Cadence Pharmaceuticals' CEO Discusses Q2 2013 Results - Earnings Call Transcript

Jul.31.13 | About: Mallinckrodt PLC (MNK)

Cadence Pharmaceuticals, Inc. (CADX) Q2 2013 Earnings Conference Call July 30, 2013 4:30 PM ET

Executives

William R. LaRue - SVP, CFO and Treasurer

Theodore R. Schroeder - President and CEO

Scott A. Byrd - SVP and Chief Commercial Officer

Analysts

Eric Schmidt - Cowen and Company

Louise Chen - Guggenheim

Juan Sanchez - Ladenburg

David Amsellem - Piper Jaffray

John Newman - JMP Securities

Patti Bank - Discern Securities

Greg Fraser - Banc of America-Merrill Lynch

Operator

Good afternoon and welcome to the Cadence Pharmaceuticals Second 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 for questions and answers after the management's presentation.

Our first speaker is Bill LaRue. Go ahead sir.

William R. 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 our expectations regarding the growth and the adoption metrics for OFIRMEV and its establishment as a key component in a multimodal approach to acute pain management; the commercial feasibility of launching OFIRMEV in Canada; our anticipation that our legal costs will be lower in the second half of 2013; 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 to the risks and uncertainties inherent in our business. These risks are detailed in the Risk Factors section of our current and upcoming Forms 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 obligation to revise or update the information discussed 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 in 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?

Theodore R. Schroeder

Thanks Bill. Good afternoon and thank you for joining us today. I will open by providing a brief overview of our accomplishments for the second quarter. Next, Scott will 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.

I am pleased to report that OFIRMEV's strong momentum continued through the second quarter, and we remain confident in our commercial plan. Net product revenue from sales of OFIRMEV during the second quarter came in at $24.7 million, an increase of $13.6 million or 123% from the second quarter of 2012. For the first half of 2013, our net product revenue was $48.3 million, an increase of 153% from the first half of 2012.

Our customer base has continued to expand, and as of June 30, 2013, over 4,350 unique customers had ordered OFIRMEV, which represents an increase of 37% from June 30, 2012. We are pleased with the growth we have seen and the gains we have been making in the marketplace.

At this point, I'd like to turn the call over to Scott, who will discuss our commercial operations and sales performance during the second quarter.

Scott A. Byrd

Thank you. We continue to effectively execute on our business plan during the second quarter, as evidenced by the increase in our market share. During the quarter, hospitals purchased more than 2.2 million vials of OFIRMEV. This is double the 1.1 million vials we sold during the second quarter of 2012, and this puts us at over 4.1 million vials purchased during the six months ended June 30 of this year. OFIRMEV's quarterly IV analgesic unit market share increased to 3.41% in the second quarter of 2013, as compared to 1.93% in the second quarter of 2012.

Since its launch in January of 2011, through the second quarter of 2013, hospitals have purchased approximately 10.3 million vials of OFIRMEV. We estimate that during this period, approximately 4.1 million to 5.1 million patients have been treated with OFIRMEV, using an estimated average of about 2 to 2.5 vials per patient.

In addition, the number of unique accounts that have been ordered of OFIRMEV as of June 30, 2013, increased to over 4,350, and OFIRMEV is being utilized in more than four out of five of the top 2,000 hospitals in the United States; when ranked by the quantity of injectable analgesic products purchased.

The number of repeat customers are an indicator of OFIRMEV adoption within the accounts has also grown significantly over the last year.

As of June 30, 2013, nearly 3,700 accounts or approximately 85% of our customers have placed multiple orders for OFIRMEV. This is an increase of 49% since June 30 of 2012.

The underlying fundamentals of OFIRMEV adoption remain very strong. As we shared in the past, in addition to the growth of new customers, accounted option metrics such as order size and order frequency continue to show strong gains over previous periods.

Average order size increased by 27% in the second quarter of 2013, compared to the same quarter last year, and the average number of orders per customer grew 10% over the same period.

The growth in these metrics is particularly encouraging, given the number of new accounts that have come on board each quarter. Through our collaboration with the premier healthcare alliance, we are gaining great insights, in how OFIRMEV is being adopted across various specialties and patient types.

The Premier healthcare alliance database includes over 400 hospitals and approximately 4.5 million surgical patient discharges per year. We believe that this very large sample provides a good representation of the overall U.S. hospital utilization patterns.

Our analysis of the database indicates that the average number of vials utilized per patient, continues to show very nice growth. In Q1 of this year, which is the most recent period for which the data are available. Surgical in-patients were treated with an average of 2.7 vials, an increase of 12% over Q1 of 2012.

OFIRMEV's patient share of the database has also grown rapidly. By the first quarter of this year, OFIRMEV was being used in 12% of inpatient surgical procedures. This is more than double the percentage of patients treated in the first quarter of 2012. Our analysis of these data, supports our (inaudible) some specialties, OFIRMEV is emerging as the standard of care.

For example, as of Q1 of 2013, OFIRMEV was being used in approximately 27% of the inpatient bariatric and valve surgeries, and over 20% of the major orthopedic inpatient surgeries included in the database.

We believe that these analyses are great indicators, not only with the excellent execution by our team here at Cadence, but in OFIRMEV's utility in improving acute pain management.

I am also pleased to announce that we received marketing approval for OFIRMEV in Canada at the end of June. Our next step would be to request the pricing review for the product with the Canadian Patent of Medicines prices review board, which we plan to do later this year.

Following the completion of this process, we will assess the commercial feasibility of launching the product in Canada, either independently or in collaboration with the company, with an existing Canadian commercial presence.

We are receiving numerous positive reports from doctors regarding their use of OFIRMEV. (inaudible) has also been the subject of numerous investigator driven studies, addressing a wider variety of surgical settings. With over 20 studies published during the first half of this year.

Given the commercial ramp in the scientific interest in the drug, we believe that OFIRMEV is being established as the key component and a multimodal approach to acute pain management.

I will now turn the call over to Bill, who will review our financial results.

William R. LaRue

Thanks Scott. During the second quarter of 2013, we achieved net product revenue of $24.7 million, an increase of $13.6 million or 123% from the second quarter of 2012, and an increase of $1.1 million or 5% from the first quarter of 2013. More importantly, excluding the $2.6 million in previously deferred revenue we recognized during the first quarter of this year, our net product revenue grew by $3.7 million or 18% in the second quarter, as compared to the first quarter of this year. For the six months ended June 30, 2013, our net product revenue was $48.3 million.

For the second quarter this year, we reported a net loss of $11.9 million or $0.14 per share, compared to a net loss of $21 million or $0.25 per share for the comparable period in 2012. For the six months ended June 30, 2013, we reported a net loss of $13.2 million or $0.15 per share, compared to $43.7 million, or $0.51 per share for the six months ended June 30, 2012.

Included in our net loss for the six months ended June 30, 2013, was the gain of $7.7 million related to waiver and termination of our option to purchase Incline Therapeutics Inc. and the sale of our Incline stock, for which we received a total of $14.7 million in cash in January.

Our gross margin for both the second quarter and the six months ended June 30, were 66% as compared to 48% for both the second quarter and six months ended June 30, 2012. These increases were primarily a result of higher freight costs incurred during 2012, that were not incurred in 2013, and the impact of price increases implemented in July 2012 and January 2013.

Our operating expenses were $27.2 million for the three months ended June 30, 2013, which was an increase of $1.9 million or 7% from the $25.3 million for the same period in 2012. This increase was primarily attributable to higher legal expenses incurred during the current period related to our ongoing intellectual property litigation, partially offset by lower sales and marketing costs.

For the six months ended June 30, 2013, our operating expenses were $50.6 million, which was a decrease of $100,000 when compared to $50.7 million for the same period in 2012. This decrease was primarily attributable to lower sales and marketing costs during these periods, but was offset by higher legal expenses related to our ongoing intellectual property litigation. We anticipate that our legal expenses will be lower in the second half of 2013 than in the first half of the year, due to the timing of the stages of our intellectual property litigation.

As of June 30, 2013, we had cash, cash equivalents and short term investments of $56.8 million and net accounts receivable of $9 million. Ted?

Theodore R. Schroeder

Thanks Bill. As of today, we are increasing our 2013 OFIRMEV revenue guidance. We now expect that our net product revenue from sales of OFIRMEV for the 12 months ending December 31, 2013 will range between $103 million and $105 million. Our dedicated commercial team has continued to produce great results over the first half of this year, as we strive to establish OFIRMEV as the foundation of a multimodal approach to acute pain management.

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

Question-and-Answer Session

Operator

Thank you, Mr. Schroeder. The question-and-answer session will begin at this time. (Operator Instructions). Our first question comes from Eric Schmidt of Cowen and Company. Your line is open. Please go ahead.

Eric Schmidt - Cowen and Company

Thanks for taking my question. I guess the first is for Scott. I think in the past, you provided us with the average order size and order frequency in the quarter, could you talk about each of those, and then maybe how summer seasonality either impacts those variables or what you are seeing, more broadly with summer seasonality and sales?

Scott A. Byrd

Yeah Eric, I'd be happy to. The average order size for the quarter was just north of 100 vials, which is up about -- just under 5% over Q1 of this year, and the order frequency, which is the number of weeks during the quarter, that accounts order was 4.9, which is up about 3.5% of the previous quarter, and recognize both of those include in their denominator, both all of the existing customers we had coming end of the quarter, as well as new customers that came on board during the quarter. So we are really pleased to continue to see that kind of growth, given the expansion of our overall customer base.

I don't really think either of those are materially impacted by seasonality, certainly through Q2. We typically don't begin to see significant fluctuations in seasonal patterns until sometime in the summer, which is typically a Q3 phenomenon. Saved the holiday impacts that we talked about over the Christmas and the New Year's period. The summer here really starts to show some differences, and the hospital [census] and surgical patterns in Q3.

Having said that, we still feel great about the underlying growth, not only in the number of patients getting treated, but the penetration that we are seeing across the surgical specialties, and I am anticipating that -- well, I don't see any reason why that's not going to continue through the summer and through the end of the year.

Eric Schmidt - Cowen and Company

Okay. Then maybe for Ted on the Excella litigation, is there any updated thoughts on timing and can Bill provide further guidance on what exactly we should expect, in terms of the impact SG&A, lower spending in the second half of the year?

Theodore R. Schroeder

Sure Eric. There is nothing really new. It's moving along with the court, and believe the final briefs have -- post trial briefs have been filed and now is with the judge, and waiting for his ruling. I think as we have talked about before, we don't really expect that really much before October this year, it could be the end of the year. Certainly in other trials, it takes as long as nine months for the judge to rule. So it's a little bit open ended, but I think most of the folks we work with are expecting something between October and the end of the year.

William R. LaRue

In terms of operating expenses, SG&A, Eric, I would just guide you that I would expect third and fourth quarter to be close to the first quarter, than the second quarter.

Eric Schmidt - Cowen and Company

Great. Congrats on a nice quarter guys.

Theodore R. Schroeder

Thanks Eric.

Operator

Thank you. Our next question comes of Louise Chen of Guggenheim. Your line is open, please go ahead.

Louise Chen - Guggenheim

Hi thanks. Congrats on the quarter, and I had a couple of follow-up questions here. So first, with respect to the vial size, the vials per patient that you mentioned, the 2.7, how high do you expect that to go and over what period of time? Then secondly on the gross margin, is that sort of at steady state now, or is there still more expansion that's possible over time. Then lastly, just your thoughts on consolidation in the space, there has been a lot of M&A activity, I have seen a lot of your peers being acquired, I am just wondering if you think that consolidation will continue? Thanks.

Theodore R. Schroeder

Yes Louise. So the vials per patient, the 2.7 is on the inpatient procedures. The outpatient procedures are lower than that, and we don't expect to see much difference on the outpatient side of the business. On the inpatient side, we do expect to see that increase to around four vials per patient, maybe even a little bit more on that, over the next several years. It's continuing to go up. Our assumptions in our peak sales models have us at about 3.5 vials per patient. So we think there is upside there. We are certainly seeing some specialties, where average vials per patient are actually much higher than that, well above four vials per patient.

So over time, we expect that will continue. We do see kind of a natural evolution that is a physician is new to the product. They tend to use it in the outpatient settings, so that's a low number of vials, and then begin to use the product more, often in more complicated cases and then start to prescribe the product beyond the recovery room, and (inaudible) the patient to the floor. And so I think we are moving physicians through that process, so we expect that that will continue over time.

As far as the margin, I think the margin is relatively stable for the next several years. I think we have gotten -- part of the impact there is, keep in mind that our royalty structure with Bristol-Myers Squibb is an escalating role as sales go up. So as we gain efficiencies on the manufacturing side, we kind of give those back with increasing royalties, so that the royalty rate stays relatively flat moving forward, unless we did something kind of extraordinary on that. But at this point, I think the right assumption is, it's relatively steady.

Then regarding consolidation in this space, I think that's healthy. I think it's very clear that there are a lot of companies within the hospital space and combining some of those companies, it creates stronger platforms, more breadth in the hospital is important, and I see no reason why we wouldn't see some more consolidation in this space, as we all seek to build shareholder value.

Louise Chen - Guggenheim

Thanks.

Scott A. Byrd

The only thing, this is Scott. The only thing I might add, just to provide a little bit more insight into our penetration in some of the surgical specialties, particularly around Louise your question on vials per patient. We have seen in some of the procedure types, where the value proposition maybe more self-evident, such as the bariatric and major valve procedures. Those are -- it's one of the procedures I mentioned in my opening remarks, where we have got very significant share. We are also seeing physicians use over five vials per patient already here, just a couple of years into launch. And we are seeing some of the same trends, a little north of three vials per patient, and general surgical procedures, which is the biggest bucket of all. So those are maybe the gall bladder procedures, robotic procedures etcetera.

So we are seeing really-really nice improvements over time across many of the different surgical specialties, and I think as the physicians and some of the other sub-specialties get more and more familiar with the product, I am expecting them to use it much more like the bariatric and the colorectal surgeons are, and reap the same benefits that they are seeing. So really-really great patterns right here now, and I think it's largely driven by the execution of the team, and spending more time with some of the surgical specialties over the last six months or so.

Operator

Thank you. Our next question comes from the line of Juan Sanchez of Ladenburg. Your line is open, please go ahead.

Juan Sanchez - Ladenburg

The market size -- I mean, I wondered if the market continues to be unchanged at 300 million units or do you see some small growth? Your level of confidence, as you can penetrate 10% to 15% of the market? What do you think -- can you increase that, as you get to those levels of penetration?

Theodore R. Schroeder

Great question Juan. We did recognize that the injectable analgesic market basket includes more than hospitals, and even more than ambulatory surgical centers, including patient offices, long term care, etcetera. So as we think about the hospital market specifically, it's a little bit closer to around 200 million, 225 million units and that's most of the market share data that I provided is using that as the denominator.

We don't see the market size changing dramatically year-over-year. We do see some ebb and flow on the quarters. For example, Q2 of this year, the market basket declined 2% versus Q1, and here we grew a little more than 17% in the hospital purchases. I think we will continue to see that ebb and flow, because we are seeing not only the shortages that are common with generic manufacturers of injectable medications impact some of these products, but we are also -- certainly in our target hospitals, seeing their opioid purchases coming down, the more they are utilizing OFIRMEV.

So I don't think that it will drive the whole market down, but I think we can still have really good chances and expectation of getting to that ballpark that you described. The reference point there I will just highlight is ketorolac. And ketorolac is really the only other meaningful non-opioid injectable analgesic out there, and in available patients to be treated by that product are just a small sliver of the patients that would be eligible for OFIRMEV. So we think that's a pretty good benchmark, and one that OFIRMEV should be able to achieve over its lifecycle.

Juan Sanchez - Ladenburg

Final question is which hospital, (inaudible) or specialty are you having more trouble with adoption?

Scott A. Byrd

We are not -- I wouldn't say we are having particular trouble in any of the surgical specialties there. Some that we are not spending a lot of time focusing on, and that's just really a matter of prioritization and capacity. We don't tend to spend a tremendous amount of time in plastics or E&T surgeons as an example. So although we have pretty good use there, it's not as deep as where we are with bariatrics, bowels, general surgery and orthopedics. We rarely run into resistance from any specialty, because the value proposition may be slightly different for cardio-thoracic surgeon, is more worried about bleeding and respiration than it is for a colorectal surgeon, who is more concerned about valve recovery. But the value proposition is still very-very strong.

We are prioritizing our efforts with both, where there is a lot of patients and a great compelling value proposition. So you see the bulk of our business coming from those three specialties that I mentioned. But whether we are talking about -- OB-GYN is another big specialty for us. We are seeing share penetration, I think pretty close to around 14% in that specialty, which is pretty similar to what we are seeing in trauma and cardiothoracic. So really across the board, we are seeing nice penetration. Just the size of those markets really dictate how much they are really contributing to our overall bottom line.

Juan Sanchez - Ladenburg

One final question if as -- whether or not, you were to spend like $10 million or $20 million more in commercialization. Do you think you will get a good return on that investment, or your focus right now is more on acquiring new products?

Scott A. Byrd

Well I mean I will start and certainly let Ted comment as well. But we think that we are right-sized for the OFIRMEV market opportunity, and in fact, we think that we are right-sized to be able to sell multiple products into this space right now. Almost any product I can think of is going to have, at a minimum, it would be a great compliment for OFIRMEV and more likely, would be synergistic. So with more money, we are probably investing that and expanding the product portfolio and as you know from some of our previous calls, that's a big priority for us, and something we are very active in right now, and I guess I will let Ted speak to that, if you'd like?

Theodore R. Schroeder

Hi Juan, I agree with that. I think the better growth driver for the company would be to bring in additional products. I think we are appropriately invested in the commercialization of OFIRMEV at this point. $20 million increase in the OFIRMEV spend, I don't think would be the best use of resources at this point. I do think however, bringing in another product to put in the salesforce will actually benefit OFIRMEV, by increasing the amount of time we spend with the appropriate target physician groups, principally surgeons and the more time we have there, and the second product will facilitate that, adding to more growth we are going to drive.

Juan Sanchez - Ladenburg

Thank you very much.

Operator

Thank you. Our next question comes from the line of David Amsellem of Piper Jaffray. Your line is open, please go ahead.

David Amsellem - Piper Jaffray

Thanks. Just a couple. So I will start off with a question on pricing. You have taken two this year, last year you took one. So has anything changed in the marketplace regarding pricing, what's the extent to which you think you can continue to take price?

Theodore R. Schroeder

Well yeah, we did take price again here in July. We still have had very muted response, at least negative response from customers. It has been pretty quite out there, and I think the reason behind that is, that we have not only a very cost effective product, and we launched at a relatively low price, but value proposition is becoming not just clear theoretically, but I think it's becoming more and more clear in (inaudible) of the hospitals, because they are measuring the benefits within their systems, and so, whether they are spending $45 or $48 per day, if they are using four doses, that's really a meaningless difference in the overall cost of the surgical patient.

So we do think that we have got some room to continue to move price. I have said before, I think that we can get into the mid to upper teens, dollars per vial, as we reach the end of the lifecycle of the product, and still don't see any reason why we can't get there. I would just caution you not to necessarily expect price increases on a semi-annual basis, that isn't necessarily our strategy, but we do believe there is some room for growth, over the long term.

David Amsellem - Piper Jaffray

Okay. That's helpful. Then my second question is, and you may have alluded to this earlier, but just I guess the question here is, how much of a priority is getting a bigger footprint for OFIRMEV in other parts of the hospital, non-surgical -- in other words, the ER-ICU, hematology, oncology, what's the extent to which you are seeing usage there, and is there -- do you think there is real opportunity to drive the product in those areas of the hospital?

Scott A. Byrd

That's a really-really good question. We are seeing a still relatively small portion of our overall business in the non-operative space. It's mid-single digits as a percent of our overall patients and vials. Obviously, that's because we are not spending a lot of time promoting the product in those areas of the hospitals. But we do see organic growth in use there. Just by their exposure to the product, with the post-op patients. So overall, the market size is maybe 60-40 surgical, non-surgical or even two-thirds, one-third, somewhere in that range is the breakdown for all injectable analgesics. We think that's also going to be true for OFIRMEV long term. We are not focusing our efforts now on penetrating the non-operative space, because we just think there is still so much room to go, with post-op patients and the different service lines there.

As we get to a point, and think that either with some complementary products or some nice synergies, even within the OFIRMEV space that when it's time to go over there, then we will do that. We are just not doing it quite yet David.

David Amsellem - Piper Jaffray

Just to follow-up to that, if and when you get to the point where you are looking at the non-operative space with OFIRMEV, would you need a headcount expansion to support that?

Scott A. Byrd

Absolutely not. We definitely have the folks to be able to cover that space now. In some territories, we already are. As you know, driven by the customers in those cases, but our reps are quite capable of getting to those places and serving those needs, and that really is the underlying premise, with which we have said that we think we can bring more products and without having to significantly expand the footprint.

Theodore R. Schroeder

David, so the issue is, it's not a capacity issue to access non-operative pain, it's a focus issue, and we prospectively made the decision to focus on the surgical area, because it's twice as valuable as the non-operative pain area. But as we get more fully penetrated in surgery, non-operative pain is an obvious place to go to continue to grow.

David Amsellem - Piper Jaffray

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of John Newman of JMP Securities. Your line is open. Please go ahead.

John Newman - JMP Securities

Hey guys, thanks for taking the question. Actually I had two. First one is for Scott. Scott, you made an interesting comment about the number of valves per patient that you are seeing in bariatric and major valve surgery. Are you guys getting good resonance with your message there, in terms of doctors realizing that this is a great way to avoid any kind of constipation in a lot of other patients, and will you continue to press that message, if it is? Then just one question, how often business development -- is there any sort of increased appetite for business development now, versus say earlier this year, or do you just maintain sort of a constant search for the right type of product? Thanks.

Scott A. Byrd

I will address your vial per patient, and then I will let Ted talk about our appetite for BD. Well, just to be real clear, yes, the surgeons that are doing those bariatric and valve procedures do absolutely see and are experiencing the benefits you described. They have been burdened with solely having opioids available for so long, that I think they may not have really fully understood how much better they could be treating their patients, and having a faster return of their valve functions and reduction of PONV. So we are hearing a tremendous number of anecdotal reports coming back from those customers, and I think that's what's spurring a lot of the utilization.

But having said that, there is also a growing scientific literature out there. I mean, even this year, there have been at least three different publications that have shown a reduction of PONV, all the way from Turkish study, and gall bladder procedures to a gastric bypass study done by Dr. Ziemann-Gimmel down in Florida, which she published this year; and then Christian Apfel, also published a manuscript. It was a meta-analysis of 30 different studies that showed reductions in PONV with the use.

Now that's a scientific literature. We are not out promoting actively that OFIRMEV reduces PONV. We do very much spend time promoting the reduction of opioids and these docs understand the benefits of using less opioids and they are working actively to see those benefits in their practice.

So I guess, I will hand the next question over to Ted on our BD hunger.

Theodore R. Schroeder

John, I think it's fair to say that our appetite is going up to do business development transaction. I think as we are more established with OFIRMEV, it's clear that the salesforce has capacity to bring on another product, and that would be -- it's part of our plan. I don't feel like we have a gun to our head to execute on our business development transaction in the relative near term, but it's certainly something we recognize that would be a great addition to Cadence -- it would be great for building the business, and I think would add a lot of value. So we are very active on that front, and have very significant deal flow at this point.

And just to remind everyone, we are focused on products that -- so much smaller products, but products that are at least FDA approved, that we can drop into the salesforce immediately.

John Newman - JMP Securities

Great, and if I could ask just one quick follow-up. What would be sort of the [gauging] factor, sort of the go-no go factor in terms of launching the product in Canada? Would it be solely the type of price that you are able to get, or would it be -- would it also be related to what type of promotional footprint that you would need to establish there?

Theodore R. Schroeder

No, it's really about price. The promotional footprint is really very modest, they have actually managed the hospital business in Canada before, and you only need a handful of people that cover the major centers in Canada. So that really would be an incremental increase in headcount. But that's all driven by price, and it really matters if we can get value, price for the product, and we will go ahead and launch. But if not, I don't think we will ever launch the product in Canada.

John Newman - JMP Securities

Great. Thank you.

Operator

Thank you. Our next question comes from the line of Patti Bank of Discern Securities. Your line is open, please go ahead.

Patti Bank - Discern Securities

Hi, just two questions. One, Scott, you have talked before about spinal surgeries, and traction that you are seeing there. I didn't hear you call that out in this call. So I am just wondering if you can kind of give an update there, and any way I guess to quantify, how far long that curve you think you are? Then the second question is just, any more granularity on how OFIRMEV is being used at this point, whether alone or in terms of where the opioids are added and how much, and whether you are seeing an increase of pain guidelines within the hospitals being implemented?

Scott A. Byrd

Well, there was a beep on your second part of your question Patti, so let me answer the first one, and then if I could ask you to restate the second question, that would be helpful. The spinal procedures, the neuro procedures, we are seeing really-really nice utilization. As best we can tell, in Q1 of this year, have a premier database, we were seeing about 20% of the patients across the neurosurgical space, we are getting at least one does of OFIRMEV. So actually, pretty good utilization.

The only challenge there in terms of its overall contribution, is there is just not that many neurosurgical procedures, relative to orthopedics in general. So that's why, really the only reason I didn't speak about it earlier, but it's for the reasons that we have talked about before. Again, another patient group, where opioids are really problematic, and where OFIRMEV has some great benefits to share, and I think they were probably even some of their earlier adoptors, that spurred many of the other orthopedic surgeons that used the product in some hospitals. So I like that business a lot.

So the second part of your question again, if you wouldn't mind?

Patti Bank - Discern Securities

Yup. The second question was just any more color in terms of how OFIRMEV is being used? I guess, what percent of procedures, doctors do have, opioids versus -- they can use a (inaudible), and just whether you are seeing that prompt increase in implementation of pain guidelines in more hospitals that include OFIRMEV?

Scott A. Byrd

Well I mean, in terms of the procedures that physicians can use OFIRMEV in, rather than opioids alone, I would say it's like 99% than others, so few patients that would not be appropriate. Essentially those that are already allergic, which I haven't heard many yet, I am sure there probably are some, or patients that have severe liver disease with the obviously exclusions as appropriate patients. But that's a very small percent of the overall pie.

So we think that the universe is appropriate.

Patti Bank - Discern Securities

I guess I am speaking more in terms of where (inaudible) off, and they haven't had to go to opioids, using a [Pharma Avalon]?

Scott A. Byrd

I don't think there is going to be one surgical type, that is going to be blanket across the country, or across every surgeon's practice. But we have heard a lot of anecdotal feedback in the space you referred to, which is the neurosurgical space, the spinal procedures with many patients getting away, without having any injectable opioids on-board during their stay.

That's also true; and the OB-GYN procedures, where those physicians have historically used a fair amount of ketorolac, now they have got another non-opioid, so many of those docs are using both those products together, to avoid opioids, and that whole approach is the one that is more and more frequently being used in some of the other soft tissue surgeries like the bariatrics and valves, and indeed, is the basis for one -- that study that I mentioned by Dr. Ziemann-Gimmel in Florida. He used ketorolac and OFIRMEV in gastric bypass procedure. So we are seeing that more and more frequently. I can't tell you with any great certainty on the call right now, what percent of patients would be eligible for an opioid avoidance strategy, but I think as docs see that efficacy more and more, they are going to be able to treat a greater portion of their patients that way.

So it's a growing trend, and I think you will see more and more scientific data coming out, supporting that strategy.

Patti Bank - Discern Securities

I guess just as a follow-up, do you know of any studies investigated or initiated that are underway to support that or support the reduction in length of hospitals today, that we should be aware of?

Theodore R. Schroeder

There are certainly other studies underway. Looking at the length of the stay, there are a number of hospitals that have presented posters on their experience with reductions in length of stay, from all over the country. We have had the number from the northeast, and just here recently that have published their information, a different (inaudible) presentation. I don't know if they are going to put them in the manuscripts, but I am fairly confident we will see some more publications coming out over the course of the next year to showing reductions of length of stay.

In terms of the opioid avoidance; off the top of my head, I can't speak to any Malcolm might have some familiarity with them, but I can't say that there are studies that were published several years ago with the European literature, for example, in pancolectomy, where they were able to show that the large majority -- I am going to be a little bit off in my memory, but it's almost three-fourths of those patients I think, were able to be discharged without any opioid therapy.

So there is probably many more than that, but they are not coming to mind, right off the top of my head.

Patti Bank - Discern Securities

Thanks, and then just one quick one for Bill. Bill, just want to make sure that the increased guidance does do more to the better demand than to the adjustment of the price increase in July 1st, and that was already assumed in your guidance all the way through?

William R. LaRue

That's correct Patti.

Patti Bank - Discern Securities

Thank you.

Operator

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

Greg Fraser - Banc of America-Merrill Lynch

Good afternoon. Thanks for taking the question. My first one is on the injectable analgesic shortages that have occurred in the market. Can you just comment on where you might have opportunities to capitalize on those shortages, and boost OFIRMEV demand?

Scott A. Byrd

Well Greg, as you might know, the shortages are very common, they tend not to be nationwide. So they tend to be specific to a manufacturer, which means they impact individual hospitals very-very differently. Over the last quarter, we have seen a couple of shortages that [sentinel] seemed to having a fair number of problems with different manufacturers, that manufacture sentinel, as well as to a lesser extent, ketorolac shortages have been ongoing. When we see those, what typically happens is, we tend to see the benefit in those hospitals and their ramp or utilization of OFIRMEV, and the beauty is, when the products, the opioids become more freely available, we don't see any decline in their use of OFIRMEV.

So the shortages tend to trigger maybe a slight acceleration in trial and then adoption for OFIRMEV, so they are good for us, not only in the short term, but the long term.

Greg Fraser - Banc of America-Merrill Lynch

Okay. Then on the patent litigation with Excella, you are confident in your case heading into the trials, you've expressed confidence coming out of the trial. At this time, is there still some form of settlement that you would consider, just to take what I believe you view as a small risk off the table?

Theodore R. Schroeder

Well I think we are always open to having discussions around a reasonable settlement, and I think like all prudent businesspeople, we would rather have certainty than not. Yeah so, I think that's really all we can say about it, we are certainly open to something that's reasonable.

Greg Fraser - Banc of America-Merrill Lynch

If you were to settle with (inaudible) that preserves their first (inaudible), that would create a barrier for the other generic filers. I am just wondering if that's your (inaudible) or thinking as you considered -- how hard to pursue the settlement around?

Theodore R. Schroeder

Well we have thought about all the different aspects, and have -- are open to the distribution. So it's -- I don't think there is any aspect to this, we haven't considered as we have moved forward. It takes two people to have a discussion.

Greg Fraser - Banc of America-Merrill Lynch

Lastly, how much was the SG&A spend this quarter? Was there legal expense in this?

Theodore R. Schroeder

Greg, we don't give out that specificity in terms of the actual dollars. But as I said, most of the increase quarter-over-quarter and SG&A had to do with legal expenses.

Greg Fraser - Banc of America-Merrill Lynch

Okay. Thank you.

Operator

At this time, there are no further questions. So I will turn the conference back over to Mr. Schroeder.

Theodore R. Schroeder

Thank you very much for joining us today. Appreciate your questions and your interest in Cadence and your continued support. 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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