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AMAG Pharmaceuticals Inc. (NASDAQ:AMAG)

Q1 2010 Earnings Call

April 27, 2010 04:30 pm ET

Executives

Amy Sullivan - IR

Brian Pereira - President and CEO

Tim Healey - SVP of Commercial Operations

David Arkowitz - CFO and CBO

Analysts

Mark Monane - Needham & Company

Matt Roden - Banc of America

Yaron Werber - Citi

Eun Yang - Jefferies

Chris Raymond - Robert W. Baird

Geoff Meacham - JPMorgan

Adam Cutler - Canaccord

Joseph Schwartz - Leerink Swann

Operator

Good afternoon my name is Tracey and I will be your conference operator today. At this time I would like to welcome everyone to the AMAG Pharmaceuticals first quarter financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions). Thank you. Amy Sullivan, you may begin your conference.

Amy Sullivan

Thank you Tracey. Welcome to the AMAG Pharmaceuticals conference call to discuss our first quarter 2010 financial results. I would like to remind you all that we are using slides today for that call and the slides are available on the Investor Section of our website at www.amagpharma.com. Before proceeding with this call, please keep in mind that this conference call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. Any statements contained herein which do not describe historical facts including but not limited to. Statements regarding the significance of the market opportunity for Feraheme and our Feraheme development plans are forward-looking statements which involve risks and uncertainties that could cause actual results to differ materially from those discussed in such forward-looking statements. For a full list of risks and uncertainties associated with our business, please refer to our filings with the Securities and Exchange Commission including our annual report on Form 10-K for the year ended December 31, 2009.

On slide three, you will see the agenda for our call beginning with our President and Chief Executive Officer Brian Pereira who discuss some of AMAG's accomplishments today. Tim Healey our Senior Vice President of Commercial Operations will then share his perspective on the commercialization of Feraheme. David Arkowitz our CFO and Chief Business Officer will follow with the review of our financial results for the quarter and Brian will close the prepared remarks for the call before we open the floor for Q&A.

I will now turn the call over to Brian.

Brian Pereira

Thank you, Amy. And thank you to those of you who have joined us this afternoon. I will begin with slide five. We've had a very busy few months to begin 2010 and I am proud of our accomplishments to-date. In 2010, we've already made significant progress towards our objectives for the year.

We are continuing the successful commercialization of Feraheme in the US CKD market. This is evidenced by the significant 57% increase in provided demand and utilization over the fourth quarter of 2009. In addition, we have [grown] our presence in the hospital and hematology segments, two segments that we have targeted for growth. Tim will discuss this in greater detail.

Another major objective for 2010 is to expand the global reach of Feraheme. Their partnership with Takeda marked a major step forward on this front as they bring commercial expertise in specialty pharmaceuticals in the major ex-US territory where they will be responsible for the commercialization of Feraheme.

We believe that this deal brings tremendous value for our shareholders. Between the financing that we completed in January and the upfront payment received from Takeda in April. We are now well capitalized to achieve our goals in the foreseeable future.

To provide AMAG with further commercial expertise in global specialty markets, we today announce the appointment of Gary Zieziula to the newly created role of Chief Commercial Officer. Gary is with us today and be happy to answer any questions about his expertise and the strength he brings to AMAG.

I will now turn the call over to Tim.

Tim Healey

Thank you, Brian. On slide seven, you can see that we reported $13.1 million in Feraheme net product revenues for the first quarter of 2010. This included 2.2 million in previously deferred product revenues related to our large incentive program. This 2.2 million reflects actual Feraheme utilization by our customers in the quarter as reported to us. We look at the first quarter of 2010 as compared to the fourth quarter of 2009; we achieved a 57% increase in provider demand and launch incentive program utilization with continued growth across both dialysis and non-dialysis CKD utilization.

The marked increase in provider demand in the first quarter did not translate into a significant increase in Feraheme revenues as compared to last quarter because Feraheme inventory levels on a grand basis their wholesalers and distributors were essentially unchanged from December 31, 2009 to March 31, 2010. David will discuss this topic in more detail later on this call.

For the quarter approximately 60% of provider demand was outside of the dialysis setting with hospitals and hematology clinics representing the majority of non-dialysis demand. Through April 2 of 2010 approximately 1700 providers had purchased Feraheme, with 67% of those providers having purchased on a repeat basis.

In the first quarter alone more than 585 providers purchased Feraheme for the first time, 75% of which were hospitals or hematology clinics, this is great progress. And our goal is to grow the number of hospital and hematology clinics using Feraheme substantially during the course of 2010. We believe the best indicator of success for Feraheme is to look at quarter-over-quarter growth in provider demand.

On slide eight, you can see the growth achieved in provider demand and launch incentive utilization on a quarter-over-quarter basis with a 57% increase from fourth quarter of 2009 to the first quarter of 2010.

Moving to slide nine, about 1.6 million grams of IV iron were used in the U.S. in 2009 and 8% growth rate over 2008. This iron is used by a variety of providers that we have broken out into two groups in the pie chart on the left side of the slide. These groups are dialysis centers representing 59% and all other settings representing the remaining 41%.

On the right side of the slide, we have identified three key provider segments, small dialysis organizations which we refer to on the slide as FDOs, clinics which are physician practices including nephrologists and hematologists and hospitals. These segments represent a large piece of the total IV iron market and we are pleased with the progress that we have made with these providers today.

On slide 10 we showed the breakdown of our customers in our three target provider segments. Launch to date; the majority of our customers are clinics which include hematology and nephrology practices followed by hospitals and dialysis centers. Important to remember that although dialysis organizations make up the smallest number of accounts, they tend to be the biggest users of IV iron on a per capita basis. That said in 2010 a primary focus for AMAG is to accelerate adoption in hematology clinics and hospitals.

The hospital segment is relatively untapped with approximately 10% of the potential customers in that segment penetrated. In the hematology segment, we have 23% of all hematology practices as accounted today. These accounts tend to be high IV iron users representing approximately 40% of all IV iron administered by hematology practices in 2009. As we continue our efforts this year we have two primary goals with the hospital and hematology segments to increase utilization with our current customers why we attract new customers.

On slide 11 you could see the break down of provider demand in the first quarter of 2010. This excludes loss incentive program utilization, reflective of the majority of new accounts being hospital in hematology clinics these segments had increased on an absolute basis and as a proportion of our business since year end. Hospitals and hematology today represent approximately 60% of our customers yet they make up just 40% of our demand. As we grow the total number of hematology clinics and hospitals using Feraheme and increased utilization by these accounts, we believe that, that proportion of our business attributable to these segments will increase overtime.

While a particular segment may decrease as a proportion of our business as it had in this quarter with dialysis and nephrology, it does not mean that our business in these segments are shrinking. As volume has grown in these segments on an absolute basis, you'll see this on the next slide.

On slide 12, you can see the increase in provider demand on an absolute basis like segment from the fourth quarter of 2009 to the first quarter of 2010. This excludes launch incentive program utilization. We have seen growth across all segments with the most significant growth achieved in hospitals with an 82% increase and hematology clinics representing a 58% increase. These results are consistent with our focus in 2010 to increase penetration of Feraheme with these two important provider segments.

On slide 13, we showed the monthly provider demand is reported by IMS in purple and launch incentive program utilization as reported by our customers to AMAG in green. We are pleased with this substantial month-over-month increase in total demand and launch incentive utilization in the first quarter of 2010 as compared to the fourth quarter of 2009.

Please note that the loss incentive utilization is not captured in pharmaceutical sales audits like IMS. In addition the IMS DDD reporting data generally breaks quarters in the two four-week months and one five-week month. Accordingly, on this chart September, December, and March are five weeks reporting periods. The IMS reporting cycle coupled with the structure of our [eBay] programs which is based on cumulative quarterly provider approaches have led to increases in demand at the end of each quarter. The rebate programs that we have had in place for the past few quarters are continuing. So this could continue to lead to some end-of-quarter increases and provider purchasing activity. As providers become more familiar with our rebate programs and begin to estimate their quarterly IVR and utilization and plan their purchases accordingly. We expect that this choppiness in demand may begin to subside in coming quarters. As such, we would encourage you to pay attention to quarterly progress instead of month to month variation.

As I have said previously, we believe the best indicator of success referring is quarter-over-quarter provider demand. As the monthly data is still to variable for reasons already discussed. I'll close slide 14 which is the same as slide eight and shows a 57% increase in quarter-over-quarter growth from the fourth quarter of 2009 to the first quarter of 2010. This is the way that we will be measuring our success on a going forward basis.

I'll now turn the call over to David who has dug a little deeper into the topic of inventory and review our financial results for the quarter, David?

David Arkowitz

Thanks Tim, I'll start on slide 16. This is pretty basic stuff and most of you are well aware how we sell and record revenues for Feraheme. But since we still see folks just adding up IMS reported monthly Feraheme sales to calculate our net sales for the quarter, we thought it would be worthwhile to quickly review this. And for the sake of simplicity I am going to exclude the large intensive program and the recognition of the associated deferred revenues from this discussion.

Not unlike many other pharmaceutical companies, our revenues primarily reflect sales of Feraheme to wholesales are distributors. So whatever we sell and ship to wholesalers and distributors during the quarter comprise our gross product sales which is then adjusted for fees, discount, rebates and returns to get to the net product sales for you for the quarter.

IMS on the other hand reports what is purchased by providers including hospital's physician practices, (inaudible) with organization from these wholesalers and distributors. These are proprietary methodologies to dollarize this demand and report this dollar amount to you on a monthly basis through their IMS NSP product.

So it is important to be careful using monthly NSD dollars from IMS as these do not capture any changes in wholesaler or distributor inventory levels as well as all of the fees, discounts, rebates and returns that are included in our net sales.

Moving on to slide 17. This lays out the Feraheme inventory levels at wholesalers and distributors at the end of each of quarters from launch through the first quarter of 2010. Please note this information excludes the launch incentive program. As you can see and as one would expect, the amount of grams that wholesalers and distributors held increased significantly from the end of the third quarter of 2009 to yearend 2009 as there were significant increase in provider demand during fourth quarter specifically wholesalers and distributors had approximately 8,800 grams of Feraheme at year-end 2009 which equated to five weeks of inventory based on December provider demand.

At the end of the first quarter of 2010 Feraheme inventory at wholesalers and distributors on grams basis, remain flat as compared to year end 2009 and this equated to four weeks of inventory based on March provider demand. We believe that four to six weeks of inventory is a reasonable amount for wholesalers and distributors that have on hand during a launch.

As we get more commercial history behind us, we believe that wholesalers and distributors will get more comfortable with AMAG as a commercial entity gain confidence in our ability to quickly deliver products and further understand provider purchasing interesting patterns, and as a result will adjust their inventory levels accordingly. Although we closely monitor the purchasing of Feraheme by our wholesalers and distributors, we do not require them to maintain any specific levels of inventory. It is in their best to interest to ensure that they have enough on hand to meet the demands of their customers and we feel that they are best suited to make that determination.

Now on slide 18 let me quickly review our financial results for the quarter and provide some color on our expenses for 2010. Our total revenues for the quarter were 13.3 million, 13.1 million of which were Feraheme net product sales including 2.2 million of previously deferred large incentive program revenues. As we've already discussed, despite a market increase in provider demand during the first quarter of 2010, our revenues were essentially flat as compared to the fourth quarter of 2009 as inventory levels of wholesalers and distributors were relatively unchanged from December 31 2009 to March 31 2010.

Healthcare reform also kicked in during the quarter and the key provisions that impact us relates to Medicaid. We believe that the impact of these changes will be an increase in our gross to net sales adjustment by 1 to 2% in 2010. Please keep in mind that the total gross and net sales adjustment is driven by a wide range of factors including customer mix and buying patterns, the level of discounts rebates and fees offered and earned, segment utilization assumption, adjustment to the prior estimates and we're still in launch mode. As a result, there may be fluctuations when looking at this across quarters.

Our cost to product sales for the quarter increased over the fourth quarter to approximately $1 million. The cost of product sales continue to benefit somewhat from Feraheme inventory that was manufactured prior to approval and previously expensed. Once we have fully depleted our pre-approval Feraheme inventory, we expect that our cost of product sales as a percentage of net product sales will increase. As expected, R&D expenses increased about $3.5 million in the first quarter of 2010 from the fourth quarter of 2009 as we initiated the first study and encouraged start up cost for the global registration program for iron deficiency anemia which will start enrolling patients during the middle of this year. We expect that R&D expenses will continue to ramp up over the remainder of the year related to the advancement of the broad-based iron deficiency anemia program and as we initiate pediatric studies for Feraheme.

SG&A expenses are running at a rate consistent with that of the fourth quarter of 2009 and as we are pretty much at a steady state with commercial spending, we think that this is a reasonable run rate for the remainder of the year.

So all-in-all we reported a net loss of approximately $23 million or a loss of $1.15 per share. We are now in a very strong financial position with $283 million in the bank at the end of March and another $60 million that we received in April as the upfront payment from Takeda which for the first quarter reporting period is sitting on our balance sheet as a receivable.

As I mentioned previously, we recognized $2.2 million of previously deferred revenues in the quarter related for launch incentive program purchases. However our short-term deferred revenues increased for the quarter as this 2.2 million decrease was offset by the addition of the current portion of the amortization of the $60 million upfront payment from Takeda which is $6 million. We are amortizing the $60 million upfront payment over the European patent life for Feraheme which is 10 years. The remaining $54 million is included in the long-term deferred revenue line on our balance sheet.

I will now turn the call back to Brian.

Brian Pereira

Thank you, David. In conclusion on slide 20, today as the commercial biopharmaceutical company, (inaudible) foundation in place that provides us with several near and long-term opportunities for growth. The market opportunity that exists for Feraheme within our current label is large. We believe that the observed advantages of Feraheme are being well received by both segments of the CKD US iron deficiency anemia market. Along with ensuring the commercial success of Feraheme in this market, we plan to expand the label and the geographic reach of Feraheme by unlocking the value of this asset for iron deficiency anemia patients with or without chronic kidney disease as well as imaging patients around the world.

In the past few months, we have made great strides towards achieving these objectives through the following: the Canadian regulatory submission in the fourth quarter of 2009 is currently under review. The advancement of Phase II imaging study for patients with peripheral arterial disease for which as you know we have a Fast Track designation. This is now more than 90% enrolled.

The initiation of the first study to support our regulatory filing with the EMEA and reimbursement in EU. We are preparing for our planned EU regulatory filing for the treatment of iron deficiency, anemia and CKD patients in the middle of this year and the establishment of the collaboration with Takeda will be responsible for commercializing Feraheme in several ex-US territories including the EU.

And finally the beginning of startup activities for our global registration program for [ID8] which is slated to begin in the middle of this year.

The therapeutic opportunities coupled with the imaging potential of Feraheme provide our company with unique growth opportunities upon which we hope to build through a positive business development activities. We believe that the addition of Gary Zieziula to our executive team will help ensure that we fully recognize the commercial value of Feraheme and will help us at the commercial value of any assets that we may contemplate adding to our portfolio.

This concludes our prepared remarks. We will now open the call for question-and-answers. Operator any questions?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Mark Monane from Needham & Company. Your line is open.

Mark Monane - Needham & Company

Thank you very much for reviewing the quarter and the insights for 2010 with us so far. Can you spend a little bit more time discussing the quarter-over-quarter revenue results versus the growth that we see? Is the right parameter to use therefore the grounds in seeking of our projecting going forward?

David Arkowitz

Mark, this is David. I think the right way to think about this is, our revenues in any given quarter are going to be driven by three things. It's going to be driven by the demand grams in that quarter, it's going to be driven by any changes in the wholesaler, distributor, inventory levels from the beginning of the quarter to the end of the quarter and its going to be driven by the large incentive program utilization. And all those things, obviously need to be installed with grams and then dollarized appropriately.

Mark Monane - Needham & Company

In follow-up, there was a nice discussion about the penetration in the different market segments. Our dialysis is the biggest market segment right now, but you seem to be having a nice growth in the hematology and hospital segment. Can you go over the different strategies and marketing that apply to those two different segments, does it indicate a different pricing strategy? Or is it more a different strategy in thinking about the relative value in each section.

Tim Healey

Sure Mark, this is Tim Healey. So we don't really get into the details of our marketing strategies specifically by segments, but we are committed to selling Feraheme and communicating the story of Feraheme across all of our segments and what we do is we are emphasizing the clinical, the operational, and the economic advantages and benefits that's Feraheme can provide and so that's really the mission of our team to communicate those parameters.

Mark Monane - Needham & Company

Okay. I think I'll go back in the queue. Thank you for the added information.

Operator

Your next question comes from Marshall Urist from Morgan Stanley. Your line is open.

Unidentified Analyst

Good morning, good afternoon. This is [Mira Hasani] stepping in for Marshall Urist. The other question regarding the nephrologists and whether getting office-based nephrologists administer therapy, Feraheme has been more difficult than expected and if so how has the company responded?

Tim Healey

Hi, this is Tim Healey again. As you would image before launch we did a great inbound of research understanding the dynamics and the nephrology office space and we identified offices and characteristics of offices that we think would lead to rapid adoption of Feraheme and the nephrology office as well as offices that maybe more difficult. We have been very pleased with the uptake in the nephrology office. And as we reported on our last earnings call we actually became the number one IV iron used by nephrologists within 2009. And we continue to see momentum in that sector now. So, we are very encouraged how we do, we do think that there is great opportunity for growth in that segment overtime. So, that's where we are. And of course on slide 12, you did note that there is good demand, good increases in provider demand in the first quarter as well 21%.

Unidentified Analyst

Great, thank you.

Operator

Your next question comes from Matt Roden from Banc of America. Your line is open.

Matt Roden - Banc of America

Thanks for taking the questions. First one is on the hospital segment and then the second one will be on clinical trials. But first on hospitals, Tim if I heard you right, I think you said you have about 10% penetration in that segment up quarter-over-quarter. Can you go into what you need to do this year to maximize penetration in the hospitals whether it's leveraging the unique codes or getting docs up in front of P&T committees. What is the reasonable expectation for results in the hospital segment this year?

Tim Healey

Right, so speaking broadly because we are not going to get into older details of our strategy in that segment but again when we look to the hospital segment there is roughly around 5000 hospital accounts in United States that are finding billing IV iron products, we as you would have imaged have segmented that market and have identified the subset of accounts that we think are very high potential target and so targets we're putting our recourses against those targets. We are very pleased with what we have seen to date with the number of accounts that are coming on both in terms of making the parts available having formal formulary additions made. So what are objective now in the hospital setting is pretty simple. We want to continue to accelerate the number of accounts that are coming on, number one and number two, for our existing accounts we want to get them more comfortable with Feraheme so we can drive pull through in those accounts. And so that's really the core in the hospital segment for the rest of the year.

Matt Roden - Banc of America

Thanks, Tim and a question on the 150 patient clinical trial head-to-head in CKD. Assuming that those data will be made available to the EMEA for the filing, I would imagine that the timelines for that trial would have some data by year-end this year. So the question is, what are your plans for communication of that data? Would we see a press release as to what you are finding in that trial or is it something where we would wait for medical conferences either this year or next year? Or would we have to wait until the EMEA documents are published?

Lee Allen

We certainly plan to use that data of the data that's available at the time we get questions from the EMEA in terms of supporting the CKD EMEA, but the terms of actual publication with us we have in the past wait until appropriate medical forum to release that information.

Operator

Your next question comes from Yaron Werber from Citi. Your line is open.

Yaron Werber - Citi

I had a question about, just trying to understand a little bit sort of the gross to net adjustments that we should be using. Because I guess, maybe just to walk you through, I'm calculating you did it around 5,900 grams in the launch incentive program, but that is about $2.2 million. That comes out to about 373 per gram. And last quarter it was 1,650 and you booked $1.9 million. So it was sort of over 1,100, about 1,151. I'm just struggling to understand kind of what pricing should we be using because it is obviously very different in the ASP. And then I have a follow-on as well.

David Arkowitz

So, you are wrong -- you are right in terms of the calculation you did for the first quarter in the launch incentive. Grams are at fairly low price and that's what we talked about when we introduced that program that would be a one-time program to really drive early adoption by dialysis organizations that was made available in the September of last year. So it is at a pretty healthy discount and not consistent obviously with what we are selling the rest of our, the rest of Feraheme at.

Yaron Werber - Citi

I guess the following question is, if you look at what in January customers paid about $9.5 million for the launch incentive program, but they use about $3.8 million, so that there is still a good amount left. About $5.9 was left, but they only used $2.2 million this quarter. So it almost seems that there is still another two or three quarters worth of launch incentive program to kind of drill down. Am I thinking about it the right way?

Tim Healey

Hi, this is Tim Healey I think that is about right, you know the comment that I would make is that the utilization of the grams associated with 13 launch incentive program has been a bit slower than anticipated. And what we found is that implementing a change in the protocol takes time and some of the accounts. This is taken a bit longer than expected.

David Arkowitz

If I could just add into that there is actually $8 million last of launch incentive program purchases at the end of first quarter.

Yaron Werber - Citi

I'm sorry. There's $8 million, right?

David Arkowitz

$8 million

Yaron Werber – Citi

Do you mind if I just sneak in one other follow-up and I'm sorry about that. Just to help us understand what the R&D was $12.4 million and you said it is going to continue to increase throughout the year. Can you help us understand a little bit what are we talking about? I mean because it does really make a difference long-term on a company with about 17 million shares outstanding or I'm sorry 21 million shares outstanding.

David Arkowitz

We've given some color around our expectations on the R&D expenses as you said and as I had noticed, noted it went up $3.5 million from fourth quarter to first quarter and we continued and we expected to continue to ramp over the rest of the year. We hadn't given any kind of further guidance as to what that amount could be but as I mentioned we are going to be initiating our broad-based iron deficiency anemia program by the middle this year. So we will start enrolling patients we've incurred some startup expenses associated with that. And we will be initiating our pediatric studies later this year as well. So both of those will drive R&D expenses up from we are in the first quarter.

Yaron Werber - Citi

Great thanks.

Operator

Your next question comes from Eun Yang from Jefferies your line is open.

Eun Yang - Jefferies

Thanks. With the upcoming expanded the [bundling] starting next year, can you comment on what impact would it be on Feraheme? And how do you see that plays out for you?

Tim Healey

It's important to remember that the final rule has not yet come out on the bundle. We are expecting that, that come out any day, or certainly over the next several weeks. But in general, we do think that there will be a greater role for Iron and for IV Iron and the bundle as it's a more cost effective way to initially treat patients with iron deficiency anemia and CKD. And then we believe that the clinical and operational benefits of Feraheme are valuable to patients and providers in the dialed setting so I think that really summarizes our position on that, we are obviously committed to the dialysis segment and we will be emphasizing our clinical and operational benefits.

Eun Yang - Jefferies

How about pricing? Your pricing strategy clearly, Feraheme is significantly more expensive than other IV items on the market, but highly likely that it is going to be tremendous price pressure on the product. So what is your pricing strategy?

Tim Healey

Well I think it is fair to say that there won't be some pricing pressure in the market. We don't as a matter of course provide details on our pricing strategy in general or even for the various segments. But what I would say is that, we are committed to dialysis market. And as I mentioned before, we will be educated in the market on our benefits operationally and clinically. At the same time you need to make sure that we don't take actions that will ruin our opportunity outside of dialysis. And so again I am not going to comment on our pricing strategy. But what I will say is that we are taking strategies to very actively and carefully manage our estate.

Eun Yang - Jefferies

Can I ask one more question? Can you actually price the drug, the Feraheme differently, in different settings? Like for example, dialysis versus hematology use?

Tim Healey

You can't price it differently although you could theoretically offer different rebates to different process of trade.

Eun Yang - Jefferies

Thank you.

Tim Healey

Sure

Operator

Your next question comes from Chris Raymond from Robert W. Baird your line is open

Chris Raymond - Robert W. Baird

Thanks for taking the question. I guess I'm still a little confused on the numbers and maybe it's just I'm a little slow today, but when I look at the launch incentive numbers that you gave and then back out the revenue impact from inventory build in Q4, I guess I have a question. Why publish the launch incentive numbers in the first place if it really doesn't reflect the revenue numbers. I guess that's the first question and looking at what the end user demand was in Q1, understanding that you backup the inventory impact. When did you know that you had that sort of impact from the inventory build in Q4?

David Arkowitz

Chris this is David, I'll maybe just clarify the first question about booking launch incentive revenues.

Chris Raymond - Robert W. Baird

If you just do the math and look at Q1 grams and obviously assume that there is a big discount of the launch incentive product, you've got a natural demand here of well in excess of $16 million, $17 million just due to an eyeball. Backing out the roughly $4 million to $5 million I can see your revenue numbers, but…

David Arkowitz

So maybe if I can jump in, so then what we layer on top of that is the utilization of grams that were purchased under the launch incentive program. So those grams were sold at the end of the third quarter to a select number of dialysis organizations. If you recall, we hung that all up on our balance sheet as deferred revenue and then we recognized them for the sales associated with those grams when they are actually utilized by those launch incentive participants.

Chris Raymond - Robert W. Baird

But so the second question is, I know when you pre-released the Q4 numbers, I don't recall any discussion of an inventory build there and knowing this is early in the launch and you'll learn as you go, when did you know that there was that really large of an impact on the Q4 numbers. Is that how you look at it? Actually Q4 was really $12.8 million minus $5 million?

David Arkowitz

Keep in mind that I mean Q4 was our first four quarter of sales. So we were starting from 3 million of sales in Q4 and an appropriate level or inventory build at the end of that quarter end of Q3. For Q4, we did talk about that the inventory level held by wholesalers and distributors at the end of Q4 was between four to five weeks based on December demand. So we knew what the build was and it's natural given what our starting point was.

Chris Raymond - Robert W. Baird

And was there any change in DSO and maybe can you walk through what your DSO number likely is at? I don't think you put those in your numbers not when you published your Q?

David Arkowitz

We don't release any days of sales outstanding. I mean will obviously and we have in our release what the account receivable is and that's been obviously just working its working down as customers are paying and also we benefited this quarter by about $10 million of payment from launch incentive program, customers paying, a bulk of what they owed us.

Chris Raymond - Robert W. Baird

Okay, you are talking about any (inaudible).

David Arkowitz

So just at a high level, our payment terms that we provided additional time to pay at launch and we've subsequently been retching them down to what I'll call standard industry terms at this point in time.

Operator

Your next question comes from Geoff Meacham from JPMorgan, your line is open.

Geoff Meacham - JPMorgan

You mentioned that inventory has stabilized sometime this year. I am wondering if you could discuss when you think that could happen, how many weeks. Do you think that could stabilize that and does this vary significantly amongst segments?

Tim Healey

Let me begin by saying that we do think that the pattern that you saw on slide 13, we'll continue and that's because again remember that from a demand perspective that IMF is reporting in the four, four, five monthly pattern to four week months followed by a five week month and also that we are continuing to offer rebates into the marketplace or programs into the marketplace that will allow providers to qualify for rebates based on their cumulative quarterly purchases.

But what we believe is that there maybe some moderation of this choppiness overtime as providers become more familiar with our programs and it can better estimate their demand. So we see that happening overtime. And also in general as the wholesalers get more comfortable with our demand trajectory, you will also see some adjustment in inventory levels and that's normal over the course of the launch. We're still very early in the launch and so with the variability I think the inventory levels that you are seeing out there, that are kind of in the four to six week range, we think are reasonable and appropriate.

Brian Pereira

I was referring to the previous one, a question by Chris as well. We have to remember two things, this is Brian that with time, given X inventory as the demand increases, the same X inventory becomes a smaller and smaller number of weeks of inventory as the demand grows. So, if you have 8,000 grams of inventory when the demand is low that could be six weeks of inventory. When the demand is 16,000 grams a month, now it suddenly becomes two weeks of inventory. So there are two dynamics one has to keep in mind.

Jack Nesham - JPMorgan

And just as a follow-up of the providers that haven't purchased on a repeat basis, can you just generally characterize maybe the issues there?

Tim Healey

I think it's too early for us to do those kind of diagnostics, but generally speaking we have been very pleased with the feedback from providers on their experiences with the Feraheme.

Operator

Your next question comes from Adam Cutler from Canaccord. Your line is open.

Adam Cutler - Canaccord

Hi, thanks for taking the question. I'm just wondering if you can review, and I apologize if this is repetitive, but review the current status of the deferred revenue. So how much revenue is still deferred and yet to be recognized? And can you remind us as much as you are able to tell us about the terms around that deferred revenue? That is, I thought I recalled that there is a finite time period that should be finishing soon, if it hasn't already by which those customers need to pay you, hopefully have used the product and pay you or have a reason to return that product.

David Arkowitz

Yes, sure. Adam this is David. So, at the end of 2009, I'll just give you round numbers, there was about 10 million of differed revenues that were on our balance sheet. As we said we recognized as a result of the utilization of a portion of those outstanding grams, we recognized $2.2 million during the first quarter. So, the balance and again in up terms is outstanding at the end of the first quarter is $8 million. The provisions around the launch incentive program were fairly meaningful discounts from a pricing standpoint, expanded return rights and extended payment terms. The majority of payments due from the launch incentive customers was paid in the first quarter and that was to the tune of $10 million, so there is still a little bit left in terms of what customers need to pay us but the bulk of it has been paid.

Adam Cutler - Canaccord

So, sorry, how do I reconcile the bulk of it having been paid versus only two [multiple speakers]?

David Arkowitz

Like any other revenues, we don't recognize revenues based on when it's paid for the launch incentive program. We recognize revenues when the product is used and we get reports from the launch incentive program customers on a periodic basis when they actually use Feraheme as they purchased under that program.

Adam Cutler - Canaccord

So is it strange then that they have paid for it and haven't yet used it? I mean I kind of thought that, in the first quarter given the Q code being in place and still favorable, most favorable reimbursement in terms of (inaudible) plus six that that would have encouraged those customers to use the product, especially given that they had to pay for it.

Brian Pereira

So, Adam you are right on all counts. You would expect that having paid the only time they had recoup what they have paid us is when they use and build the product. What really happens is within dialysis change, it takes time to operationalize a new paradigm be it an IV iron or any other drug. And it's taken some of the dialysis change through purchase of Feraheme, much longer than what they or we are anticipated. Again there is a spread; some of them picked the ground running, the day they purchased it. They have target the pull through, others were in the middle, some are taking even longer. But at the end of the day it's in their best interest to use the drug at the earliest so they can recoup what they have already outlaid cash for.

Adam Cutler - Canaccord

All right. So would it be then your expectation that the remainder of that product that has now been paid for that hasn't been used would be used in the second quarter?

Brian Pereira

Well it's hard to say that because some folks have purchased far more than one or two quarters of need and so in the ensuing quarters we expect them to utilize better as to what they have purchased. And again, there is both a pull and a push. There is a push from the dialysis chain that bides it and there is a pull from our own sales force we're trying to educate them medical directors on the benefits of Feraheme.

Adam Cutler - Canaccord

Okay. If I can just ask one more question in sort of the bigger picture sense. So in the first quarter, the Q code was in place, and customers had the benefit of (inaudible) plus six reimbursement starting April 1. They now are subject to ASP plus six reimbursement. Do you have any sense from your interaction with customers on how that dynamic may be impacting their decision process, if at all?

Brian Pereira

Well the answer is yes, the second quarter is T+6 is $817 of RAM which is a very healthy reimbursement. With time that will decrease but we will manage our contracting and pricing strategies such that the customers will continue to have a clinical and operational advantage and so will provide attractive economic terms as well. So as you've seen across the board, these hospitals hematology, the demand has been very strong and growing. And even in nephrology where Tim said earlier, we had already become the number one iron in the nephrology offices by the fourth quarter of last year. We see a 21% demand and then dialysis which is a segment which most investors have been skeptical about has also shown a 21% demand in this quarter, growth in demand in this quarter. So our commercial team is looking hard to establish new accounts and encourage existing accounts to continue using and using more.

Operator

Your next question comes from Joseph Schwartz with Leerink Swann your line is open.

Joseph Schwartz - Leerink Swann

Thanks. I was wondering if you could tell us what the repeat purchase pattern is like within the centers that have participated in the launch incentive program.

Tim Healey

So at this point customers that have participated in the loss incentive program are still working through their inventory and so they have not yet been re-purchases for those accounts.

Brian Pereira

I know as I said earlier that different chains have moved their different paces in terms of using up what they purchased. Some of them will be running out in order, some of them it will take a little longer for them to run through what they've purchased. So accordingly those who had purchased and have exhausted what they purchased we'll be offering them attractive contracts in the month ahead.

Joseph Schwartz - Leerink Swann

Okay. And could you talk a little bit about what in-licensing opportunities you guys see pursuing going forward, how big and what areas since I don't think there is that much within anemia? So how tangential, how creative will you have to get in order to find a similar call point?

Brian Pereira

Good question you know for the last year, our major focus has been on identifying partners to out license Feraheme in key territories. We are currently working hard on imaging franchise. Lu Branner who has been leading the imaging franchise has been along with us business development team speaking to folks in the imaging space regarding the broad portfolio of opportunities that Feraheme builds.

Now that we those to one done and on its way, our BD team and our medical team have been evaluating opportunities then our focus has been identifying opportunities in areas where our sales force called. That is hospitals, Peritoneal Dialysis and nephrology offices. And there are interesting opportunities out there. The key here for us is what's the right time and what's the size of the opportunity and now that some of our key task that we have set ourselves to do are under the barrack. We are now spending more time in the remaining things that we had set up to do namely in licensing our acquisitions.

Operator

(Operator Instructions) Your next question comes from (inaudible) Jefferies. Your line is open.

Unidentified Analyst

Just some back-of-the-envelope calculations, it looks like ASP for non-launch incentive sales is about $580,000 this quarter. That's quite a substantial drop from the initial ASC that I think around $800 there. [CMS] release, I was just wondering in going forward how should we be thinking about ASC and is it going to be in the $500 to $600 range or is it going to be closer to in the initial ASP from CMS?

Brian Pereira

I don't think you've got the math's right because the grams that you see out there are consist of a blend of gram's sold under the launch incentive program and grams sold under substandard contracting a strategy that we have in place.

Unidentified Analyst

I think it's part where you show where you break it out by 18,000 and 19,000 grams sold outside of the launch incentive program and you guys spoke about under (inaudible) million in revenue for that segment and are you just going to do some rough math and I guess it needs about [$580] a gram.

David Arkowitz

So it's important to think about what we reflect on our books in net sales definitely from what ultimately makes its way into ASP. So there are certain items that are included in our gross-to-net sales adjustments that will never be included in the ASP calculation because these are the rules of the government, and things that are not included are returns reserves what's considered bonafide fees to vendors for services provided, Medicaid rebates; those are all things that are in our gross-to-net reduction that you were referring to that show up in our P&L sales that will not be included in the ASP calculation ever.

On top of that ASP has some unique methodologies that differ from how we capture things on our books. So ASP is the methodologies on what we call a cash basis. So it only captures for the appropriate periods rebates as they are paid when we look at this for our books we have to do it on in accrual basis. And then the final point is that ASP looks at rebates in volume on a trailing basis what shows up in a quarter obviously for our P&L was going to be whatever occurs in that particular quarter.

As I said there are some permanent differences, things that will never show up in ASP that are in our gross-to-net adjustments and there are some other things that we call temporary differences that over time we'll think of.

Unidentified Analyst

So we shouldn't be taking CMS's numbers and just plugging them to our model. Can you give us some guidance in terms of what should be the correct number to AMAG that we should be kind of modeling on going forward?

David Arkowitz

The correct model for AMAG in terms of dollarizing the grants that we sell to wholesalers and distributors and this excludes the launch incentive program but you can look at our 10-Qs and 10-Ks and look at the gross-to-net adjustment for 2009 and that was 25% adjustments so that's the reduction from the wholesale acquisition cost to the net sales. We expect that figure or that figure will be more or less in line with what we saw in 2009 for the first quarter of 2010 as well.

Unidentified Analyst

Thanks very much.

Operator

There are no further questions at this time. I'd now like to turn the call back over to presenters.

Brian Pereira

Thank you very much for joining us today. We look forward to seeing you at upcoming investor conferences. Have a wonderful evening.

Operator

This concludes today's conference. You may now disconnect.

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Source: AMAG Pharmaceuticals Inc. Q1 2010 Earnings Call Transcript
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