2016togetinventoriesbackdowntonormal.Whynotjusttakeitallatonce?


Well,we'renotsurethatwouldbethebestthingforthewholesalersorthecustomers.Andwewantedtodoitinapredictable,gradual,reliableway.Andsowe'rehopingtonegotiatetheseDSAsalongthoselines.

Also,Imean,we'vegivenourselvestwofullyears.Andthattimeframeisbasedoncurrentprescriptiondemand.

Andofcourse,ourprescriptionshavebeengrowingverynicely.AndifwearegrantedtheIBSDapproval,aswe'relookingforwardtoinfirstquarternextyear,thenthat--allofthatwillhelptoacceleratethat.Sothat'sjust,wethink,thebestplantodoitandtodealwithit.





Okay.SoevenifyouweretosignIMAstomorrow,it'snotasifinventorieswouldinstantlygototherestoftheindustryattwotofourweeks.It'syourplan,aspartofIMAagreements,tograduallyworkitdownoverthenexttwoyears.Isthatcorrect?


Yes.AndweactuallyhaveourHeadofBusinessDevelopmentandTrade,ourExecutiveVPRickScruggs,heretoday.Rick,I'mgoingtoletyouanswerthat.

RickScruggs (EVPofBusinessDevelopment):

Yes.Sowewillhopefullyincludethoseagreementsandputthoseinplaceinthefirstquarter.Andthenwe'lldothemechanicstomakethatdrawdownappropriateoverthenexttwoyears.Itmayhappensooner,though.


Andjusttobeclear,we'recomfortablewithourinventorylevelswheretheyare,now,aswesaidinthepressrelease.


Yes.Imean,we'refortunateinthatourproductsdomoveveryquickly.Wehavegoodmovement,goodgrowth.

Andwehaveverylongdating.Ithinktheminimumonanyofthesekeyproductsis36months,andXIFAXANnowhas5yearsofdatingonit.

ButthereasonwewanttomovetotheseDSAsisjusttoimprovevisibilityandpredictabilitybecause,asyouknow,we'vemissedourguidancenowforacoupleofquarters,andwedon'tlikedoingthat.Sowewanttobeabletohavemorepredictabilityandmorecertainty,justsowecanbetterplanandguideourshareholders,ouranalysts,everybody.


Okay.Thankyou.

Operator:

We'lltakeournextquestionfromMarioCorsowithMizuhoUSA.

Mario Corso (Analyst-MizuhoSecurities):

Goodevening.Thanksfortakingmyquestions.

SoIguessIdon'tfullyunderstand,whenyousaythatyoubelievetheaccountingisappropriateontheinventories.Youmeanwheretheyarenow?Ordoyoumeanappropriateaccounting,intermsofhowtheygotthere?Imean,Ican'timagineninemonthsonXIFAXANwasplanned.

Andthenwithyourguidanceforyouryear--revenue$1.6billiondownto$1.4billion--isthatcomingmoreso,I[wouldsay,fromXIFAXANthananyotherareasyouhaveguided]?


Mario,youwerebreakingup,rightthereattheveryend.




Timmayhavesomethingmoretosayabouttheaccounting.Butasfarasmissingourguidance,alotofthatisrelatedto--ifyouremember,Ithinkwehavetalkedaboutthisonearliercalls.WeclosedtheSantarusdealonJanuary2,andwemovedalotoftheSantarusandInventivesalesreps,whichwerepartofSantarus,overandintegratedthemintoourvarioussalesforces.

Theonethingintheintegrationthatsurpriseduswasthehighturnoverratewiththeserepresentatives.WiththeSantarusrepresentatives,itwasover40%.AndwiththeInventiverepresentatives,Ithinkitwasinthe35%range.

SowespentJanuary,February,Marchgettingallofthosepeopletrainedonourproductsandourpeopletrainedontheirproducts,basedonwhichsalesforcestheyweregoinginto.Wedidthenationalsalesmeeting,andwewerereadytogo,andwehadforecastedprescriptionstoramp,fromthatpointforward.

Butwhenthosepeoplestarted,alotofthem,leaving--andonthepeoplewehired,ourselves,externally,theturnoverratewasaround20%.WithourlegacySalixpeople,itwasinthe,Ithink,8%or9%level.Butasthosevacanciesoccurred,mostlydrivenbySantarusrepsandInventivereps,thenwehadtohire,retrain,andgeteverybodyoutthereagain.

Soonaverage,ittakesaboutfivecallsonaphysiciantochangeaprescribinghabit.Soyouhaveearlyadopters,midadopters,lateadopters,aseverybodyknows.Butitjusteatsuptime.

Sowehadthebiggestmonthwe'vehadonmanyofourproductsinSeptember.Anditlooksasthough--wedon'thavemonthlydataforOctober,yet--butitlooksasthough,whenwegetallthedatainforOctober,thatOctoberisgoingtobeevenbiggerthanSeptember.

Soitlookslikeit'sallcomingtogether.It'sjusthappeningthreeorfourmonthslaterthanwehadoriginallyanticipated.Andthenyouknow,whenpeopleareplanningonleavingaCompany,they'renotalwaysascommittedorasfocusedorworkingashardforthatmonthorsothatthey'relookingforajobandinterviewing,thatyouwouldhopetheyare.

Soourprescriptiongrowthisgreat,butweexpectedittobegreatsooner.Andbythispointintheyear,youknow,ifyou'relaterstartingyourramp,thentherampnevergetsto,bytheendoftheyear,whereyouhadforecasteditwouldget.Ifallofthatmakessense.


Andonyouraccountingquestion,webelievethatouraccountinginrelationtosalestowholesalershasbeenappropriate.Anyquestionsrelatingtowholesaleinventorylevelsrelatesolelytodisclosure.

Andaswepreviouslysaid,ourauditor,Ernst&Young,hasconducteditsreviewsofthethreequartersof2014.Andthey'vealsoinformedustheystandbehindtheirunqualifiedopiniononour2013financialstatements.


Yes.We'vealwayshadalotofinventoryinthechannel.Someofitisatourthird-partylogisticsplace.Someofitwasinwholesalers.

Aswepullitdowninwholesalers,wewillincreaseitatourthird-partylogisticspartnerbecausewedohavelongdating,wehavefast-movingprescriptionsforourmajorproducts,andthesearetheonesthatareaffectedbythehigherlevels.Andwearenotdualsourcedineverycomponentalongthewayofgettingthefinishedproducttomarket.

Sowhilepeoplecouldsay,wellyoudon'tneedthatmuchinventory,iftherewasadisruptionforaproductlike




XIFAXAN,wejustcan'triskbeingoutofstockorbeingoutofproductforthreeorfourmonthsorwhateveritcouldbe.Andtogetanewfacilityqualified,itlooksasthoughabout18monthsisaboutasfastasthatcanhappen.

Sowedon'thaveanyofourownmanufacturingfacilities.Andeventhoughwe'veneverhadaglitch,wemanagecontractmanufacturersveryclosely.Wemakesurethatthey'reverygoodfacilities.

Atanygiventime,anybodycanhaveaproblem,andwe'vecertainlyseenthatinthisindustryonseveraloccasions.Sowejustdon'twanttoputourselvesinthatposition.

Operator:

We'lltakeournextquestionfromMichaelFaermwithWellsFargo.

MichaelFaerm(Analyst-WellsFargoSecurities):

Hi.Thanksfortakingthequestion.

Justaquestionontheinventory.Thismaybesimplistic,butifyourpastrevenuesareverifiedascorrectandyourcurrentrevenuesandyourcurrentinventoriesasoftoday'spressreleasearecorrect,thenIguesstheconclusionhastobethatthepastinventorylevelsthatyou'vetalkedaboutinthepast--forexample,XIFAXANattwoandahalfmonths--wereincorrect.AmIthinkingaboutthattherightway?


Imean,IthinkIhavetojustreferyoubackto,Ican'treallycommentonanythingthattheauditcommitteeisreviewing.That'sjustnotappropriateformedothat.SoIdon'tknowwhatelsetotellyou,exceptthat.


Okay.Thenjustonefollowupaboutyourviewsastowhattheoptimalinventorylevelshouldbe,goingforward.Inthepast,you'vetalkedaboutlastquartergettingtowardseightweeksasanoptimallevel.

Now,itsoundslikeyouaretalkingaboutninemonthsforXIFAXANasbeingrightlevel.AndthreemonthsforXIFAXANbeingtherightlevel,inthefuture.Maybeyoucouldhelpmeunderstandthedifferingviewsofwhattherightlevelis.


ThisisRickScruggs.I' lltakethatanswer.

Webelievethattheoptimallevelforourcurrentproductsthathavegreatprescriptiongrowthisaboutthreemonths.Andthat'swhatwe'regoingtogoto.Wedon'thave--wedidn'tsayninemonths.Ithinkyoumadeareferencetoninemonthsinyourstatement.

We'renotlookingforninemonthsofinventory.Ithinkthat'swhat'sinpressreleasesrightnow.Butwewillbelookingatdoingthesedistributionservicesagreementsandachievingthree-monthinventorylevelwithourkeyproducts.


Yes.Theninemonths,aswesaidbefore,we'recomfortablewiththoselevelsnowwithouttheDSA.ThreemonthsisreallyinthecontextoftheDSAandallthefactorsyounegotiatewithintheDSA.





Great.Thankyou.

Operator:

We'lltakeournextquestionfromAndrewFinkelsteinwithSusquehanna.

AndrewFinkelstein(Analyst-SusquehannaFinancialGroup):

Thanksverymuchfortakingthequestion.

MaybeIcanaskjustintermsof--it'sverycomplex,recognizingrevenueeachquarterwithalltheprovisionsthatareneededontheseproducts.Andyoudomentioninthereleasethatthe--anadvantageofsigningtheDSAswouldbe--makeiteasiertoallocatediscountsbetweenperiods.

Canyoujustcommentonhowyoudeterminethatthetimingofpastrevenuerecognitioniscorrect?Andmaybespecifically,asyouestimatethecurrentrunratesfortheseproducts,areyouusingthesamepriceperscriptasyouhadinthepast?Orwereanyadjustmentsneeded,intermsofhowyouestimatenetpriceperprescription,goingforward?


Toyourlastquestion,thenetprice--theserunratesarejustpoint-in-timeestimate.Sothey'rebasedononemonthofprescriptionsannualized,basedonourcurrentnetpriceforeachproduct.

Andthenfor--Iguess,onyourlastquestion--Imean,yourfirstquestion,whichwasontheaccountingis,aswesaid,webelieveouraccountingisappropriate.AndErnst&Younghasgivenusour--standbytheirunqualifiedopinion.


IfIcouldaskafollow-up.Justasyougothroughthisprocesswiththewholesalers--andyouseemprettyconfidentthattheagreementswillbeinplacebythebeginningoftheyear,whichwouldsuggestyou'reprettyfaralongwiththem--arethereanyimplicationsforthetimingand/ormagnitudeofpriceincreasesinyourproducts,relativetohistory?


Well,onpriceincreases,there'snothingthatwouldaffectourabilitydothat.Sowedon'tannouncetimingonthemforcompetitivereasons.Butwewouldexpecttocontinuetohavepriceincreasesonourproducts.


Yes.AndthenyourquestionaroundgettingtheseDSAsinplace--wefeelextremelyconfidentwe'llgettheseinplaceinfirstquarterof2015.We'realreadydowntheroadofworkingwithourkeywholesalersontheseagreements.


Thanksverymuch.

Operator:

We'lltakeournextquestionfromGaryNachmanwithGoldmanSachs.

GaryNachman(Analyst-GoldmanSachsGroup):

Hi.Carolyn,howshouldweevenbegintothinkaboutsalesrunratesforthenextcoupleofyears?We're




obviouslyverymuchinthedarkhere.

Socouldyoujusthelpusalittlebit,maybeusing4Qasastartingpoint?Imean,we'regoingtobestrugglingtryingtoforecastnow,goingforward.


Well,therunrates,asTimexplained--andwe'llcontinuetogivethose--buttherunratesare--therunratesthatareinthematerialstodayarebasedontheprescriptionsfromSeptemberdata,thelastmonthofthethirdquarter.


No,Iunderstandthat.ButImean,asfaras--asyou'reworkingdowninventorylevelsoverthenextcoupleofyears,we'regoingtohavetomakethoseadjustments.Sohowdoweevenbegindothat?

Atwhatpointwillyoubeabletogiveus,Iguess,guidance,atleast,for2015?HowlongwillittakeafteryousignDSAs?


Weplantogiveguidancefor2015onouryear-endearningscall,asisourpastpractice.Havingsaidthat,we'veattemptedtogivesomedatatoallowyou--tohelpinyourmodeling.Wegavetheestimateofourwholesaleinventoryforourkeyproducts,asofSeptember30,andourdesiredlevel,asofthreemonthsattheend[2016].

Andthenobviously,Glumetzaisauniquecase,whereitwillhavegenericcompetitorinearly2016.Soweexpectthewholesalerstobringinventorylevelsdowntoaroundonemonth.

Soinadditiontothat,factorin,ofcourse,increasedscriptgrowth,priceincreases,andournewproducts--suchasRuconest,Ucerisrectalfoam,andRelistorsubcutaneousinjectionforchronicpain.


Well,andwegaveguidanceforQ4thatwedohaveahighlevelofconfidencein.Andthen,goinginto2015withtheDSAsinplace,that'sthemainreasonwe'regoingtotheDSAsissothatwequithavingthisvolatility,andthatwearebetterabletogiveguidancebyquarter.


Okay.Andthenonecommercialquestion.Givensomeoftheturnoverthatyousawinthesalesforcehastakenalittlebitlongertogetthetractionthatyouwerehoping,justcommenthowyoufeelcomfortablethatyou'llbeabletocommercializeXIFAXAN,beforetheIBSindication,effectively.Thanks.


Ournormalturnoverrateforpeoplethatwehireissomewhereintheindustryaverageof15%to20%.WiththeSantarusandInventiverepresentatives,welookedattheirtrackrecordatthepreviouscompany.Andwelookedattheirresumesandtheirexperienceandwaytheywereevaluatedwheretheywere.

Butwedidnotputthemthroughournormalinterviewingprocess.AndIamnotsayingoursisbetterthantheirswas,oranythinglikethat.

Butwejustpluggedpeoplein,andtheyleftforvariousreasons.Someofthemdidn'tliketheirnewterritory--missedtheiroldphysicianbase.Weareaverydemandingcultureformarketsharegrowthandscriptgrowth,




andweaskpeopletomakealotofcallsanddoalotofthingsthatnoteverycompanydoes.Welikealotoftimeinthefieldinfrontofourhealthcareproviders,andnoteverybodyoperatesthesameway,sothereweresomeculturaldifferences.

Ithink,moredirectly,toyourquestionaboutIBSD,wewillbedoingournormalinterviewingprocessandmaking--andwewon'tbetakingpeoplethatwerehiredbysomeoneelseandputtingtheminanewsituation.

Wewillbehiringpeoplethatwanttojoinus,andit'stheirdecisiontojoinusandourdecisiontobringthemonboard.Sothat--we'veneverhadanunusuallyhighturnoverrateinthatsituation.

DidIansweryourquestion?


Okay.Yes,partofit.ButI' lljumpbackinqueue.Thankyou.

Operator:

We'lltakeournextquestionfromJasonGerberrywithLeerinkpartners.

JasonGerberry(Analyst-LeerinkSwann):

Hi.


Hey,Jason.


Hi.Goodevening.Thanksfortakingthequestion.

Justcuriousifyoucouldtakeusbacktothetriggersfortheaudit.Iamjustcurious,ifinanyway,someCompanyislookingtopotentiallyacquireSalix--ifthatwasapotentialtrigger.Andifyou'recurrentlystillreviewingoffersforCompanysale?

Andthen,mysecondquestion--canyoumaybetalkalittlebitabouttheeconomicsaroundXIFAXAN?You'vedoneacoupleagreementsnowwithCiplaandLupintohelpshoreuptheIPportfolio.

Justcurious,whenwethinkabouttheroyalties,Iassumethosearebookedincostofgoods.Arethosemeaningful?Hasthegrossmarginprofilechangedmuchfromwhatwethoughtwasa95%grossmarginonthatproduct?Thanks.


Thatwasalotofquestions,soforgiveusifwedon'thitonallofthem.You'lljusthavetoremindus.

Butasfar--Ithinkyouaskedaquestionaroundthatinvolvedauditcommittee'sreviewofeverything.SoasI'vealreadysaid,wecan'tcommentonthat.

Andthen,inrelationtoM&A,Idon'tthinkanycompany--Iknowwecertainlydon'tgetcaughtupincommentingonrumorsandmarketspeculationsandthingslikethat.

ThenasfarastheagreementsonRifaximin,what--reminduswhat--





Yes.Sorry.ThefollowuponRifaximinwasjust,withalltheseagreementswithCipla,Lupin,justkindofcurioushowyouguysareaccountingforanyroyaltiesassociatedwiththoseagreements.Andhowweshouldbethinkingaboutyourgrossmarginprofileforthatproduct.


Yes.TheeconomicshavenotchangedsignificantlyonRifaximin.


Yes.ThisisRickagain.

SotheCiplalicenseonthatIPdoesn'tapplytothecurrentform.Soit'saroundournewSSDandindevelopment.Soitwon'tchangeeconomicsofourcurrentform.


Okay.Thankyou.

Operator:

We'lltakeournextquestionfromGregGilbertwithDeutscheBank.

GregoryGilbert (Analyst-DeutscheBank):

Yes,thankyou.Myfirstquestionis,willthecurrentsituationaffectyourabilitytofile10-Qsand10-Ksinatimelymanner?

Myfollowupis,havetherebeenanyotherchangesinpersonnel,otherthantheCFO?Thanks.


Managementdoesn'texpectanychangesinourabilitytofileourrequiredfilingsof10-Qsand10-Ks.


Andno.Therehavebeennootherchanges.


Asapartofthatfirstone,canyoutellmewhatthe--youguyssubmittedanapplicationtohaveconfidentialtreatmentforsomeexhibitsintheform8-K.Canyoushedsomelightonthat?


I'mnotsureweknowwhatyou're--


Yes.We'llhaveto--which8-Kisthat?


JustanSECdocumentdatedNovember6,2014,(inaudible)grantingconfidentialtreatmentundertheSecuritiesExchangeActof1934.Wecanfollow-upafterifit'snot--





Yes.Ifyouwanttofollowup,thatwouldbegreat.


Thanks.

Operator:

We'lltakeournextquestionfromShibaniMalhotrawithStern,Agee.Pleasegoahead.

ShibaniMalhotra (Analyst-SterneAgee&Leach):

Hi.Soabouttheauditcommittee--Iknowyoucan'tcommentonwhat'sgoingon--butcanyougiveusanupdateorestimateonthetimingofwhenthat'sgoingtoplayout?

Andthen,followingonfromthat,Carolyn,you'vetalkedaboutshareholdervalueveryoftenoncalls.Andclearlythiseventisgoingtolikelycauseahit,intermsofthatparameter.

Sohowrealistic,orhowlikelyisitthattheBoardmightconsidernowsellingSalixassetstosomeoneelsewhomightbeabletobettermanageormoreappropriatelymanagetheassets?Howareyouthinkingaboutthat?Thanks.


Letmegobacktoyourfirstquestion,Shibani.Yes.There'ssomemusicbleedingthrough.

Theauditcommittee--they'regoingtobeverythorough,andtheyaremadeupofourindependentdirectors.Managementisnotinvolvedinthis.

Soreally,it'snotappropriateformetotalkalotabouttheirbusinessandtheworkthey'reconducting.Butwedo--managementdoesfeelconfidentthattheywillcompletethisinatimelymanner,buttheywillcertainlytakeallthetimetheyneed.

Andthen,weexpectthatwhencompleted,theauditcommitteewilladvisemanagementhere.AndtheCompanywillmakeanyappropriatedisclosuresatthattime.

Then,asfarastheBoardinterestedinsellingtheCompany,ourprospectsforgrowtharestrong.Ourpipelineisstrong.Ourcurrentproductsaregrowinglikecrazy--Imean,we'vegotalotofgreatthingsgoingforus.

Buthavingsaidthat,theBoardhasacompleteunderstandingoftheirfiduciaryresponsibilitiestoevaluateallopportunitiesanddelivervaluetoshareholders.Sowe'vealwaysdonethat.

Butthisissuethatwe'reworkingthroughandthatwe'redescribingtodayis--it'saverytemporaryissueinonesmallaspectofourbusiness,comparedtoourpipeline,comparedtoourgrowingportfolioofproducts,comparedtoalltheotherthingswehavegoingon,nottheleastofwhichisahugeindicationthatwehopewewillbegettinginfirstquarternextyear.


Okay.Thankyou.

Operator:

We'lltakeournextquestionfromTimLugowithWilliamBlair.

TimLugo (Analyst-WilliamBlair):




Thanksfortakingthequestion.Giventhathugeindicationcomingupin2015,ifweseescripttrendscontinuetobestrong,isXIFAXAN'ssalesgrowthgoingtobecorrespondingtoscripttrendsbythen?


Saythatagain,Tim.


TherevenuerecognizedfromsalesofXIFAXAN--willweseeitgrowingin-linewithstrongscripttrends,especiallywithalaunchinIBS?


Aswesaid,weplantoreduceourwholesalerinventoriesthroughtheperiodof2016.ButifwehavescriptgrowthfromtheIBSlaunch,obviously,thatcouldhappenquicker.Andassoonaswegetinventoriesnormalizedtothreemonths,thenwehopethatscriptgrowthwouldbemoredirectlyreflectedinourrevenuenumbers.


So3monthsistheinventorytarget,asopposedto9,obviously,and10to12weekswe'vebeenhearing.


Correct.CurrentinventorylevelforXIFAXANisninemonths.Andourtargetbytheendof2016isthreemonths.


Understood.Thanks.

Operator:

We'llgonexttoIrinaKofflerwithCantorFitzgerald.

IrinaKof f lerRivkind(Analyst-CantorFitzgerald):

Thanksfortakingthequestion.IwantedgobacktoIBSD.HastheFDAaskedyouforanyadditionalXIFAXANinformationsinceyousubmittedtheNDA?Anyinterimanalyses,biomarkers,anything?AndisthereanypossibilityofadelayedPDUFA?


Hi,Irina.ThisisBill.

Ithinkrightnow,theyhavenotmentionedanythingaboutadelay.They'remakingtheirwaythroughthedata.Iwouldcharacterizethebackandforthasbeingfairlyroutine.

It'salargedataset.Wealwayssaidthat.Weknewitwouldbeachallenge,gettingthroughallofthisdatainsixmonths.Buthavingsaidthat,wearegettingquestionsfromthem.Andwe'reansweringthosequestionsasfastaswecan.Andthey'vedonesomeaudits,asexpected,oftheclinicalcenters.Andthose,frommyunderstanding,havegoneextremelywell.Iknowseveralhaveresultedinno483beingissuedatall.

SoIthink,rightnow,wejustseethemprogressingonthereview.Whetherornottheywilldelaytheireventualdecision,issomethingIcan'tevenspeculateonbecausewejustdon'thaveanyknowledgeofthat.ButasIcansay,we'redoingeverythingonoursidetomakesurethatwefacilitate,inanywaywecan,theirreview.



©2014TheStreet,Inc.AllRightsReserved Page18 of 25


Perfect.Andjustaconstructivequestiononmodelingtheinventory,goingforward.Soshouldwe--basedonRick'scomments--expectastraightlineinventoryworkdown?Oristhereapossibilityofsomelumpinessinthere?


Ithinkitwillbemoreofastraightline.Andaswesaidbefore,thatitwillbeaffectedbyfuturescriptgrowth,priceincreases,growthofournewproducts,andthosethings.


Thankyou.

Operator:

We'llgonexttoShawwithCreditSuisse.

RonakShah(Analyst-CreditSuisse):

Hi.Thankyoufortakingmyquestions.Ithink--justtogoclarifyonthetwoyearsandhowwemodelthisout.Particularlyinthebackdropofinventorybeingdrawndownoverthisperiod,isitfairtosaythat,basically,thereportedsalesnumbereveryquarterislikelytocomeinbelowdemandasinventoryis,basically,beingdrawndown?AndIhaveonefollowupquestion.


Yes.


Okay.Great.Justintermsofthefollowupquestion--ifwethinkfromhowyouaremonitoring,asyoulookattherolloutofnewgenerationofhepatitisCagents.CanyougiveusasenseofhowyoumonitoritsimpactonXIFAXAN'sencephalopathybusiness?Andwhatkindofimpactyouexpect,andinwhattimeframedoyouthinkthiscanmanifestitself?


Wellfortheforeseeablefuture,wedon'tthinkthatitwillhaveanyimpact.Thereare--somepeoplebelievethattherecouldbeapositiveimpactbecausethereissuchabigpushnowandsomuchtalkaboutHepCthathopefullymoreandmorepatientsarebeingdiagnosed.

Soifthosepatientsthatarebeingdiagnosedalreadyhaveascarredorcirrhosedliver,theymayalreadybeexperiencingHE.Andthatwouldbediscovered,andthenwewouldbeavailabletotreatthatasatreatmentoption.

SotheHepCpopulationisexpectedtonotpeakuntil2020.Inthemeantime,thethingthateveryoneinthelivercommunityorthattreatsliverpatientsistalkingaboutisNASH,alsocommonlyknownasfattyliverdisease.Sothatissupposedto,Ithink,beasbigasmaybecholesterol.It'sbeencomparedtothecholesterolmarket.

Sowefeellikethatthefutureforhepaticencephalopathytreatmentsisgreat.SoImean,that'sbasedonallthedata,talkingwiththoughtleaders--everythingwehaveatourdisposaltellsusthat.





Great.Thankyou.

Operator:

We'llgonexttoOrenLivnatwithJMPSecurities.

OrenLivnat (Analyst-JMPSecurities):

Thanks.Iamjusttryingtowrapmymindalittlebitmoreaboutthisconceptofwhatarunrateis,inthepastandgoingforward.SoIunderstand--andhaveunderstood--thateverymonthorquarter,yougiveusthelatestmonth's,annualizeit,kindofprice.Butyou'reactuallyshippingbottleseverydayandrecordingsales.

Soasthisinventoryhasaccumulatedunbeknownsttoyoutoaverylargeninemonths,whatwereyou--wasyourrunratethetrueRXtimespricerunrate?Orwereyougivingusarunratebasedonwhatyouwereshipping,whichmayhavebeen,infact,inflatedovertime?

Andistherunrateyouaregivingusnowbasedonatrue--weknowwhatthepriceis,weknowwhattheaveragediscountsare,rebatestopayers--thisis,infact,thefundamentaldemandnumber?AndIguess,howdidwemissthedifferentialbetweenwhatyou'reshippingandwhatyou'retellingustherunrateisforthelastXnumberofquartersoryears?


Well,therunrate,asIsaidbefore,issortofaone-timeevent.Andit'sbasedonthemonth'sprescriptionstimesourcurrentnetprice.Andit'sthesamecalculationwe'vedoneanddisclosedineachofourcalls.

Theproblemwithtryingtorelateittosalesoveranyperiodoftime--orshipmentsoranythinglikethat--isthere'salotmorevariablesthatareinvolved,suchaspriceincreases,changesinrebates,andthenourmonthlyprescriptionsarenotstatic.SoIthink--Imean,doesthatansweryourquestion?


Well,Iguess,scriptsaresortofanend-userissue,right?Sothewholesalerismonetizingscripts.You'remonetizingshipmentstowholesalers,right?

Soifyou'rebuildingupahalfayear'sextrainventoryabovewhatyouthoughtyouhad,presumably,theywerepayingyouforallofthatproduct.Andyouwerebookingawholelotofrevenuethatwasaboveandbeyondwhattheprescription,quoteunquote,runrateshouldhavebeen.

SoI'mjusttryingtounderstanddisconnectofhowcould--unlesstheyweren'tpayingyouforit.ButIthinkiftheywere,theywouldhavebeenpushingbackalotearlier,Iwouldhavethought,basedontheirowncashflowsituation.We'rebuyingmorethanweareselling.Canyouhelpusjustunderstandhowthatcouldhappen--thatdisconnect?


Imean,Iguess,theinventorylevels,aswesaid,haveremainedconstantoverthisperiodoftime--over2014.Andaswe--you'rebasicallytryingtojustcomparebananasandapples.Becausetherunrateamountdoesnottakeintoaccountallthevariabilitywiththeprescriptionsbymonth,changesinrebates,priceincreases,andthevarietyofitemsthathitourrevenueinanyparticularperiod.


Andthenwehavereturns.





Thenwehavereturn[reserves].Yes.


Dependingonwhatisshipped.Andtherearereturnreserves,basedonproductmovement.


Correct.


Okay.AndifIcouldjusttrythesamequestion--justonelastangle.Andplease,bearwithme.

Thelasttwoquarters,we'veallbeenoperatingundertheassumptionthat,basedontherunrateyougaveusandsalesyoureportedandthetwoshortfallswehadthelasttwoquarters,thatthatindicated,quoteunquote,destocking,right?Youhadarunratenumber.Youreportedanumberthatwasn'treallyconsistentwiththat,andhence,thedifferencebeingdestocking--manyweeksonseveralproducts,wethought.

Butthentoday,you'retellingusinventoryhasactuallybeenreallystableatninemonthsforXIFAXAN.Sotherehasn'tbeendestockingthelasttwoquarters.

Whatwashappeningthelasttwoquarters,whenyoursalesweresignificantlylowerthanthe,quoteunquote,runrate?Orwhenyouinvestigatedthedifference,whatdidyoulearnsixmonthsagoinMarch--thefirsttimethathappened?


Unfortunately,Ican'tcommentonthepriordisclosuresbecausetheauditcommitteeisretainedoutsidecounselandisconductingareview.SoI'munabletocommentonthatquestion.


Well,thanks.

Operator:

We'lltakeafollowupnextfromMarioCorsowithMizuhoUSA.


Yes.Thanksforthefollowup.Iamgoingtotrytore-askmyinitialquestion.Imightnothaveaskeditveryclearly.Whenwethinkabout4Q,iftheIMAsaren'tgoingintoeffectuntilQ1of2015,I'mtryingtofigureoutwhat'shittingQ4revenuethatdidn'thitQ3revenue.Becausetheonlythingthatlookedmateriallydifferentthandemandin3Qismaybethepurgative.InfrontoftheIMAsgoingintoeffect,isthereareductionininventorythat'sstartingin4Q,andthat'swhywe'reseeingthatprojectedshortfallinrevenue?Thankyou.


No.Imean,Ithinktheshortfallonrevenueisbecauseourprescriptiongrowthhasbeenlessthanwehadexpectedandbecauseofthefactorswetalkedaboutbefore--thehighunexpectedturnoverinSantarus.Andweexpect,Ithink,ourinventoriestobeconstantattheendoftheyearbecausewewon'tbeabletoenterintotheIMAsuntileffectiveJanuary1.





That'scorrect.


Oratsomepointinfirstquarter.


Yes.


Butwe're--withtheDSAs,we'reintheprocessofnegotiatingthose.Thosewillbeinplaceatthebeginningof2015.Theremainderofthisyear,ourinventoriesremainconstant.


Sothat'stheSantarusportfoliothatyou'respeakingabout,then?


No.I'mtalkingabouttheentireSalixportfolio,whichincludesSantarus.


Andthatrepdefectionishavingthatsignificanteffecton,say,XIFAXANthen?


Yes.


Yes,becauseasmuchasXIFAXANisgrowing,wehadveryaggressiveprescriptionnumbersforthisyear--orforecast--becauseweexpectedthenewsalesforcetobeupandrunningandtostarttohaveaprettysteepramp,cominginthatMarch,Apriltimeframe.Andtherampisnotreallyacceleratinganddoingwhatwehadexpectedittodo.We'rejustseeingthatinthelastcoupleofmonths.


Andthesalespeoplethathavebeenleavingweresellingallofourproducts,notjusttheSantarusproducts.Wejustidentifiedthembecausetheyweretheoneshiredinconnectionwiththemerger.


Yes.WhentheSantarusandInventiverepscameover,alotofthemweresellingSalixproductsbecausegoingintotheprimarycaremarketplace,theprimaryproductthereonmostcallsisXIFAXAN550.

Operator:

We'llnexttakeafollowupfromMichaelFaermwithWellsFargo.Mr.Faerm,yourlineisopen.


Sorryforthedelay.Thanksforthefollowup.




RegardingtheCFOdeparture,withthenamingofaninterimCFOandhiringofasearchfirm,itwouldseemtobeanunplannedevent.Canyoucommentonanyofthereasonsforthedeparture?


No.We'renotgoingtomakeanycommentbeyondwhat'sstatedinthe8-Kandthepressreleasewiththat.


Okay.Justoneotherfollowup.Haveyouconsidered--ormightweexpecttosee--anyexpensereductionsover2015and2016thatmightpartlyoffsetthenegativeimpactonrevenuesfromthedestocking?


We'realwaysmonitoringourexpenselevels.Andwe'llcontinuetomonitorthem,sowe'lltakethatintoaccount.


Thankyou.

Operator:

We'lltakeafollowupfromShibaniMalhotrawithStern,Agee.


Hi.Nomusicthistime.Conceptually,wantedtoaskyouaquestion.Isitfairtolookatthislikewe'relosing--ifyoutookalltheinventoriesdowninonego,wearelosingaroundsixmonthsofsalesforSalixformostofyourkeyproducts.Butthenbeyondthat,thingsshouldbeclean.Andwe'regoingtogobacktotherunrateplussomethingbecauseyouhaveproductsgrowing,andyouhaveXIFAXANIBDcomingout.Isthatthecorrectwaytolookatit,intermsofavaluation?


Ingeneral,itis.Buttheninemonthsisbasedonournext-quarterestimates.Andasourprescriptionscontinuetogrowandwelaunchotherproducts,thatcouldreducetheperiodoftimeortheamountthatitaffectsourrevenues.


Right.Soinaworstcase,it'ssixmonthsofrevenues.Andthat'skindofwhatwe'velost--justbyaccounting,correct?


Ithinkthat'sfair.


Okay.Andthesecondthing--ifyoucangiveusjustanupdatedsenseofpricingforyourkeyproducts,justsothatwe'reallonthesamepointfornow?


Areyouaskingforrecentpriceincreases?





Justwhatthecurrentpriceperscriptisforeachofyourkeyproducts,oryourmeaningfulproducts.


Wemayneedto--


Yes.We'llhavetofollowupwithyouonthatone.


Yes.


Okay.Thankyou.Thankyouverymuch.

Operator:

AfollowupfromGregoryGilbertwithDeutschebank.


Thankyou.Twofollowups.Oneis,allthetalksofarhasbeenaboutwholesaleinventorylevels.Isthereanythingtonoteaboutretailerinventorylevelsthroughoutthissituation?

Andthesecondpartisregardingyourthree-monthtarget.I'mprettysurethat'sthehighestIhaveheardforcompanieswefollow,inanIMAcontext.

Areyousurethatthreemonthsiswhereyouwanttobe?Andistheresomethinguniqueaboutyourproducts,versustherestoftheindustrythatseemstobeatonemonthorbelow?Thanks.


ThisisRickagain.Wehavenoimpactatretail.OurDSAswillguaranteeservicelevelsthatwillmakesurethattheproductsareatpharmacyforpatients.Sowehavenoproblemswiththat.

Andwe'recomfortablewiththistargetbecauseofourproductshavereallygoodprescriptiongrowthandhavelongdatingonalltheproducts.Andsowebelievethat'stherightlevelforus.


Thanks.

Operator:

We'lltakeafollowupfromOrenLivnatfromJMPSecurities.


Thanks.Ijustwanttomakesuremymathisright.SoIthinkthereisstillsomeconfusionaroundQ4.

You'resayingthatthereisnoinventorydrag,perse,inthatquarter.Andthatit'sjustscriptsunderperformingyourambitiousexpectations.ButifIjustadduptherevenue,thedifferencebetweenQ4--yourfull-yearguidanceandwhatyou'vedoneyear-to-date,arewenotseeingaquarter-over-quarterdecline?




DidIjustdomymathwrong?I'msorry.


Imean,yes.Wehad$355millioninQ3and$325millionasourguidanceforQ4.

Aswesaid,theshortfallisbecauseofourprescriptiongrowthonourkeyproductsislessthanwehadexpected.And--becauseoftheturnoverinSantarussalesforce,wholesalerdiscountshigherthanbudgeted,andhigherthanexpectedrebatesontheSantarusproduct.


Well,andinfairness,Oren,wedon'twanttoputguidanceoutthereandmissitagain.


Right.ButjustsoI'mclear--scriptsaregoingupandtotheright,especiallyforyourbiggestproducts,whichisgreatandreallyencouraging.Presumably,ifthere'snodemanddragforinventorydestockinQ4andtherunrateyou'regivingusorthevalueperscriptiswhatitisandisn'tchangingorgoingdown,shouldn'tsalesgoupnextquarter?


Well,andtheymay,hopefully.


AndsinceweareinthemiddleofnegotiatingtheseDSAs,we'renot--we'realittleapprehensiveabouthowthewholesalerswillreact.Sowe,asCarolynsaid,wewantedtogiveanumberthatwecouldhitforQ4,basedonourexpectations.


Okay.It'sjustadramaticdropoff.AndsoIacceptthatmaybeyou'rebeingveryconservative,andperhapsthere'ssomerebatinginvolvedandsomestuffthathappens.

Butwe'rejusttryingtoreconcilesortof--goingforward,everything'snormal.Scripts--justmodelisstraight-linedragstartingnextyear.Butalready,Ifeellikewearegettingintoanotherconfusingquarter,rightoffthebat,thisnextquarter.Ijustwanttomakesureweunderstand.


Yes.Well,Imean,thisquarterisgoingtobedifferentbecausewe'regoingtobeintheprocessofnegotiatingtheagreements.Sowebelieveit'sjustatemporary,one-timethingaswenegotiatetheagreementsandmoveforwardintonextyear.


Allright.Well,thankssomuch.

Operator:

Andwe'lltakeournextquestionfromIrinaKofflerRivkindwithCantorFitzgerald.


Thanksforthefollowup.VerysimpleinventoryaccountingstufflikeLIFOorFIFO--whenwe'reforecasting




howit'sgoingtogetworkeddown,shouldwebeforecastingusingthemorecurrentpricing,whichishigher?Andtherefore,youcouldworkitdownfaster?Thanks.


Well,yes.Imean,oursalesintotheinventorywillbeatthecurrentpricing.Sothat'swhatourrevenuewillberecognizedbasedon.


Okay.Thankyou.

Operator:

Thatdoesconcludeourquestionandanswersessionfortoday.I'dnowliketoturnthecallbackovertoMs.Loganforfurtherremarks.


Iwouldjustliketothankeverybodyforbeingonthecall.We'verunalittlebitover,sothanksforstayingonthecallwithus.Andwelookforwardtotalkingwithyouonournextearningscall.Thankyou.

Operator:

Ladiesandgentlemen,thisdoesconcludetoday'steleconference.Wethankyouforyourparticipation.

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