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Zogenix, Inc. (NASDAQ:ZGNX)

Q1 2013 Earnings Call

May 9, 2013 4:30 pm ET

Executives

Zack Kubow – The Ruth Group

Roger L. Hawley – Chief Executive Officer

Stephen J. Farr – President and Chief Operating Officer

Ann D. Rhoads – Executive Vice President and Chief Financial Officer

Analysts

Tim Lugo – William Blair

Annabel Samimy – Stifel Nicolaus

Michael K. Tong – Wells Fargo Securities LLC

Michael Schmidt – Leerkink Swann

Michael Higgins – Brinson Patrick Securities

Operator

Good day, ladies and gentlemen and welcome to the Q1 2013 Zogenix Inc Earnings Conference Call. My name is Catherine and I will be your operator for today. At this time, all participants are in listen-only mode, we will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would like to turn the call over to Zack Kubow, The Ruth Group. Please proceed, sir.

Zack Kubow

Thank you, Catherine. And thank you all for joining us this afternoon. With me on today’s call are Roger Hawley, our Chief Executive Officer; Dr. Stephen Farr, our President, Ann Rhoads, Executive Vice President and Chief Financial Officer and Scott Shively, our Executive Vice President & Chief Commercial Officer.

Earlier today, Zogenix issued a news release announcing the company’s financial results for the first quarter 2013. We encourage everyone to read today’s news as well as Zogenix’s quarterly report on Form 10-Q which will be available on our website at www.zogenix.com. Please note that certain of the information discussed on the call today is covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act. We caution listeners that during this call, Zogenix’s management will be making forward-looking statements. Actual results could differ materially from those stated or implied by these forward-looking statements due to risks and uncertainties associated with the company’s business. These forward-looking statements are qualified by the cautionary statements contained in Zogenix’s news releases and SEC filings included in its annual report on Form 10-K.

This conference call also contains time-sensitive information that is accurate only as of the date of this live broadcast May 9, 2013. Zogenix undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call.

Now, I’d like to turn the call over to Roger Hawley.

Roger L. Hawley

Thanks to everyone for joining us on our first quarter 2013 conference call. Unfortunately, for all stakeholders including patients who continue to use hydrocodone combination products for chronic pain, we are still faced with further delay from the FDA on our Zohydro ER NDA.

To our knowledge this sort of delay is unprecedented. And I say without any humor, we do feel your pain and I assure you that we are working tirelessly on your behalf towards the goal of gaining approval of Zohydro ER. And we had made great progress on commercial readiness planning at a very detailed level during the first quarter including planning for our important safe use initiatives.

Because of the importance of Zohydro ER to patients, to the company, to our investors and to our employees, I’m asking Stephen Farr to start-off the call with an updated on Zohydro and then changing gears, Steve will take you through his updates on the progress with another development programs and we will then provide a view of our commercial business and financial performance for the first quarter. And I’ll come back to wrap up the call and begin Q&A.

And now I’ll just turn the call over to Steve.

Stephen J. Farr

Thanks Roger and good afternoon to all. As we previously reported, the FDA delayed the auction letter for Zohydro ER new drug application beyond the original PDUFA rate of March of 1 this year. We recently spoke with the FDA regarding the status of the delay. On the call, we learned that the FDA are now planning to take action on/or NDA of some time during the summer.

As you probably expect, we are trying to determine both at the level of the review division and retire levels of (inaudible) management of better understanding and what is preventing action on the Zohydro ER NDA. Unfortunately, why I believe the FDA is acknowledged to our concerns. The information we have received is not been helpful in understanding the precise timing or potential outcome of the situation.

What we understand is this; the FDA has not informed us of any deficiencies in the NDA and suggested that finalization of the Zohydro ERM’s to be consistent with the updated class-wide REMS, and labeling of the next logical steps for the review process. And we also know or understand the agency is working to resolve several quarter OPR detected issues that need to be addressed prior to the action on Zohydro ER.

We clearly recognize and understand that our PDUFA date occurred during a time when a broader policy issue is surrounding opioid-based drug products have been a key priority for the FDA. However, we are disappointed that a decision on the Zohydro NDA has not been forth coming as it impacts several stakeholders from patients, to Zogenix employees and to our investors. We strongly believe in the benefits of acetaminophen-free hydrocodone as provided by Zohydro ER will bring to patients and addressing the risk of liver toxicities associates with hydrocodone acetaminophen combination R&G Dixon chronic pain.

We also feel that the introduction of Zohydro ER reinforces the FDA’s focus on ensuring safe and appropriate use of opioids by being the first hydrocodone product to be part of the REMS program. The first schedule two hydrocodone product making it subject to stricter prescribing regulations and our commitment to safety use via training for professionals, patients assistance on safe storage and acentino surveillance program monitoring from misuse and abuse of the product and the oversight of independent safe use forward. We are committed to working with FDA to make this important therapeutic option available to people living with chronic pain who need alternatives to manage the pain, while being able continue with normal daily functioning.

Turning to our other product initiatives we have made excellent progress on Relday, and our DosePro Co-Marketing efforts with Battelle in this quarter. Last week, we announced positive top line results for our extended Phase I clinical trial for Relday, which has allowed us to transition our efforts to secure in a development and commercialization product. As a remainder, Relday is a proprietary once-monthly subcutaneous formulation of risperidone for the treatment of schizophrenia.

The Phase I extension includes testing of a single 100 milligram dose building our existing positive dose with 25 milligram or 50 milligram doses. The results for the 100 milligram dose showed risperidone blood concentration in the therapeutic range were achieved on the first eight dosing and they are maintained throughout the one-month period.

In addition, we have now established dose proportionality across the full-dose range that would be anticipated the using clinical practice. The 100 milligram dose was safe, well tolerated on the adverse event for trial was commensurate with other risperidone products and inline with our experiences with the 25 on the 50 milligram doses.

With a positive data from Phase I extension, we are now well positioned to begin a clinical trial to revise steady-state pharmacokinetic and safety data across multiple doses. As previously stated, our next goals is to secure a strategic development and commercialization partner to collaborate on the multidose trial and these all goes well, the Phase III development studies.

There has been strong interest in Relday for potential partners and we’re working with consulting firm to help us with the business development process. During the quarter, we also renewed our DosePro Co-Marketing Partnership with Battelle. Both teams have been actively marketing the DosePro technology and we have had positive interest on needle-free delivery system from several potential partners. We believe that a significant potential for DosePro with increased prescribing and adoption important drugs that require self injection such as biologic drugs.

And with that said a summary of the developments, I would now turn the call over to Ann for a financial update.

Ann D. Rhoads

Thank you, Steve. During the course of our discussion today, I’ll be referring to the press release and also to the attached unaudited statements of operation and the balance sheet. I’ll be rounding numbers for purposes of this call, so please refer to these documents for the precise figures.

Gross factory sales for the quarter totaled $11.4 million. Net product revenue for the first quarter 2013 was $7 million, compared to $9.9 million in the first quarter of 2012. Net product revenue in the first quarter of 2013 included $1.2 million net adjustment to the future product return reserve. With this adjustment we have made a significant increase to our return reserve, which now stands at $3.7 million as of the end of first quarter 2013.

Our analysis of actual product returns considers products returned on an individual product lot basis since launch an include factors such as the dating of the product at the time shipment, prescription trends, and changes in the estimates levels of inventory within the distribution channel.

There were two additional factors that impacted our first quarter 2013, some of those net product revenue results. First the resetting of health insurance co-pays and co-insurance at the beginning of the year slowed patient volumes to a greater degree then in past years. Second, we had fewer sales representatives detailing our product during the first quarter of 2013 compared to the same period of 2012.

As we’ve discussed in prior calls, the first quarter of 2012 was the last quarter in which the sellers provided sales support under our co-promotion agreement with them. Despite these challenges there were positive trends during the first quarter of 2013. The Zogenix team maintained some of our prescriptions despite having fewer reps in the field compared to a year ago period. This also included improved refill rates which is a positive for the long term outlook on the brand. We are focusing on driving new patient starts across the continuum of physicians and our specialists in high volume segment.

In the Mallinckrodt segment, their team of reps delivered improved results throughout the quarter. We believe they are on a positive trajectory and both of our teams remain committed to drive adoption of SUMAVEL DosePro in [Aradigm] segment. Also want to provide a brief update on SUMAVEL prescription trends as tracked by Source Healthcare Analytics and IMS Health. During the first quarter and as we reported on our year end call, the IMS Health data continues to appear to be tracking as much as 14% above the data provided by Source Health Analytics. We are working to understand the drivers of this discrepancy and want to be transparent regarding the situation in case you use the IMS prescription data in your analysis. Finally, our wholesale inventory levels remain at approximately 4 weeks, that’s consistent with where we were at the end of 2012.

Cost of sales for the first quarter of 2013 was $4.2 million compared to $5.1 million in the first quarter of 2012. Our gross margin was 40% in the first quarter of 2013 compared to 49% in the first quarter of 2012. The decrease in product gross margin was primarily due to higher cost per unit and a decrease in the net selling price which was also impacted by the adjustment to future product return reserves. Royalty expense for the first quarter of 2013 was $282,000 reflecting royalties that we would have paid at Aradigm on the sales of SUMAVEL DosePro and this compared to $357,000 in the first quarter of 2012.

Research and development expenses in the first quarter of 2013 were $3.2 million, that’s a 46% decrease from $6 million in the first quarter of 2012. This decrease was driven by lower development costs for Zohydro ER and Relday.

Selling, general and administrative expenses for the first quarter 2013 were $14.5 million, a 1% decrease from the $14.6 million in the first quarter of 2012. We’re continuing to move forward with our pre-commercial planning activities for Zohydro ER. But it’s strategically decided to wait approval to begin any significant spending related to the Zohydro. If approved we’re prepared to move forward with the remaining pre-launch activities, which will put is in a position to launch Zohydro in three to four months post approval.

Other expense for the first quarter of 2013 was $5.9 million, which includes a $4.3 million non-cash mark-to-market adjustment in the fair value of the company’s outstanding work. We provided a table with the full description of the other expenses in our press release issued earlier today.

Our net loss for the first quarter of 2013 was $21.1 million or $0.21 per share compared to a net loss of $10.3 million or $0.16 per share in the first quarter of 2012. Non-GAAP net loss for the first quarter 2013 adjusted for certain non-cash or non-recurring items was $0.17 per share. The non-GAAP financial results are detailed in the table included in our financial results press release issued today.

Weighted average shares outstanding for the first quarter 2013 were 100,809 shares. Lastly, we finished the quarter with cash and cash equivalents of $25.3 million. Because of the pending decisions from the FDI regarding the potential approval of Zohydro ER and the related business implications, the company is not providing financial guidance at this time.

I’ll now turn the call back over to Roger for a wrap up on our new product initiatives. Roger?

Roger L. Hawley

Thanks Ann and Steve. I’ll just very quickly summarize, and we’ll move directly into questions. As I said earlier, I know all of our stake holders are disappointed with continued delay by the FDA on Zohydro ER. We continue to work tirelessly with conviction on behalf of patients suffering with pain. We use hydrocodone chronically as they deserve a safer acetaminophen free alternative with 12 hour dosing. In addition to support for this product from pain management experts on behalf of their chronic pain patients, we are also fully aware of the FDA’s own longstanding efforts to make prescription, combination, pain medications containing acetaminophen safer for patients to use.

This too has been our goal for the past six years in clinical development of Zohydro. As over doses from prescription, combination products containing acetaminophen account for nearly half of all cases of acetaminophen related liver failure in the United States, many of these cases result in liver damage, liver transplant or death every year. These are not just my words, the words taken from the FDA, press releases issued during the late stage of our Phase 3 clinical program was Zohydro ER. We look forward to response from the FDA on the Zohydro ER NDA and will be prepared for launch of product in three to four months post approval.

On a more positive note we continue to make good progress in our efforts to drive adoption of SUMAVEL by more physicians and patients. Our internal team continues to perform well and although we’ve seen a modest impact so far we’ll continue to work closely with our co-promotion partner, Mallinckrodt. Q1 has been more challenging with New Year resets on patient insurance policy deductibles and we’re seeing more co-insurance policies. But our SUMAVEL promotional campaign for the year is solid and our patient resources have never been better.

We now better understand the drivers of our term reserves with more history and new vendors supporting our return processing and while it was a negative impact on reported Q1 revenues, we made the needed adjustments for our balance sheet reserve for future product returns based on the totality of the information.

The Relday program is on track and with our Phase 1 dataset and current market research we are now focused on securing a development commercialization partner with (inaudible) development process of the team at Locust Walk Partners. We renewed our DosePro marketing agreement with Battelle for another year and we’re seeing strong interest and encouraging progress in licensing opportunities for the DosePro system, particularly for patient-administered biologic products. Taking together, this gives us an important core business with continued growth potential.

As with new product pipeline that includes several potentially significant near-term value creating milestones, including Zohydro ER over the summer; while delayed, it is still a very important product to us and our therapeutic class where we can make a positive impact.

I would now like to turn the call over to the operator to begin the question-and-answer session. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question is from the line of Tim Lugo from William Blair. Please go ahead.

Tim Lugo – William Blair

Hi guys thanks for taking my question. I am wondering in your discussion with the FDA we all know the issues surrounding abuse of opioids and maybe in your discussion with the FDA in the past has there been – have they brought out or have you brought out may be the lack of abuse of some of other opioids out there I’m thinking about Invega which is obviously very similar to the Hydro and probably the most comparable?

Roger L. Hawley

So you can go ahead Steve.

Stephen J. Farr

Tim, this is Steve. We have brought the agency to attention but during pretty well between other Broadway committee and our PDUFA date with the FDA has continued to approve generic opioids including Zogenix Invega which has the same technology as ours.

Tim Lugo – William Blair

All right, thanks. And do you have your – in your discussions with the agency have there been any updates I know you haven’t seen anything, but obviously there was a pretty contentious panel regarding the immediate release products. This was brought up again in the most recent discussion with the agency for hydrocodone ER?

Roger L. Hawley

Tim, this is Roger. So there you’re asking about the contentious being labeling on the combination products.

Tim Lugo – William Blair

We are doing or even a discussion of – I know the rescheduling the panel which around rescheduling or maybe the Q3 combination are?

Roger L. Hawley

Yeah, we obviously, they held an advisory committee and there was a lot of discussion in that meeting. We’ve always been scheduled to C2 product with the ramps in addition to our own safe use initiatives. So we are not sure how that would impact the FDA decision on us. I’m not saying that it couldn’t be one of the things that they are dealing with and obviously the FDA themselves have been on the different side of the debate than for continuing the Schedule 3. So the patients had access to the lower strength hydrocodone products, which many times are used for more acute pain. But we also know that many of those patients are using high doses over long periods of times, hydrocodone for chronic pain as well, which was the target audience for us.

So we are quiet happy to be on the Schedule 2. If the other products are rescheduled, we would certainly hope that patients have adequate resources to gain access to physicians who could prescribe their products. So I count on the FDA being thoughtful of that changes made and they will do it in a way that is a gradual and not an overnight occurrence. There are literally hundreds of thousands if not millions of patients that would be affected. So I don’t know the outcome there, but we don’t see a legitimate reason why that factor is a cause to continue a delay where we have no known issues with the review division.

Tim Lugo – William Blair

All right. Thanks for answering the questions.

Roger L. Hawley

You bet.

Operator

Thank you. The next question is from Annabel Samimy from Stifel. Please go ahead.

Roger L. Hawley

Hey, Annabel.

Annabel Samimy – Stifel Nicolaus

Hi, there. How are you? Thanks for taking my questions. I have several actually. If I can just continue on the Zohydro line, was there any sense of the timing that in terms of response from FDA would be earlier in the summer or later in the summer, because I guess, of course, it was that where, so I am so concerned about it, the cash remaining that you have left. And I don’t want to expect the words, but in the event that FDA can come to the right decision. What kind of contingency plans you have?

Stephen J. Farr

Annabel, this is Steve. I’ll address your first part of the question. We unfortunately, don’t have any more specificity even I provided in my script today, as well as in the press release. You can imagine we tried very hard in various discussions as to get more information I think it’s just with the FDA they need some time and they don’t and I think they are hitting on the side of caution here in terms of providing us for the timeline. This relatively indefinite order to say summer time in order to make sure they can do everything within, but they need to do. I wish I had a better answer to you (inaudible) unfortunately do not. On the cash, Roger, you’re going to take that one?

Roger L. Hawley

Yeah, Annabel, would you mind just restating your question on the cash?

Annabel Samimy – Stifel Nicolaus

Just on the cash situation and you are going to come up against the situation in some point in the near future where you are going to need some financing?

Roger L. Hawley

Yeah.

Annabel Samimy – Stifel Nicolaus

And if this continues any longer obviously you won’t be able to form any kind of partnership or you can find any other alternative sources of financing that might not be non-dilutive. So do you have any kind of contingency plans if this continues to get delayed indefinitely?

Roger L. Hawley

Well, number one we just found about this news just recently. And yes, we have had contingency plans but what is the stage now, where we as a management team and with our Board need to look at our alternatives to move forward obviously well aware of our cash situation.

We also have other programs underway such as railway where we are looking for a partner and we have some DosePro contracts where we may have some progress there before the end of the year but as you known as for a long-time, you also know that w are not the sort of company that continues to rely on things that may or may not happen.

So we would be reviewing all of our options and opportunities including managing our cash balance thoughtfully and due to things that are necessary we did – we have indicated that we have a cash run way into the fourth quarter and for us we’ll want to improve on that situation with this news from the FDA.

It would be have been very helpful if they could given us any kind of tied or time line from where we were but December is a pretty big window to small company that was if you will poised to move forward. We had partnering interest on Zohydro and we just need to refocus and change gears and deal with what we have in front of us right now. Now that would be our attention, if we do make decisions to our changes, we will appropriately communicate that to the market.

Ann D. Rhoads

Okay maybe I can move on from Zohydro a littler bit and relative what tends to be better news for you given the positive data, so you have the different doses, good dose dependent responses in terms of the blood concentrations. Is there any possibility for – as the product gets developed, are we going to see possible differentiation not only in duration but potential side-effect profile because of the smoother blood concentration. Are you investigating that?

Roger L. Hawley

Well, we’re seeing a relatively small; it’s a relatively small Phase I trial. And I think what we’ve been very encouraged by the safety profile that we’ve seen but now the sample size is too small to even start to think that this may have now a better profile from a side effect basis than other products. We certainly I think have a PK profile which is very desirable.

The thing that we’re really excited about is the fact that we get plasma levels in the therapeutic range on day one, which is very different to the products that are currently on the market where now you have to either go through a loading dose which is get more frequently to begin with and even higher doses to begin with before you end up the maintenance dose or actually use all supplementation during that initial period.

We feel that our product is not required that we’ve done quite a lot of pharmacokinetic modeling to predict steady state and that will show (inaudible) we have a very reliable and robust and steady and as you say, in plasma profile that is pretty constant. So it’s very excited to go into multi dose trials that will give us even more information on that basis. The next thing would be an end of Phase II within the FDA and moving into Phase III.

Annabel Samimy – Stifel Nicolaus

If I can ask one more question with regards to (inaudible) you mention that you’ve seen some good trends from the sales reps. Can you characterize that a little bit better? And is that what you expect it from them or does it seem that they’re distracted with their spin off from Covidien?

Roger L. Hawley

Yeah, this is Roger, and Bill, it’s been modest. We and I believe they would say they were anticipating a quicker impact on the brand. Having said that, I think you know that company well. They have been working towards the spin out, which I believe is now targeted towards the end of June. They made some changes in senior management preparation for that. They made some realignment changes on their sales team, not sure one way or another. All of that has had an impact. But what we are encouraged by is our communication with them is still very positive.

They seem to be actually be more intend and deliberate on achieving success with SUMAVEL. They moved forward. I think they see that this is a product with some potential for growth and we hope that they continue to work with us and use the tools that we’ve developed and continue to drive the brand. Yes, the result has been modest. It has been below both of our companies expectation, but I don’t have the same concerns about sort of using different tools or not listening or not working with each other that we’ve had in other situations. So at this stage we are still hopeful.

Annabel Samimy – Stifel Nicolaus

Great. Thank you

Roger L. Hawley

Yeah.

Operator

The next question comes from the line of Michael Tong from Wells Fargo Securities. Please go ahead.

Michael K. Tong – Wells Fargo Securities LLC

Hi. Thanks for taking the questions. Two quick financial ones for Ann, and then one for Steve, obviously Ann, the year-over-year unit shipped for SUMAVEL DosePro didn’t look that great, obviously attributable to the buying pattern from a year ago. So if we were to normalize the buying pattern how would you characterize in the directional be the units shipped a similar Dosepro in 1Q 2013 versus 1Q 2012 and then based on what you know now regarding the status of the Zohydro ER, frankly I think 1Q SG&A was little bit higher than – I thought it would be – is it fair to say that the first quarter number would be sort of the high watermarked for the year on a quarterly basis and then finally for Steve. What are the anticipated doses to be used in practice for Relday?

Ann D. Rhoads

Sorry, Michael just to address the financial question first, X factor units for Q1 2013 were at around a 120,000 units, that was down from where were in Q1 of 2012 which was around 150,000 units. Now I think as we had discussed on our previous call, we did end the year with (inaudible) is having about a week more of inventory than we were expecting as we were getting to year-end I think.

The other thing that’s clearly been happening is that as we’ve seen these 4000 volumes either in terms of physician visits or getting strip sells that’s clearly having an impact in terms of coming from the wholesale channel. So we are optimistic that as we move further out into the year, the insurance related, considerations or kind to be softening and we will start to see some pickup there and then our team is continuing to do a nice job in terms of resale at 41% for the quarter itself. We’re definitely looking at kind of improving trends for the rest of the year.

But as one other reminder just for folks that may not be as familiar with the story, but Q1 of 2012 was the last quarter that is (inaudible) on the brand. So there were significantly more people out promoting the product in Q1 2012 than versus Q1 2013. And then as it relates to SG&A, the first quarter is kind of hard watermark for us based on the timing for incentive compensations other things, it does tend to Q1 to be at the higher. I think your assumption about, is that the high water mark for the year is a good one.

Stephen J. Farr

And I will follow up on the question about cities on densities. Based upon the results, roughly it’s one trial looking at the PK levels there – plasma levels were pretty down. And then comparing it to how was in the literature for other long-acting injection products. We feel pretty good that the dose range for algae will be in the 50 to 100 milligrams per month, so one injection per month rather than 50 or 100 milligram. We certainly intend to test that in our next trial which will be the multidose trial. We are going to look at the intermediate dose between (inaudible) milligram dose as well.

Michael K. Tong – Wells Fargo Securities LLC

Thank you.

Operator

Thank you. The next question is from the line of Michael Schmidt, Leerkink Swann. Please go ahead.

Michael Schmidt – Leerkink Swann

Hi, thanks for taking my questions. On Zohydro, I was just wondering, have you actually had discussions with the FDA around REMS or potentially labeling language and have you met any progress in potentially evaluating the possibility to develop and abusive turned formulations down the road. And with the existing efficacy data it should be not too capital intensive to develop and a bio prevalent abusive term formulation?

And then a follow up on similar and I was just wondering how should we think about long-term volume growth met script volumes have been fairly constant over the last five or six quarters in a row on 20,000 to 21,000 scripts. How should you think about that product long-term, given your efforts in marketing and co-promoting the product at Mallinckrodt? Thanks.

Roger L. Hawley

Go ahead Steve, you want to start off, I will talk that soon without question.

Stephen J. Farr

Hi, Michael. So regarding your first question about REMS and labeling and any interactions with the FDA today; yes, we’ve had introductions with the FDA regarding the REMS. These interactions have occurred since the outcome and through this waiting period. Basically, the request of being to ensure that our REMS is consistent with the current version of the class-wide yellow REMS and we’ve done that once and there is a request to do that again since the latest – the classified version was updated in the in mid April?

On labeling we have not had any formal discussions or negotiations on label? With respect to ADT, as we have mentioned before, we have been and continue to be active in this area. We’ve had a pre-IND meeting with the FDA regarding an ADT form of Zohydro. We know what the pathway to approve of that product will be and it will be clearly a scientific using a scientific bridge to our existing safety and efficacy data, so we know what needs to be done, we harvest our best in a pilot trial that the revised formulation is by equivalent to these Zohydro ER but we certainly will need to do more work in terms of PK as well as abused liability studies moving forward for that product to be ultimately approved.

Roger L. Hawley

Okay. And I will take question on was the future to look like for SUMAVEL DosePro, but I think – start quickly with you mentioned that over the last five the brand has been relatively flat and that’s true. In 2012 we had over 21000 prescriptions but that was also the high watermark for Astellas, they put in a significant effort tin that final quarter.

I will say that while that business didn’t stick it wasn’t with physicians, who continue to write, so they got one script out of them in that final quarter and from a lot of docs in those weren’t carried on and in that quarter Astellas was credited for about on the unit channel just under 50,000 of those units. So we went down over 420 representatives in Q2 and Q3 and then in Q4. We did began to see some lift from the Mallinckrodt team. And as I mentioned, we’re hopeful that we began to see more in Q2 and beyond.

But the fact that we are back where we’re a year ago, not paying fairly significant fees to our co-promotion partner; our small team has done a good job of working through this transition and keeping our focus on the highest prescribers in the base. It has been disruptive.

The other thing going forward, as we said earlier day, we thought we would be literately expanding our team to approximately 155 territories and they would have two products in their bag. Now we’re going to have to reevaluate what we do, we haven’t given guidance for the year. So it’s very hard for me to tell you what to expect about some of all those going forward.

If the question is “Is the brand capable of growth?” I would respond, yes, it is. We have plans for ongoing improvements to our campaign. We have some new data coming out in June. We have our four milligram strength that we hope will be on the market by the end of the year.

We have the sounds suppression device. We have a new generation three of our toolbox, which has been very popular. We’re coming out with a new training tool. The migraine play book, which will be used in the offices to even better train patients, so we’re still committed to a product that we have long runway and there is still – it’s a very significant patient need for better migraine outcomes and they can achieve that with SUMAVEL. So the real question is, it has the brain, it get resource. What’s the selling effort against that and that we still have to determine. So I can’t give any committeemen there. We hopefully will be talking more about that in weeks ahead.

Michael Schmidt – Leerkink Swann

Okay, great. Thanks for taking my questions.

Roger L. Hawley

Yeah.

Operator

Thank you. The next question is from the line of Michael Higgins from Brinson Patrick Securities. Please go ahead.

Roger L. Hawley

Hey, Mike, how are you?

Michael Higgins – Brinson Patrick Securities

Hi, guys. Obviously disappointed on the delay, that will be shocked, not some other things going around that?

Roger L. Hawley

Yeah.

Michael Higgins – Brinson Patrick Securities

I think we’re all turning now that the – the guess again when this event may eventually occur? First wanted to clarify your comments on labeling process, I think you’re referring to the FDAs (inaudible) hope you would labeling that they want to complete or get further into that process. Is that what you’re referring too?

Roger L. Hawley

No, I was not. I was referring to the question whether or not we had any labeling discussions specifically with R&DA, but still how do we are, we have not – I was not discussing these certain broader question about whether FDA is going to consider more of a tested label for extended these opioids, whole opioids in generation.

Michael Higgins – Brinson Patrick Securities

Okay, let me sit back and get to a more basic question, just according the press release, we have included the FDA working on several part of opioid related tissues that need to be address prior to an action on our NDA. Is that based on what they’ve told you that based on speculation or somewhere in between having talk a little bit that some folks have the FDA around the FDA. We’re just at the conclusion compound?

Roger L. Hawley

It’s a conclusion from as you might imagine several discussions with various people looking the FDA.

Michael Higgins – Brinson Patrick Securities

Okay. Well, one of the issues that you maybe holding up on this, the reports coming back on the early opioid events program, I think had to be enacted by March 1 and then it started much earlier. Any idea of when this first report start to come back to the FDA?

Stephen J. Farr

I do not know that. We could certainly find that out, so through we are now members of RPC, but I don’t know that specific data in front of me.

Michael Higgins – Brinson Patrick Securities

Okay. And then turning to some of the just couple of quick ones, and how the inventory in the channel looking at this point?

Ann D. Rhoads

Our estimate is that it is trending at about four weeks right now.

Michael Higgins – Brinson Patrick Securities

Any change versus last quarter?

Ann D. Rhoads

It was slightly down but still pretty consistent it is running about week higher than we normally anticipate it running.

Michael Higgins – Brinson Patrick Securities

Okay, would sales have to differ certain percent from current from Q1 for you to change the reserve for product return? Is there some kind of a set percentage you look at?

Ann D. Rhoads

We take a look at kind of actual product returns that we’re receiving by the lot and then we take a standard rate kind of on products that’s being sold today, so we’re evaluating that on a monthly basis, I think based on the results that we had seen prior to the earnings release and really over the past two months, when we looked at the level of the reserve we felt like we needed to add to that and so that was part of the reason for the charge.

I tell you that the lot of the product that’s coming back right now is product that would have been shift into the channel in Q1 of 2012. So as Roger mentioned Astellas results and has generated a number of prescriptions from physicians that we do not see results from, we are questioning whether part of that return activity is coming from retail stocking that may have occurred in response to the Astellas scripts that were generated in Q1, but it is very difficult to know.

Roger L. Hawley

And Michael it’s Roger. I’ll just add – in 2012, we had an issue with one particular retail chain which we were monitoring closely; we work with them over the last several months. We have actually gotten really better performance there, operationally we’ve also just went through a period with one of the other very large change where they made a number of moves on their own internal ordering and where they get their product from and how similar are those process ordered by their retail stores, with exact cost and disruption which should be behind us.

We’ve got two new return processors that are working and we get more data faster in more detail. And the biggest driver of all this challenge, we’ve been facing with returns is really about what’s the product dating when you put it in the channel. We saw the gap behind curve of where we wanted to be back in later 2011 and 2012, when our co-promotion partner was significantly half of inventory levels that we have built to anticipating greater demand and most of those big batches came through in the first quarter and into April as well.

So we think most of the choppiness is behind us, but we’ve got good data and much better experience and we understand a lot of the drivers of the – they’ve now been really two quarters where we took sort of significant hits and added reserves to the balance sheet. But we believe as we said here today that we’re in pretty good shape.

Michael Higgins – Brinson Patrick Securities

Thank you. Those are helpful comments.

Roger L. Hawley

Yeah.

Michael Higgins – Brinson Patrick Securities

It sounds like the inventory situation is, I think in the past or at least it start to wind down here, so it won’t be Q2 phenomenon going forward at least?

Roger L. Hawley

Yeah, we’ve got a lot better handle on our inventories and on our dating when things leave the wholesaler. There is more dating on the product, quite a bit more, so all those things matter.

Michael Higgins – Brinson Patrick Securities

I realize it’s just very difficult to give guidance for the year. If you can help in anyway on the SG&A and R&D levels for the remainder of the year, have you kind to hit a peak here in Q1? Should it decline with Relday in the second half for the year?

Roger L. Hawley

We haven’t really given guidance and given our current state of affairs in the work that we need to do here over the next few weeks, very hard to do that. That may change on our next call. I hope we will have a tighter understanding of where we’re going and what’s going to happen. But I would just say – I would just say this, the Relday R&D is behind us. We don’t have any other programs in the clinic except of rafting up the carc study on Zohydro. So there is nothing else going on in the clinic right now. We already planned to start anything.

So on the commercial side, we sort of front loaded our SUMAVEL DosePro spend in Q1 and we were anticipating being in large model for Zohydro. So we’re certainly not going to be a significantly increasing any spend anywhere until we actually do want Zohydro. We didn’t pre-spend anywhere we didn’t have to on launch of Zohydro.

So we didn’t hire more reps or any of those kind of things. We got ready to do that, but we didn’t add any people. So the situation we’ve got is, well defined current expense situation that we’re going to have to focus on as we move forward. But there shouldn’t be – I guess it would not be right to look back to see what our spending was and project forward either. We know we’re going to have to make some changes.

Michael Higgins – Brinson Patrick Securities

Understood, I appreciate it. Thanks guys.

Roger L. Hawley

Yeah, thank you

Operator

Thank you. I would now like to turn the call over to Roger Hawley for closing remarks.

Roger L. Hawley

All right, well again thanks everyone for joining the call. Not much to add, other than we’re going to continue stay at a very committed to gaining our outcome with the FDA on behalf of patients with Zohydro; so thanks for tuning in and we’ll update you again just as soon as we can. Thank you

Operator

Thank you for joining today’s conference. This concludes the presentation. You may disconnect and have a very good day.

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