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Executives

Bill LaRue - SVP and CFO

Ted Schroeder - President and CEO

Scott Byrd - SVP and CCO

Analyst

Eric Schmidt - Cowen and Company

Richard Lau - Wedbush

David Steinberg - Deutsche Bank

Louise Chen - Guggenheim

John Newman - JMP Securities

Larry Smith - SmithOnStocks.com

Ami Fadia - UBS

Greg Fraser - Banc of America

Michael Schmidt - Leerink

Cadence Pharmaceuticals, Inc. (CADX) Q1 2013 Earnings Call May 2, 2013 4:30 PM ET

Operator

Good afternoon and welcome to the Cadence Pharmaceuticals First Quarter 2013 Financial Results Conference Call. On the call today are Ted Schroeder, President and CEO; Bill LaRue, Senior Vice President and Chief Financial Officer; and Scott Byrd, Senior Vice President and Chief Commercial Officer.

At this time, I would like to inform you that this conference call is being recorded and that all participants are in a listen-only mode. At the request of the company, we will open up the conference up for questions and answers after the management presentation.

Our first speaker is Bill LaRue. Go ahead please.

Bill LaRue

Thank you. Good afternoon everyone. Before we begin, I would like to remind you that statements included in this conference call that are not a description of historical facts are forward-looking statements. Forward-looking statements include statements regarding cases expectations regarding the growth, outlook and demand for OFIRMEV, our ability to meet our customers supply requirements for OFIRMEV and to offer the product in flexible plastic bags and our guidance regarding net product revenue from sales of OFIRMEV for the 12 months ending December 31, 2013.

You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the day hereof. Our actual future results may differ materially from our current expectations due into the risks and uncertainties inherent in our business. These risks are detailed in the Risk Factors in our most recent Form 10-K and upcoming form 10-Q as well as elsewhere in our periodic reports and other filings made with the Securities and Exchange Commission from time-to-time.

All forward-looking statements are qualified in their entirety by this cautionary statement which is made under the Safe Harbor provisions of Section 21E of the Private Securities Litigation Reform Act of 1995 and we undertake no obligations to revise or update the information disclosed during this call to reflect events or circumstances after this call.

If anyone has not seen our Press Release issued today, you can access it on our website at www.cadencepharm.com. We also post and maintain the current version of our corporate presentation on the Investors portion of our website under Events and Presentations and then Corporate Overview.

Additionally, this conference call is being webcast through our website and will be archived there for future reference. We use the Investors portion of our website as one means of disclosing material non-public information. So we encourage you to monitor our website in addition to following our Press Releases, SEC filings, and public conference calls and webcasts. Ted?

Ted Schroeder

Thank you Bill. Good afternoon everyone and thank you for joining us today. I will open by providing a brief overview of our accomplishments for the first quarter. Next I will ask Scott to provide an update on our commercial activities and progress with OFIRMEV and then Bill will discuss our financial results. Following our prepared remarks we will open the call to your questions.

We started off 2013 with strong revenue growth. Our net product revenue from sales of OFIRMEV during the quarter was $23.6 million, which includes the one-time recognition of $2.6 million in deferred revenue on previously shipped product. As of the beginning of the year we determined that we had obtained sufficient product return history to reasonably estimate future wholesaler returns so we changed the manner in which we estimate returns.

With this we now recognize revenue at the time the product is sold to wholesaler. Bill will have more to say about this when he speaks. Excluding this amount, our net product revenue for the first quarter was $21 million, which represents an increase of more than 160% from the $8 million in net product revenue recognized for the first quarter of 2012 and an increase of 23% from the $17.1 million recognized in the fourth quarter of 2012. We believe that these results demonstrate a consistent growth outlook for OFIRMEV.

During the quarter we bolstered our balance sheet with a receipt of $14.6 million in cash in early January in connection with the sale of Incline Therapeutics. In December 2012 we entered into an agreement to waive our option to purchase Incline in order to allow Incline to be sold to a third party. Incline’s sales was completed in early January and we received $13.1 million in cash for the waiver and termination of our Incline option, plus an additional $1.5 million in cash for the Incline stock that we held. This resulted in a cumulative gain of $7.7 million.

We also strengthened the supply chain for OFIRMEV during the first quarter by extending our existing supply arrangement with Lawrence Laboratories, which is a Bristol-Myers Squibb affiliate and by entering into an agreement with Laboratorios Grifols to supply us with OFIRMEV in flexible plastic bags. At this I would like to turn the call over to Scott who will discuss our commercial operations and sales performance during the first quarter.

Scott Byrd

Thank you. We got off to a quick start in 2013 and we are pleased with many positive indicators that we are seeing. Notably the gross margin on sales of OFIRMEV was 65% in the first quarter of 2013, as compared to 47% for the first quarter of 2012. Hospitals purchased approximately 1.9 million vials of OFIRMEV in the quarter ended March 31st of this year, which represents an increase of approximately 1.1 million vials or 138% as compared to the first quarter ended March 31, 2012. This represents continued market share gains and OFIRMEV’s quarterly IV analgesic unit market share was 2.85% in the first quarter of this year, versus 1.41% in the first quarter of 2012.

Since its launch in January of 2011 to the first quarter of 2013, hospitals have purchased approximately 8.1 million vials of OFIRMEV. We estimate that during this period approximately 3.2 to 4 million patients have been treated with OFIRMEV using an estimated average of 2 to 2.5 vials per patient. In addition the number unique accounts that have ordered OFIRMEV as of March 31st increased to over 4,000 accounts. This is an increase of nearly 50% since March 31, 2012

OFIRMEV is now been used in more than four out of five of the top 2,000 hospitals in the U.S. when ranked by the quantity of IV analgesic products purchased. We believe that this is indicative of physician demand for new methods to manage pain and the recognition of the role that OFIRMEV can play in acute pain management.

We’ve also been able to raise the number of our repeat customers. As of March 31st of this year over 3,300 accounts, approximately 83% of our customers have placed multiple orders for OFIRMEV. This is an increase of more than 1,300 repeat customers or 65% since the first quarter of 2012.

We also continue to make gains in our average order size. As of March 31, 2013, this average had increased by approximately 28% compared, to the same time period of 2012. We’ve continued to see growth in variety of key metrics and increased demand for OFIRMEV. We believe that this growth is a result of the combination of the fine work of our commercial team as well as the positive experiences that healthcare providers and patients are having with the product.

I’m also happy to report that OFIRMEV was placed on the VA National Formulary by the department of Veterans Affairs during the quarter. This formulary is list of products that are generally covered under the VA Pharmacy benefits and that must be available for prescription to all VA facilities. We believe that the availability of OFIRMEV on VA National Formulary demonstrates the VA’s recognition of the clinical value that OFIRMEV can offer to patients and physicians in the treatment of acute pain and fever.

We believe that this increase in our revenue in the number of vials of OFIRMEV that we sold during the first quarter is indicative of the ongoing growth of demand for the product. The extension of our agreement with Bristol-Myers Squibb through December of 2018 should strengthen our ability to meet our customer supply requirements for the product and our six year agreement with Grifols for OFIRMEV in flexible plastic bags should enable us to offer an alternative packaging configuration for the product pending FDA approval.

We’re continuing our efforts to education the healthcare community on the important role OFIRMEV that can play in a multi-model approach to the acute pain management. From our conversation, we understand that doctors and nurses are using the product to manage acute pain in increasingly diverse patient populations and procedures. We’re receiving reports, these healthcare professional are having positive experience with their use of OFIRMEV to treat to patients and that their patients are expressing satisfaction with the pain treatment.

I’ll now turn the call over to Bill who will review the financial results.

Bill LaRue

Thanks Scott. During the first quarter of 2013, we achieved net product revenue of $23.6 million, consistent with other companies with product at this stage of commercialization and based upon our determination that we have obtained sufficient product return history to reasonably estimate future wholesaler returns. Beginning on January 1, 2013, we began to recognize revenue at the time that the product is sold to the wholesaler. Previously, we recognized revenue only when the wholesaler sold the product to the end-user customer.

As Ted mentioned, as a result of this change, we recorded a onetime adjustment during the first quarter of 2013 to recognize deferred revenue on previously shipped product resulting in additional net revenue of $2.6 million and cost of sales of $900,000 for a new gross margin impact of $1.7 million. Excluding the deferred revenue we recognized on previously shipped product, net product revenue for the first quarter of 2013 was $21 million.

For the three months ended March 31, 2013 we reported a net loss of $1.4 million or $0.02 per share, compared to a net loss of $22.7 million or $0.27 per share for the comfortable period in 2012. In January 2013, we received $13.5 million from the waver and termination of Incline option and 1.5 million from the sale of Incline stock which resulted in a cumulative gain of $7.7 million.

Excluding the one side gain from the Incline transaction and then 1.7 million gross margin impact from the change in our revenue recognition accounting estimate, our net loss for the three months ended March 31, 2013 was $10.8 million or $0.13 per share. For comparison, our net loss for the three months ended March 31, 2012 was $22.7 million or $0.27 per share.

Our gross margin for the first quarter 2013 was 65%, as compared to 47% for the first quarter of 2012. The increase in margin was primarily result of higher freight costs incurred during the first quarter of 2012 that were not incurred in 2013 and the impact of price increases implemented in July 2012 and January 2013. Additionally, we recorded a onetime credit of $300,000 during the first quarter of 2013, in connection with the termination of our supply agreement with Baxter.

Our research and development expenses were $1.4 million for three months ended March 31, 2013 which was a decrease of 100,000, as compared to the $1.5 million research and development expenses for the same period in 2012. This decrease primarily resulted from lower personnel costs for our research and development team, largely offset by costs incurred in connection with our FDA required post approval clinical trial for OFIRMEV in pediatric patients.

Our selling general and administrative expenses for the three months ended March 31, 2013 were $21.6 million which was a decrease of $1.9 million from the $23.5 million for the three months ended March 31, 2012.

The decrease was mostly attributable to the timing of our educational and marketing programs, which were front loaded in 2012 but which we plan to spread more evenly throughout 2013. As of March 31, we held cash, cash equivalents, and short term investments of $64.2 million and net accounts receivable of 8.9 million.

I’ll now turn the call back over to Ted.

Ted Schroeder

As of today, we are increasing our guidance to reflect the impact of the deferred revenue recognized in the first quarter of 2013. We now expect that our net product revenue from sales of OFIRMEV for the 12 months ending December 31, 2013 will range from approximately $97 million to $103 million.

The first quarter was a strong start to the year. Our hardworking team is dedicated to establishing OFIRMEV as a foundation of a multi model approach to acute pain management and we believe this is reflected by the increasing demand for the product.

We will now open the call to your questions, Operator?

Question-and-Answer Session

Operator

Thank you, Mr. Schroeder. (Operator Instructions). Our first question is from Eric Schmidt of Cowen and Company. Your line is open. Please go ahead.

Eric Schmidt - Cowen and Company

Scott we're used to getting the order frequency data from as well as if you could provide the average order size on a quarter on quarter basis.

Scott Byrd

Yes absolutely. We've got it in our corporate presentation Eric. So you'll certainly have it for reference there as well. The average order size for the first quarter was about 96 vials. So that's an increase of about 28% over the same period last year. I think we reported about 75 vials per order in Q1 of last year.

Your other question was the order frequency and we saw about a little north of 4.7 orders per account for the quarter. That's pretty comparable, slightly ahead of where we saw in Q4 of last year and it's pretty significantly higher than we saw of course in Q1 of last year. The one thing I'll note on that is we had a pretty significant increase in the number of unique accounts this far end of the launch.

This quarter we had about 300 new accounts come on board in first quarter, which was certainly very, very exciting for us. That tend to dampen a little bit the order frequency number. So if you just look at those accounts, the existing accounts that we had on board at the end of the year, their order frequency increased by about 6% in the quarter.

Eric Schmidt - Cowen and Company

Bill you made some good progress on the gross margins this quarter you also called out the $300,000 onetime benefit in COGS. What's a reasonable number to use say for the remainder of 2013 in terms of the margins?

Bill LaRue

Eric I think that 64% - 65% in that general range I think is a good number for your model.

Eric Schmidt - Cowen and Company

And then just last question maybe for Ted, is there any update on the Excella litigation.

Ted Schroeder

No, we're moving forward and preparing for a trial at the end of the month.

Eric Schmidt - Cowen and Company

Do you have the dates handy for that?

Ted Schroeder

The trial is slated to begin on May 20th and we expect that that will be seven to 10 business days to complete.

Operator

Thank you. Our next question in queue is from Richard Lau of Wedbush. Your line is open. Please go ahead.

Richard Lau - Wedbush

I was wondering now that you guys had been out there for a little over two years. If a significant number of hospitals have had a chance to conduct a product review at this point, and also whether after they see those result, if that’s significant driver for increased utilization?

Bill LaRue

Yes, absolutely. Now those numbers aren’t really officially reported anywhere. They tend not to always publish when they have completed the review. So it’s going to be hard for me to quantify for your Richard, exactly how many.

I can say that when they are doing a balanced review to really determine the accurate impact on care, we love it when they complete those reviews. It has universally helped us. I think in fact our best estimates are that we had probably over 500 hospitals actually loosen their formulary restrictions over the course of the last year. So we think that’s primarily driven by both the formal and the informal evaluations that they are completing.

Again I can't say with great certainty how many of those reviews have taken place. We are anecdotally seeing many of them report that they have completed some. In fact we are seeing a few of them actually begun to publish the results of some of those reviews through poster presentations and other venues.

So to the extent that we see those come on the docket, I am happy to point them out. I am pretty sure there is going to be at least one, if not more presented at the upcoming American Patient Safety Foundation meeting in May. And there are likely to be some additional ones at the pharmacy related meetings towards the end of the year.

Richard Lau - Wedbush

And then just one quick follow up. Can you reminded me you guys are with Canada application and you’ve sort of partnering discussions around that?

Ted Schroeder

So Richard, we submitted the application in Canada last year and it’s working its way through the process. We recently got some minor question. So it appears that they are actually actively working on the application. And so our strategy is to move for approval and pricing, and then make a decision around partnering.

Bill LaRue

Richard, just one correction, I just looked at my notes, as Ted was answering your question on Canada. I think the poster that I mentioned on the hospital experience could be presented at the American Pain Society. So just want to make I pointed you in the right direction there.

Operator

Our next question in queue is from David Steinberg of Deutsche Bank. Your line is open.

David Steinberg - Deutsche Bank

Just two questions. First, from time to time you guys have discussed a possibility of bringing in a new product or two to better leverage your sales force. So just curious if you could give us an update on what you are seeing?

And then secondly for Bill you are showing continued improvement in gross margins. I was curious as you get more and more critical mass what you think gross margins could potentially reach in the next two or three years?

Ted Schroeder

So David you are absolutely right. We continue to be active on the business development front, looking at a lot of potential opportunities. We agree that we have capacity in the sales force to add new products and I think that is important. Under every strategy and every scenario that we have planned OFIRMEV is the number one priority. So the number one priority for Cadence is to grow OFIRMEV and to maximize its revenues and then beyond that, it is to add products that will be used primarily within the walls of a hospital.

We are looking at a variety of different opportunities that range from traditional product licenses to product acquisitions, all the way through M&A of some smaller companies and so we are a somewhat therapeutic category, agnostic but are focused on products that will help us within the hospital and that we can leverage together with OFIRMEV. The beauty of OFIRMEV is that it can be used in nearly every department in the hospital. So having an additional product we actually think we will expand our promotional efforts within the hospital.

Still feel like there is a gun to our head to get something done in the short term, but we are certainly cognizant of the opportunity and with a well-established successful experienced sales force, having a second product would be a nice accelerator to our growth.

Bill LaRue

And David with respect to the gross margin question, excluding doing something from a balance sheet standpoint where we would buy down royalty or things along those lines, I think that we are probably getting pretty close to steady state in term of gross margin with the OFIRMEV product and remember we have got that increasing royalty, which kind of offsets the improvements that you get with volume from a COGS standpoint.

I think where the real leverage will come is as we bring in other products, depending upon their gross margins but more importantly with the fixed cost structure where you really see expansion as you see the operating margin expansion and so I think that’s where we see most of the improvement but it should be substantial over time as we leverage the sales force.

Operator

Our next question in queue is from Louise Chen of Guggenheim. Your line is open.

Louise Chen - Guggenheim

So just back on the royalty buy down that you mentioned, what kind of gross margin impact could we expect from that? And then on the business development, just a follow up on that. I know a lot of companies are looking for acquisition targets. What do the valuations look like? Are you seeing a crowded market or are there plenty of opportunities to go around. And then lastly just on the NOL analysis, any update on that yet?

Bill LaRue

Louise, it’s Bill, I’ll take one and three and let Ted do two. And in terms of the NOL, we are continuing that 382, 383 work and so I would expect that we’ll have something in the next quarter in terms of being able to discuss on the next quarterly call. So, I think that we’re getting closer to completion of that particular activity. Louise, I apologize, your first question again?

Louise Chen - Guggenheim

On the royalty buy down, what kind of gross margin impact could that have?

Bill LaRue

Well, our royalty is between mid-teens and mid-20s depending upon the level of sales. I can't speculate as to what that would look like. Obviously there are number of parties involved but it could have a nice improvement in margin, but I don’t want to go down the path at this point. It’s a premature to suggest what a number might be.

Louise Chen - Guggenheim

And just valuations on business development, what you’re seeing just because lot of people mentioning that they interested in doing this. I’m just wondering there are lot of opportunities around or is it a crowded market and what you’re seeing?

Ted Schroeder

Well, there is always completion for attractive assets, there is no question. I think this space is somewhat less crowded then if you were looking on oncology or neurology, rheumatology etcetera where you’re competing not only with companies generally of our size but much larger companies as well. In general, Big Pharma and Big Biotech have not been that interested in the hospital space.

So I do you think there is somewhat less competitive environment. We have a very robust deal flow sheet. We have multiple opportunities and multiple therapeutic categories that we’re currently evaluating. So we like the deal flow, I think we’re getting a look at virtually every product that’s available in the hospital space these days.

Valuations, certainly valuations from companies have been going up but valuations for products and if you look sales multiples have somewhat stabilized and so we haven’t seen any dramatic difference in those multiples, So we still think there are clearly transactions that we can complete and if they make strategic sense, we’re going to move forward in a way that’s good for shareholders.

Operator

Our next question is queue is from John Newman from JMP Securities.

John Newman - JMP Securities

Question for Scott. Scott, I appreciate the detail that you gave us on the average vial count over a period of time. I wondered first of all have you seen any trends in the first quarter or maybe fourth quarter in terms of that picking up. And the second question is with your new accounts, are you seeing a shorter period of time to which they will start utilizing more vials per patient? Thanks.

Scott Byrd

Those are great questions. The first one in terms of the average order size, there is actually a nice chart that I’ll point you to in the corporate presentation, John that will give a sense of that. The simple version is if you got a straight edge or ruler with you, you can draw that line from effectively launch, all the way through the first quarter and that has been the line that we have been growing on, on the average order size really for entire launch.

I don’t have any reason to believe that’s not going to continue and which is pretty cool because we’re seeing that in the content of just continue to very growth in new accounts. You would think as we get north of 2000, 3000, 3500 accounts, the size of these accounts, that are coming onboard really obviously started to decline. There is only about 5000 hospitals in the country.

So many of the accounts that we see coming on board here late are smaller ambulatory surgical centers or outlying hospitals and to see the average order size maintain its growth rate and the average order frequency remain really solid during that time period is indicative that the adoption inside those hospitals is accelerating to keep the growth flat line on the average order size. So we are really liking the trends there, probably more than you really wanted to know but we are pretty fired up about the performance.

In terms of the timing, I can’t say for sure whether the accounts that have come on in the last quarter are adopting at a faster rate on average. I am aware of the accounts that they pay attention. For example maybe recent larger academic institutions that have putted on formulary recently, those I pay much closer attention to than I would say that ambulatory surgical centers that have come on board and then those larger accounts, it does look like when they come on, they come on and grow at a faster rate than what we saw say a year or two ago.

And that’s likely because the demand around that institution, the experience with the physicians that have used the products in other areas, is much, much higher and so there is more confidence in where and how to use to the product than what hospitals might have had at the very beginning of launch.

Operator

Thank you. Our next question in queue is from Larry Smith of SmithOnStocks.com. Your line is open.

Larry Smith - SmithOnStocks.com

I have a question on your supply agreement. With the termination of Baxter, are you uncomfortable that you have a single supplier or is that the case that Grifols could be secondary supplier?

Ted Schroeder

Yes, it is a secondary supplier of a sort. I think the other thing that's important about BMS, our previous supplier had a single line in a single plant. BMS has multiple lines, albeit in a single plant but they have the ability to manufacture on a multiple lines which actually decreases the risk of a single supplier. It would be unlikely that something would happen that would shut down all the lines and so we feel that risk reducing and certainly as the bag presentation gains traction, it diversifies the product offering and allows to supply from two suppliers over time. That won't be immediately the case, but over time we expect the bag will grow to take more market share.

Larry Smith - SmithOnStocks.com

You view Grifols as being your backup supplier as opposed to adding perhaps another supplier in addition to Bristol?

Ted Schroeder

Well Larry, for glass bottles if there was an opportunity to add a second supplier we would consider that. I think it's what's the cost reserving the capacity and how much capacity is available. We’d have to evaluate all those elements. So at this point we don't really feel that we've increased our risk in any way. In fact the vast majority of the product that we've sold in the U.S. has been manufactured in the Bristol facility. So their ability to supply and reliably supply has been outstanding actually. So I think we're in good shape. Grifols certainly gives us some additional flexibility.

Scott Byrd

And of course Larry, this is Scott. The team's done now several rounds, as you might imagine given, our supply chain experiences early through the launch period. We performed several rounds of very extensive risk analysis and risk management activities and we have multiple venues to manage those risks. Some of that has been managing the supply chain itself and our inventory levels. So that's a big part of us ensuring that we're going to be able to maintain the supply chain to the customers and I feel very fantastic.

I sleep quite well at night, thinking through those things but Ted didn't and we probably can't get into too many specifics; they continue to look at other options which include Grifols and other suppliers out there and that is probably going to be ongoing through the lifecycle of the product, but it's a very fair question. We've never felt as confident as we do now in our supply chain.

Larry Smith - SmithOnStocks.com

And could you frame a VA opportunity for us in terms of potential number of vials, the types of discounts you'll have to give off your usual price, and whether this has the potential to cause maybe a slight upward blip in the trend of vial shipments for you guys.

Scott Byrd

That's a great question and something that certainly has come up since the announcement of the addition to the national formulary. It’s important to recognize that as great a signal as it is and I want to spend a minute talking about that. The total vial volume that the VA hospitals represent is relatively small. It’s certainly a small single digit percent of our overall sales and opportunity in the market.

As well, we had already had a number of VA hospitals independently put OFIRMEV on their own hospital formularies, which is pretty where with new product launches but here again we think that their experience probably helped in the review process at the national level. So the incremental sales beyond that, is even smaller, because a number of the individual hospitals already have its own.

Now for both of those reasons, small portion of the overall market and we already had a number of the hospitals on board, the impact on our net price is going to be really miniscule, very difficult to pick up. The discounts are comparable to what we would give to any federal institution. So it will equate roughly to the federal supply schedule pricing.

The important element of the VA’s decision we think is they are among the most discriminating buyers and reviewers of new products. And to have them evaluate the product and put it on their formulary, we think is really a fantastic signal and has likely helped us in the reviews of some of these late-comers hospitals that are just now putting us on formulary. So to have what’s arguably recognized as your toughest and most economically sensitive customer out there put you on formularies, heck of a good sign for us in the future.

Ted Schroeder

You know, Larry the other benefit we get from the VA as most VA hospital are affiliated with teaching hospitals and residents rotate through those hospitals. So it gives us another promotional call point for surgical residents, anesthesia residents’ etcetera for our sales reps. So it acts as an expanded promotional opportunity.

So while I think it’s going to be difficult to say that the VA action, a one-to-one correlation to how it impacted sales, our 50,000 foot view as is that it will have positive impact on sales because of the recognition of the process that go through that Scott described and the increased promotional opportunity with targeted physicians.

Larry Smith - SmithOnStocks.com

I like to ask you one final question. Has (inaudible) spent a good deal money on depositions, preparing for the trial coming up?

Ted Schroeder

Probably not appropriate for us to comment on what we think they have or haven’t spent in their preparations, Larry.

Operator

Our next question in queue is from Ami Fadia of UBS. Your line is open.

Ami Fadia - UBS

I had couple of questions. Firstly with respect to the litigations of EXCELLA, I am curious if you would explore the potential of a settlement and what would be a good outcome if this obviously goes through trial in your mind and what is the most likely outcome that you are planning for? Thanks and I have a couple of follow ups I shall ask later.

Ted Schroeder

Yes Ami, we are probably not in a position to comment on most of that. We are in a period of time now I just do not think that is appropriate. We have always been for any paragraph fore (ph) filers we are always open to listen to proposals that are good for our shareholders. So that is no different with EXCELLA or any other potential fore (ph) filer.

The only thing I can say about our expected outcome is that we are very confident in the strength of our intellectual property and so we continue, there is nothing that is come up that has weakened our confidence in the IP surrounding OFIRMEV.

Ami Fadia - UBS

Okay the second question was around business development. Could you help us sort of think about how you are prioritizing the different opportunities that you are looking at and I would give some three different examples. I think you have talked about exploring product acquisitions or co-promote deals or potentially even buying out some of the royalty payment on OFIRMEV. How would you sort of prioritize these three different things and if there is anything else that you are focused on, if you could sort of play out the priority for us?

Ted Schroeder

Sure. Well the clear priority is to put products in the sales force that are commercial products or at least FDA approved and ready to be promoted by the commercial organization. It is an organization that has performed extraordinarily well, that clearly have bandwidth and we believe that that will be a benefit to anyone we partner with.

So, that’s the priority. I would say that within adding FDA approved products to the commercial organization, co-promotes are probably the lowest priority but product licenses acquisitions are a much higher priority.

The other things that you mentioned, such as buying down the royalty, that’s an opportunity but I think that’s a future opportunity. Certainly that would a way to use the balance sheet as we move towards profitability. I think we’re probably a little early in that process at this point. But it’s certainly not an option that we would be willing to explore with our partners.

Ami Fadia - UBS

And just with respect to timing of course, you can never tell the timing, but what is your target in terms of would you like to continue to focus on ramping up performance, which you've obviously ramped up quite well. Would you prefer to continue to focus on ramping up performance this year or also try to bring an another asset? From the point of view of how you’re thinking about your sales force's share of mind, is this that something that you would like to do this year itself or wait another year?

Ted Schroeder

No. I think the sales force has the capacity to add another product now. So, I think we definitely have the capacity to do that. They have the skills to do it and as I mentioned earlier, we believe that with the right products that will actually be supportive of OFIRMEV and could actually accelerate our expansion of OFIRMEV particularly in areas outside the operative setting.

So, I think we have the capacity but I think it’s important to say that we don’t feel like we have gun on our head and so we’ll continue to be selective and the opportunities that we pursue to get the ones that make best strategic sense and from there will make the most economic sense for us.

Ami Fadia - UBS

Just the question on your reported P&L for the quarter, there was other income of…

Bill LaRue

That was the gain from the sale of the Incline investment.

Ami Fadia - UBS

All right. That makes sense. And then just question, in terms of share count, how should we think about for the remainder of the year?

Bill LaRue

Our outstanding shares are 85.7 million. That will go up nominally as options are exercised, but it’s a pretty good number for the rest of the year.

Operator

(Operator Instructions). Our next question is from Greg Fraser of Banc of America. Your line is open. Please go ahead.

Greg Fraser - Banc of America

First couple of questions of price. Has there been any price pressure that you’ve encountered as you worked to expand of OFIRMEV and how do you see the ASP evolving for the balance of the year?

Ted Schroeder

No, we haven’t any incremental or differential price pressure. There is always of course economic pressures that the hotels are feeling and then by extension anybody that sales into hospital will feel. But as you know we took price increase last July and another one here in January. Neither of those resulted in any perceptive negative feedback from our customers and to the best of our ability, we haven’t been able to pick up on any negative influences of our unit growth or share growth in hospitals.

So, really signs I think overall for the adoption of the product and remember, I think it’s important, despite the fact that we’ve taken a couple of price increases, we’re still talking about a product that on a gross basis even is selling at around $12. So the difference between $12.40 versus maybe $11 and change is pretty minuscule and the scope of the hospital's treatment of these patients and their overall budgets. So I wouldn’t expect that the relatively marginal price increases that we’ve seen on an absolute basis are going have any impact on our customers and their budgets.

So, the expectations moving forward, obviously can’t talk about what’s going to happen for the rest of the year with regard the price. It’s certainly our expectation that we’ll see some ability to move price along with the market over the coming years. We’ve talked about that number of times. So I think that we've got room to continue to increase over the time. I just can’t speak to when that’s going to be.

Greg Fraser - Banc of America

And then with the respect to the upcoming trial, would it be reasonable to assume that if a deal were to be reached it would likely happen ahead of the trail or would you caution us to not make any such assumptions based on the legal timeline?

Ted Schroeder

I would caution you not to make any such assumptions because if there was a settlement to be had, it could come at any time, including the time that the judge is considering the facts.

Greg Fraser - Banc of America

And then last question just on the market. Maybe time comment on the latest growth trends that you are seeing and then, if there have been any developments in the market such as supply instructions for the products, anything of that nature that could have influence on affirmative demand?

Ted Schroeder

Yes, there is always some ebb and flow in the market basket of analgesics Greg, and we saw as you might remember through the early and middle parts of 2012, some pretty significant supply disruptions for Contralac as well as number of opioids. That would be world we live in I would say and probably that we will live in for foreseeable future.

And we have seen some periodic disruptions to supply of some of those products this year. They don’t seem to be quite as durable as what we saw last year. It’s impossible to tell given the number of manufacturers exactly how big they are and how long they will last but they tend, what we have seen at least with our experience now over the last couple of years, they tend to generally help OFIRMEV because when a hospital starts to get short, particularly on Contralac or even the Dilaudid or some of the opioids, they accelerate change and their practice of pain management.

So it’s not like it’s a one on one switch out for the two products but it’s an opportunity for doctors in the hospitals to change their treatment patterns and that almost always benefits us and so when the supply comes back for those products, you don’t see any negative impact on OFIRMEV. It just continues to grow in those institutions. So the supply disruptions don’t happen typically on a nationwide basis. They tend to hit certain pockets of hospitals or certain suppliers or wholesalers. So it’s unlikely we will necessarily see that happen widespread, but on a regional basis it certainly has occurred.

Overall other broad trends, we're just seeing, certainly a number of hospitals come on board but I think where most of the growth is coming from are hospitals that have already at least six months to a year's worth of experience with the product, and in those hospitals it appears that growth is being generated through two dimensions, broader adoption across the physicians that treat patients in the hospitals.

So for example moving from orthopedics on to other service lines or even expansion within a service line, but also these docs, now as they gotten a year or two worth of experience they're much, much more comfortable using it for 24 to 48 hours in their patients. So we're seeing that vial per patient number continue to grow as well. Again I'd expect those dynamics to continue and that's going to be what fuels our growth through the rest of the year and onto the next couple.

Operator

Our next question in queue is from Michael Schmidt of Leerink. Your line is open. Please go ahead.

Michael Schmidt - Leerink

I just had one on pricing again. Does your 2013 top line guidance include an assumption for another price increase or is that without any further pricing.

Ted Schroeder

Well, I'll kind of give the same answer I just gave which is, answering that question would provide insight into the timing of any future price increases. So I think that our expectation is that we're going to continue to grow the product, both in units and dollars through the rest of the year Michael. I’ll let Bill correct me if I don't get that right. But again any, if you think about it really, any price increases later in the year, the ability to have significant impact on that year diminishes over time. So I just think we're excited about the growth pattern and the units and the share right now.

What's really nice just to kind of put a point on it, is that here we are now entering into the third year of launch and we’ve seen no slowdown in the unit or share penetration and in fact if you really looked hard at the institutions that have adopted it, we’re seeing some acceleration in those penetrations and to have at or better than straight line growth in that adoption this far in the launch would suggest at least with other hospital products that that’s an expectation you should have for a long time coming and in fact the reinforcement for me in that is we are talking now about 3% unit share marketing Q1 of this year.

That gives us a heck of a lot of headroom to continue to grow. That translates probably into about a 10% patient share round, at least plus or minus of a couple of percent. So no matter how you look at it, the growth that we have shown has gotten us to a place where there is not a glass ceiling anywhere, at least in our near term future that we can see on the adoption side.

Operator

Thank you. At this time, there are no further questions in queue. I will turn the conference back to Mr. Schroeder.

Ted Schroeder

Well, thank you all very much for joining us, appreciate your questions and your continued support of Cadence and we look forward to providing updates on our commercial progress in the months to come. Thanks everyone.

Operator

Ladies and gentlemen, this concludes our conference call. All parties may now disconnect.

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