We carry inventory at the lower of cost or market using the first-in, first-out method. Inventories on hand at March 30, 2008 are related to ATryn ® , which is approved for sale in the European Union. We expect that all of the capitalized inventory [1371K] will be sold to LEO Pharma, our partner for ATryn ® in Europe, either for clinical trials or commercial sales.
During the first quarter of 2007, we also derived $3.3 million of our revenue from the sale of ATryn ® product to LEO for clinical and commercial use. We anticipate selling product to LEO during the second quarter of 2008.
Clearly there is no way to calculate, either prospectively or retrospectively, what fraction of product taken by LEO is sold vs used in clinical trials, nor at what rate the product they took last year and presumably last quarter was/will be deployed. All that really matters is how much cash we are getting from them and we will find that out in three weeks. If our inventory substantially increases that might signal that sales are good, but they might be good even if it doesn't since it is fifo valued at lower of cost and market and last quarter's presumptive uptake might have flushed high cost goods from the queue: "We anticipate our cost of production will be substantially reduced as we move to larger production volumes to support clinical and commercial requirements." (That may already be starting to happen.)
In other words, physical inventory might be ramping up even though its book value isn't.
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