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Executives

Ted Schroeder – President and CEO

Analysts

Greg Fraser – Bank of America/Merrill Lynch

Cadence Pharmaceuticals, Inc. (CADX) Bank of America Merrill Lynch Health Care Conference Call May 15, 2013 5:20 PM ET

Greg Fraser – Bank of America/Merrill Lynch

Good afternoon everyone and welcome to those that are tuned in via the webscast. My name is Greg Fraser. I help cover specialty pharmaceutical at the BofA/Merrill Lynch. It’s my pleasure to introduce to our next presenting company, Cadence Pharmaceuticals. Presenting for Cadence is President and CEO, Ted Schroeder. So Ted is going to run through an overview of the story, and then we should have some time for Q&A at the end. So, without further ado, Ted.

Ted Schroeder

Thank you, Greg. Thanks everyone for joining us this afternoon. I appreciate it. If I can figure out how to work this, all right. What am I doing wrong here? Maybe if I turned it over use the actual button, it will actually work. Let's try that. It’s all the new technology. So I do need to subject you to our forward-looking statements, our Safe Harbor and just refer you to our SEC filings for a full description of the risks associated with Cadence Pharmaceuticals.

So to start, we’re a hospital-focused specialty pharmaceutical company. Our business is focused on providing solutions for patients in the hospital. We have a single marketed product, OFIRMEV, which is an IV formulation of acetaminophen. Even though acetaminophen is an old drug and IV formulation actually represents a new class of analgesic in the hospital, because it’s both a non- narcotic and a non-NSAID analgesic. So it’s really positioned as a foundation of a multi-modal approach to treat pain.

I will talk about the strong uptake of the product and the revenue growth of the product, and I’ll probably touch briefly on the strength of the commercial team supporting the product.

So OFIRMEV is a proprietary intravenous formulation. It’s the first and only IV formulation of acetaminophen available in the United States. We licensed the product from Bristol-Myers Squibb in 2006. BMS actually sells the product in Europe and several other regions around the world, and in fact it’s the leading IV analgesic in Europe. Its brand name in Europe is Perfalgan.

And so the formulation that we market in the US is the exact same formulation as is currently marketed around the world. The indication is broad. We are indicated for the treatment of pain and fever in both adults and children, two years and older, as monotherapy in mild to moderate pain and in moderate to severe pain with adjunctive opioids. So it’s positioned as the first drug on board, and then you add opioids as needed. Also indicative for the treatment of fever and all that for children, two years and older.

So the message is you get significant pain relief that comes with reduced narcotic consumption. We see somewhere between 35% and an 86% reduction in narcotic consumption, and that comes with improved pain control and improved patient satisfaction and with remarkable safety profile.

The need for a non-narcotic and non-NSAID pain-reliever is actually described on this slide. Narcotics come with a lot of well-known side-effects, a whole laundry list of side-effects that are both not only uncomfortable for patients, but difficult for healthcare workers to manage. Some of them are more of annoyance and some of them are life threatening, but nonetheless they come with those that are on those liabilities. This leads to prolong recovery time, increased length of stay and of course higher costs to the institutions.

Prior to OFIRMEV, there was a single alternative and those were NSAIDs such as ketorolac and ibuprofen, both have a Black Box Warning for a number of serious side-effects, but probably in the hospital the most important ones where the risk of acute bleeding and kidney complications, which limited the use of NSAID in areas where compromise renal function and bleeding weren’t real concerns.

And as we look at the use of multi-modal approach. For mild pain, the US approach is really been up until now treat everybody with narcotics and just ever increasing doses in narcotics as pain increases. With the introduction of IV acetaminophen, you now have an alternative to start with acetaminophen in mild pain, that’s probably enough in many moderate pain cases its enough, you can add narcotics on an on-demand basis. And even in severe pain, we see significant reductions in pain and significant reductions in narcotic use as well.

We’ve had broad formularies option. We own more than 2,200 hospital formularies across the United States of Alaska and Hawaii. We’re on this map, you see dots there as well. So the product is broadly available. At the end of the first quarter, we had sold about 8.1 million vials for hospitals since launch, and that’s estimated to be somewhere between 3.2 and 4 million patients. And what’s important about that is we’re actually at a point now where we’re treating enough patients that the product is becoming part of standard of care treating pain.

With that type of foundation, to grow from you really have a base of business that isn't going to go away. It really creates a platform for future growth.

In addition to the 2,200 hospitals, we actually have 3,700 unique customers that purchase the product. So we got 1,500 more customers than hospitals where we know we’re on formulary. The repeat and growing – there are probably three real drivers to the business; it’s number of customers buying the product and how often they buy. It’s the number of patients we’re treating and how many vials those patients receive or treated with on average, and it’s how quickly the hospitals reorder.

And you can see from this slide, in everyone of those categories, we continue to improve in those areas, simply we’re treating more options more often. Our average dose per patient now is 2.8. At launch it was about a whole dose less than that per patient. And that continues to grow month over month. We have 3,300 repeat customers, that’s about 83% of all of our customers who are already in the product on a repeat basis. So that’s driving sales as we move forward.

This shows the growth in formulary additions, that’s clearly flattened out as we’ve got fully penetrated on formulary. We’re not putting a lot of emphasis on these formularies, so we don’t expect to see this to grow dramatically, although we’re still adding formularies each month.

As we look at sales growth, this plot sales from the launch month in January 2011 through March. You can see really good growth over that period of time and even acceleration in the curves as we came through the end of 2012 and into the first quarter of 2013. And as we look at reorders on customers as we’re adding accounts and then those accounts are moving on and ordering of multiple times. That continues to grow. We expect and continue to see improvement on reorders as well.

And then finally, average order frequency, that’s going – that’s nearly doubled, so hospitals are ordering more frequently. We’re at about just over four orders per quarter right now. We don’t expect that to improve much from that because a lot of hospitals order less than every two weeks, so we think we’re starting to get to the natural penetration on that. We’ll see a little improvement, but probably not a lot from there. We’ll probably see in the order frequency, we can expect going forward.

Average order size however has continued to grow. This is driven certainly by the number of new physicians prescribing the products. It’s also driven by the increasing number of doses that each patient is receiving. And so that’s been on a fairly straight line growth since the first month of launch.

Then finally, as we look at patient share, this is share of US surgical patients. The red line are outpatient procedures, the blue line are inpatient procedures, and the green line the average of all surgical procedures. You can see in the inpatient side, nearly one out of 10 US surgical patients are receiving at least one dose of OFIRMEV currently. And that’s been growing steadily, in fact accelerating over the last couple of quarters. We expect that trend to continue. The outpatient setting, we expect that to continue to grow, but we expect to see continuing separation between the inpatient and the outpatient utilization of the products.

And then finally, vial utilization in surgical patients, that’s looking at the number of vials per patient. These data are a little puffed interpret [ph] because we only get these data about every six months. So we’re always looking in the rear-view mirror. So at this point we were kind of 2.6, 2.7 vials per patient, that was in kind of September timeframe.

As we take that out, we’re estimating that we’re close to the 2.8 vials per patient at the end of the first quarter, so good growth there. We expect ultimately full penetration that we’ll see somewhere between four to six doses per patient, as we see continuous in surgery and growing use in non-operative pain.

This looks at vial sales. You can see that as far as number of vials sold compared to other president product launches over the last six or seven years or so, OFIRMEV, is clearly in a class of its own. We’ve treated far more patients, in fact 10 times the average of all of the hospital launches over that period of time including, Cubicin, which is older than the rest of the products shown here.

But we have a lot of price. So we have to treat a lot of patients in the question, but the important take away as I said before is that when you start getting to that kind of patient volume, you start to have a foundation that’s hard to disrupt. That means that physicians are – you have a lot of physicians prescribing on a routine basis. That’s really difficult to disrupt that growth and it continues to be strong.

But we don’t have anything to higher heads about dollar sales as well. You can see that for inpatient hospital sales, we’re the second biggest product launch over the last seven or eight year from dollar sales. We’re at least 10 times less expensive than the nearest product on this page. Some of these products are 100 times more expensive than OFIRMEV. So we are for sure, leading the pack when it comes to penetration in the hospital patient and growing the business.

And then just a couple of market research slides to finish up quickly. As we talk to physicians, what’s the likelihood of the product continuing to grow, we talk to anesthesiologists. We like the metric of how likely are you to recommend this product to a colleague, which gives us a little bit of recommendation when our sales force isn't there. You can see at launch, we are about seven out of 10 – 7.5 out of 10 anesthesiologists were comfortable recommending, that’s grown to almost 90% now, are comfortable recommending it to a colleague.

More significantly look at the growth from surgeons’ that’s grown up dramatically from product introduction. So when they used the product, they like product, they felt comfortable with the product and they are talking to their colleagues about it. And that’s a good sign for the future growth, particularly as you get to later adopters of any new therapy.

As we have physicians to think about what’s your use in the future? You can see significant growth from seven months ago. So you see anesthesiologists expecting about 55% of their patients will receive OFIRMEV. Surgeons, you see that’s something around 60%. Remember that we’re getting about 10% of their patients now. So there is a plenty of upside growth among these two key prescribing groups of OFIRMEV.

And then finally, from a financial standpoint, we ended the first quarter with just under $65 million in cash. We feel that we have enough cash to get us to a cash flow break even at this point as its accounts to today.

So with that, I will sit down and will move to your questions.

Question-and-Answer Session

Greg Fraser – Bank of America/Merrill Lynch

Thank you, Ted. If there are any questions out in the audience, please raise your hand and we’ll have the microphone brought over to you. I’ll start it off here just maybe with the patent case. What’s the latest on the legal situation with Exela, with the trial coming up? Any comments you can make on that?

Ted Schroeder

The trial with Exela is slated to start on Monday, the 20th. It’s scheduled be five to 10 business days. And so we’re ready to go. We’re confident in our position and confident in the intellectual property with OFIRMEV.

Greg Fraser – Bank of America/Merrill Lynch

Part of the trial is delayed I think one day to discuss there to negotiate claims language, is there anything to talk about there?

Ted Schroeder

No, it’s just normal proceedings in the trial. I wouldn’t read anything in any of that maneuvering.

Greg Fraser – Bank of America/Merrill Lynch

And what can you say about discussions that you had or that you would consider in terms of the settlement with them?

Ted Schroeder

Well I think our settlement with Perrigo is indicative of our openness to talk about settlement. And remember Perrigo, we settled last fall. We agreed to an early entry date of December 20 – excuse me, December 6, 2020. And we also gave to them the authorized generic rates. So we’re clearly open to talk about settlements, as long as that makes sense.

Greg Fraser – Bank of America/Merrill Lynch

For the Perrigo settlement, you too drove that process, or who kind of initiated, you all or Perrigo?

Ted Schroeder

Perrigo approached us first.

Greg Fraser – Bank of America/Merrill Lynch

Okay. What would be – if you can say that a acceptable settlement if you were to reach one with Exela?

Ted Schroeder

Probably shouldn’t negotiate against myself so I look for them. I guess my staring position is better than in December 6, 2020.

Greg Fraser – Bank of America/Merrill Lynch

If you have still any question about whether they are first to file or not?

Ted Schroeder

No, I think that clearly at this point that they were first to file.

Greg Fraser – Bank of America/Merrill Lynch

Okay. And then that the Perrigo settlement, do they need to get approval of their own generic to launch, or will you provide one to them on the date?

Ted Schroeder

So the way the agreement is structured on the date, they can launch their own generic, provided of course they can manufacture a generic. The authorized generic settlement is at our option, should we feel a generic is imminent, we’ll supply drug to Perrigo, that’s all marketed under their brand name with their commercial infrastructure.

Greg Fraser – Bank of America/Merrill Lynch

So Perrigo does not get generic. There is no requirement for you to provide one to them, by a certain time?

Ted Schroeder

No. There is no requirement for us to provide and so if December 6, comes and goes and there is not another generic on the horizon or on the market, we are not required to supply Perrigo.

Greg Fraser – Bank of America/Merrill Lynch

When you’re modeling at the rate that the product, I guess kind of qualitatively for internal purposes, how do you think about duration, and how long they will maintain exclusivity?

Ted Schroeder

We model out, that we’ll have exclusivity from December 6, 2020.

Greg Fraser – Bank of America/Merrill Lynch

Okay. And then after that, what do you think about the tail?

Ted Schroeder

We think that tail is actually slower than you see with the real solid products, simply because there are fewer manufacturers capable of manufacturing any IV product. This IV product is particularly tricky to manufacture, so you just can't take an existing line and switch it over to manufacture, OFIRMEV, you need a dedicated manufacturing capacity to manufacture OFIRMEV. That requires a larger investment than you would see with other products.

So that will naturally limit the number of potential suppliers globally. That limiting of suppliers tends to slowdown the rate of erosion on price, and you tend to get lumpiness in the supply which certainly favors the proprietary product.

Greg Fraser – Bank of America/Merrill Lynch

Have you discussed what you think you could maintain in terms of percentage of sales after generics launch?

Ted Schroeder

We haven't discussed that specifically, but I do think the model that says 90% of the product goes away in 12 months is still aggressive. I think if you look at IV products, you see something in the range of 35% to 50% erosion in the first 12 to 18 months, and it never really gets to 90%, mostly because for products that had difficulty in supply and just never see the supply there.

Greg Fraser – Bank of America/Merrill Lynch

And do you think you’ll do better than that just given the (inaudible).

Ted Schroeder

I think it’s possible. We could do better than that. It really depends on who takes the bet in invest and manufacturing. And if they can figure it out. We’ve had our own experience with that. It’s not so easy, even when you know exactly what to do, it’s not exactly that easy to manufacture.

Greg Fraser – Bank of America/Merrill Lynch

Any questions from the audience? The more recent two generic filers that too early in the process for you to learn anything to kind of gage the strength of their arguments?

Ted Schroeder

Yes, you’re right. It’s early days with those filers. We are just kind of going through the legal wrangling over who can see what at this point.

Greg Fraser – Bank of America/Merrill Lynch

And beyond the formulation patent and the process patent, is there an opportunity to get additional IP protection at some point.

Ted Schroeder

I think that’s the both the strength and the weakness of the IVSC to administer [ph] patents. There is one way to do it. That seems to work and that it’s a difficult for others to work around it, but it also makes it difficult for us to find new payouts for IP. But we’re always looking at new technologies that might – it may actually be a different – it may actually change it into a different product, maybe a new – it may become a new chemical entity with some of the things we look at, but so far we yet to look at anything that really offers from improvement, that would create a marketable product.

Greg Fraser – Bank of America/Merrill Lynch

And with these initiatives, is Bristol involved or is it solely?

Ted Schroeder

No, this is all us.

Greg Fraser – Bank of America/Merrill Lynch

If you were to develop an improved version, would there be any implications for your agreement with them?

Ted Schroeder

Well the implications with – the IP holders are really pharma tops, so the two French scientists, they licensed the product to Bristol. So the IP additional and what that means to the license would get worked out at the time we see something whether or not, it’s included in the license or not. I guess we know when we see it. It’s hard to speculate on that.

Greg Fraser – Bank of America/Merrill Lynch

Sure. Anyone out in the audience, any questions? Uptake has been accelerating and pretty strong based on the IMS and the Walter Schroeder [ph] data, do you use to talk about the US market dimensionally looking like – not the market, but primary share of the market looking sort of like Europe, do you still feel that that can be the case here?

Ted Schroeder

Yes, I still think that’s achievable. And its certainly the delay in approval makes that harder, but I still think we’re in the same direction as Europe. Certainly the marketplace has changed a lot over the last few years, cost pressures on hospitals both in the US and Europe by the way. So you’re looking at a launch in Europe that occurred 10 years ago.

Nonetheless I still think the value proposition for patients in the increasing emphasis on reducing narcotic exposure, the patients in the hospital is beneficial for us and we really are the best answers for that, for patients who can't take or absorb oral medications.

Greg Fraser – Bank of America/Merrill Lynch

For institutions where you haven't gotten on formularies or patent licenses [ph] what has been the reasons put forward for not using the product?

Ted Schroeder

It’s always been budget impact. There has never been a clinical reason. There has never been a safety concern. It’s always been – it’s going to be more expensive on our pharmacy budgets than the existing analgesics and it’s not really focused on cost per dose, but it’s focused on the potential number of doses that could get used.

Greg Fraser – Bank of America/Merrill Lynch

Maybe you’ve taken a price increase or two, I guess now there seems to be good flexibility based on comments that you’ve made in the past. Have you started thinking about price going forward, I know you wouldn’t want to push price?

Ted Schroeder

Well I think – yes, I still think we have potential to move the price up. I think the product is a sufficient value that the difference – we launched the $10 a dose, where now it’s about $40 a dose, the difference on that on a daily basis is really not that much. And we’re talking a difference between $40 and $49 to the hospital. So it’s not a dramatic difference in the context of the surgery. So there is still more upside room to move the price up.

I think we easily can get CPI level price increases and they’d be able to do a little better than that particularly in the short-term.

Greg Fraser – Bank of America/Merrill Lynch

And how does the sales force spending most of their time?

Ted Schroeder

They are spending most of their time in generating demand with surgeons and in helping the surgeons, staff work through the logistical issues of getting the product close to the point of care. So that means working on moving the product from central pharmacy, stocking, always the stocking in OR, helping them navigate through the electronic order entry systems like Cerner and Epic. And figure out how they get the product on to a screen where its convenient for the surgeons to find it, so they don’t have to play Where's Waldo hunting through the entire system, try to find throughout.

So those are principally the areas and then a good deal of time being spent with nurses and the quality staff on the initiatives to reduce narcotics in hospitals while delivering better pain control, that’s been a big effort.

Greg Fraser – Bank of America/Merrill Lynch

Are there targets of the country where there is a lot of injectable analgesic use where you haven't gotten use of OFIRMEV yet?

Ted Schroeder

Well we clearly have our strongest sales in the Northeast. And I’d say probably that it’s pretty evenly distributed across the country. So there aren’t big differences between regions, it’s more on a hospital by hospital basis. There is still a handful of hospitals where we’d like to have where we’re not on formulary, but that comes downs every month. It’s really hard for a hospital to say no to OFIRMEV when every hospital that they compete will have OFIRMEV available and being used broadly.

And so in some cases, it’s just – I can think of a lot of university hospital in the south that told us they would never ever over the pharmacist dead body when the product ever go on formulary, and about six months ago when one formulary because they were literally the last hospital in that region without the product on formulary becomes kind of difficult to justify why everyone else is finding value and you are not.

So ultimately I believe ultimately we’ll be available in every hospital in United States. But we really care about that first kind of thousand or so. They are really the ones that matter.

Greg Fraser – Bank of America/Merrill Lynch

For that example, does it require somebody to go – somebody, the head of pharmacists to make that decision?

Ted Schroeder

It usually just requires physicians to be just be persistent and pound the table and say I want to know why it is when I move – physicians tend – they attend at different hospitals and I can use it in my outpatient setting. I can use it at this hospital, in that hospital I can't use it here, and guess what, my patients are – I am getting better patient satisfaction scores out of it. And by the way surgeons care about that, because they get graded on that.

And there is a breadth of I’ll just start moving more of my surgeries to your competitive hospital. Lot of times it doesn’t matter to the surgeon where the cut, they just want to know they have patients there. So that type of push back actually changes folks view on it. But if a real – those are real component driven decisions. They are not decisions driven global costs. Global costs, we always win.

Greg Fraser – Bank of America/Merrill Lynch

There was some discussion on the last call about buying down on royalty. I wasn’t sure if that was driven by – if that was an initiative that you were considering seriously that improved the margin or if that was something that you would have to do to improve the margin and to embark that in response to a question, how are you thinking about that?

Ted Schroeder

Well we’re thinking – there is certainly an option to do that. I don’t think that option is now. I think when we have our own balance sheet that we can use that maybe a good use of cash on the balance sheet to buy the royalty down, but I think that was more a response to a question, could you buy the royalty down? I think the answer is that’s a possibility. And we’d be open to that, but I don’t see that as a near-term – the best of use of cash near-term.

Greg Fraser – Bank of America/Merrill Lynch

Any questions out there? Maybe you partially answered my question about the doc driving a decision between inpatient or hospital outpatient, just is there any data on top of that of doctor using it in a hospital and not in his outpatient practice? Is there any big gap that is easily closed I guess is the question?

Ted Schroeder

Yes, we usually see the other way around. We usually see the earliest adoption in the outpatient setting. The challenge with us in the outpatient setting, it tends to be a relatively low value patient, it’s usually one dose. So that’s $12 a patient. The patient in the hospital is far more valuable.

So at a cost point [ph] and as a place to gain initial experience, the outpatient setting is actually pretty attractive. It’s often easier to access a physician in that area, but from a long-term business driver, it’s really the inpatient business that matters. So you really have to switch that utilization over to the inpatient side to really drive business. We’ll take the incremental business, but it’s not where the growth is

Greg Fraser – Bank of America/Merrill Lynch

I’ll squeeze in one more. How high of a priority is business development?

Ted Schroeder

Business development is the second highest priority, I mean growing and maximizing OFIRMEV is priority number one under every scenario, but we have an effective relatively large sales force that has capacity to add products to it, and we’d be foolish not to be looking at the opportunities to leverage that.

Greg Fraser – Bank of America/Merrill Lynch

Okay. Well that will end it there. Thanks a lot, Ted, for attending the conference.

Ted Schroeder

Thank you. Thanks very much.

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