Auxilium Pharmaceuticals' CEO Discusses Q4 2013 Results - Earnings Call Transcript

Auxilium Pharmaceuticals, Inc. (NASDAQ:AUXL)

Q4 2013 Earnings Conference Call

February 28, 2014 9:00 a.m. ET

Executives

Adrian Adams - Chief Executive Officer and President

James Fickenscher - Chief Financial Officer

James Patrick Tursi - Chief Medical Officer

Keri Mattox - Senior Vice President of Investor Relations and Corporate Communications

Analysts

Mark Goodman - UBS

Mario Corso - Mziuho

Thomas Wei - Jefferies

Eric Schmidt - Cowen

Joseph Schwartz - Leerink Partners

Difei Yang - R.F. Lafferty

Greg Fraser - Bank of America

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2013 Auxilium Pharmaceuticals Inc. Earnings Conference Call. My name is Kathrin, and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. Later, we will facilitate a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I will now like to turn the presentation over to your host for today's call, Mr. Adrian Adams, Chief Executive Officer and President. Please proceed.

Adrian Adams

Thank you, operator, and good morning everyone, and thank you for joining us for Auxilium's webcast to discuss our fourth quarter and full year 2013 financial results, our 2014 financial guidance and tactical and strategic priorities for the coming year.

With me this morning are Chief Financial Officer, Jim Fickenscher; Chief Medical Officer, James Tursi; and Senior Vice President of Investor Relations and Corporate Communications, Keri Mattox.

Before I proceed, I would like to ask Keri to read our forward-looking statements. Keri?

Keri Mattox

Thank you, Adrian. Before we get started, I would like to remind everyone that we have a slide presentation to accompany our conference call this morning, which can be viewed at our website at www.auxilium.com. If you are listening to this call on your telephone, you may access a synchronized slide deck on our website by choosing the link on our Webcast Page that says, "Click here to listen."

This presentation contains a description of the non-GAAP calculations and reconciliations to the closest comparable GAAP measures, as well as the company's rationale for what we believe to be the utility to investors of the non-GAAP measures it has elected to report. This description and reconciliation can be found in the appendix accompanying this presentation. The non-GAAP financial measures reported by the company should not be relied upon as an alternative to GAAP measures.

This conference call and presentation also contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995, and which are described in detail on the first slide to the accompanying presentation. Our forward-looking statements convey management's expectations, beliefs, plans and objectives regarding future financial and operational performance, and are subject to a wide range of risks and uncertainties that could cause results to differ in material respects.

Today, our forward-looking statements will include, but will not be limited to statements relating to whether we will grow and build shareholder value, whether we will meet our expected milestones, financial projections and development and operational goals for 2014, the success of our U.S. launches of XIAFLEX for the treatment of Peyronie's disease and STENDRA, the time to market, size of market, growth potential and therapeutic benefits of our products and product candidate, the size and development of and our strategies for further developing the markets for our product and sales of our product, including the rate of reimbursement approval by payers, the EU and the rest of the world, whether the number of Dupuytren's contracture procedures using XIAFLEX will increase and whether XIAFLEX's market share for such procedures will grow. The U.S. Food and Drug Administration's review of our submission of a supplemental biologic license application requesting approval of XIAFLEX for the treatment of multiple Dupuytren's cord concurrently, and the FDA's review of the submission of the 15-minute onset of action label expansion for STENDRA, the size and growth potential of the testosterone replacement therapy market and the influence of our competitors on market growth, whether the TRT gel market will continue to slow and whether the market for injectables will continue to show strong growth, and the timing of reporting results for our Phase II study for CCH for the treatment of cellulite and frozen shoulder syndrome.

Our actual results could differ materially from those described in this conference call and presentation. Information on various factors that could affect Auxilium's results are provided in more detail on Slide 1 of the accompanying presentation, which I urge you to review in detail, and are also detailed in the reports we file with the Securities and Exchange Commission. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements.

Now, I'll turn the call back over to Adrian.

Adrian Adams

Thank you, Keri. I would like to begin by saying how truly excited I am about the momentum we've built coming into 2014, and how we believe Auxilium is poised for growth, with the potentials build significant shareholder value going forward.

Over the past 12 months, we have commenced a transformation of the company, and we're endeavoring to invest strategically to building on our leadership position in men's healthcare. Ultimately, it is our goal to become one of the most consistently successful and admired specialty biopharmaceutical companies in the United States.

On this slide, Slide number 2, you will find the agenda for this morning's call. I'll begin with an overview of our progress and corporate milestones in 2013, and we will discuss our portfolio performance and highlights. Jim will then review our financial results in detail for both the fourth quarter and the full year.

I'll then conclude with an update on our corporate strategy for 2014, our new product launches for STENDRA and XIAFLEX in Peyronie's disease, and importantly, our 2014 financial guidance. And finally, we'll open up the call for your valued questions.

Turning now to Slide number 3, we believe 2013 was a transformative year for Auxilium. Here you'll see what we think were the key milestones achieved as we worked to broaden and diversify our product portfolio and establish a leadership position in men's healthcare.

Importantly, while doing so, we've also driven robust revenue growth and achieved record setting Auxilium net revenues of just over $400 million for 2013. Additional highlights for 2013 include the successful raising of the capital needed to fund the corporate developments and license and activities we undertook. The acquisition of Actient Holdings, the in-licensing of STENDRA, the first new oral treatment for erectile dysfunction in approximately 10 years. Continued progress in our research and development pipeline including positive data for frozen shoulder syndrome, Phase II trials initiated in frozen shoulder and cellulite, and positive Phase IIIb data for XIAFLEX in Dupuytren's contracture patients with multiple cords. And importantly, at the end of 2013, we also achieved key regulatory milestones including securing FDA approval for XIAFLEX in Peyronie's disease, the patients with a curvature deformity of 30 degrees or more at the start of treatment.

Submitting to the FDA or XIAFLEX multicord label expansion application and working with VIVUS to submit to the FDA a STENDRA 15-minute onset of action label expansion application. We are extremely proud of this progress. And most importantly, we are excited about how we see ourselves positioned for future growth and shareholder value creation.

To further illustrate this progress, you will see on our next slide, Slide number 4, the Auxilium product portfolio of the store at beginning of 2013 with only two products, Testim and XIAFLEX for Dupuytren's contracture.

And here on Slide number 5, now, you will see our product portfolio at the end of 2013 significantly expanded and diversified as we move from two to 12 products. We have now established what we believe is a leadership position in the men's healthcare area whilst also broadening our product portfolio and advancing our research and development pipeline in orthopaedics and dermatology with five growth products including two exciting new products, STENDRA and XIAFLEX for Peyronie's disease recently launched in January of this year. We believe we are strongly positioned to deliver value to our shareholders and important treatment options to patients this year and beyond.

Now, let's talk about financial results, on 2013 update for select products across our portfolio.

Turning to Slide number 6, the TRT market and Testim; as you can see from this chart and the steep decline, 2013 was a surprising and disappointing year for the testosterone gel market overall. In fact, global market expanded 31.4% in 2012. It only grew 1.4% in 2013. And to-date for 2014, it is showing 12.5% compared to the same period last year.

Given the change in market dynamics and the increasingly competitive situation of the gel market within the coming year, we are planning to closely manage Testim as a mature product.

Our efforts in 2013 resulted in worldwide net revenues of $59 million in the fourth quarter and ($211.2) million for the full year. These were decreases from $59.7 million for the fourth quarter of 2012 and $237.5 million for the full year 2012. We should note that in fourth quarter 2013, we saw approximately 7 million to 8 million in stocking of Testim and inventory by wholesalers.

As we move into 2014, we are prepared for additional competition in the space, and we are planning for Upsher-Smith Laboratories market entry. We are not aware of USL receiving final approval, or a therapeutic equivalent rating yet from the FDA.

Now, let's turn to Slide number 7, moving into our growth products. We remain excited about the growth potential of TESTOPEL and our anticipated ability to accelerate this product traction in 2014.

TESTOPEL is a differentiated treatment option for low testosterone and the only FDA approved long acting implantable testosterone pellets available. While the gel market is slowing, the injectable market, which we believe is a strong indicator for an implantable product grew in 2013 as patients looked for longer acting, more convenient and less transferable treatments. Overall in 2013, we were quite happy with the 73% increase in pellets shipped.

In the fourth quarter of 2013, we realized TESTOPEL net revenues of $25 million, a 21% increase over the third quarter of 2013. Of note, after increasing the size of our Innovia sales force in the middle of 2013, we realized a 36% increase in the number of TESTOPEL implanters in the second half of 2013, versus the same time in 2012. For the full year, our TESTOPEL net revenues were $16 million.

Moving on to Slide number 8, we are looking to maintain our strong leadership position with Edex, the leading injectable treatment for erectile dysfunction. With our new prescriptions now over the 50,000 and a market share approaching 50% in 2013, we've continued to grow this product successfully within the non-oral erectile dysfunction market.

Our Edex revenues for the fourth quarter 2013 were $8.9 million, an 11% increase over the third quarter of 2013. And our full year revenues reached $21.9 million.

Turning now to Slide number 9, we continue to see stable growth in XIAFLEX and Dupuytren's contracture. Our vial sales have climbed steadily with more than 20,000 vials sold in 2013, a 15% growth over 2012. This resulted in strong quarterly revenue growth with U.S. net revenues of $19.7 million in the fourth quarter, a 13% increase over the same period in 2012.

For the full year, we saw U.S. net revenues of $62.5 million, a 13% increase over the full year 2012. Broadly, we are seeing both increased awareness and demand for XIAFLEX and Dupuytren's contracture. In 2013, the number of procedures increased 10% over 2012, and XIAFLEX market share of oral procedures reached 27%.

Now, I'd like to turn the call over to Jim Fickenscher, our Chief Financial Officer to talk in a bit more detail about the overall financial results. Jim?

James Fickenscher

Thank you, Adrian. Please note that my comments this morning will discuss our results on a non-GAAP basis. I encourage all of you to see the appendix of the presentation for a reconciliation of the non-GAAP financial measures for the closest GAAP financial measures.

I also want to highlight that we've made an adjustment to our purchase accounting for the Actient transaction with respect to the income tax credit and expense recorded in the second and third quarters of 2013. The impact on the quarterly GAAP and non-GAAP financial information can also be found in the appendix to this presentation.

Moving on to Slide number 10, as a result of the addition of the Actient products to our portfolio, a consistent growth of XIAFLEX and Dupuytren's contracture, revenues increased by an impressive 56% in the fourth quarter of 2013 over the comparable period of 2012.

This chart also illustrates how the strategic addition of new products to our portfolio has diversified our revenue stream. We started 2013 with only two products, but ended the year with a broad portfolio of 12 products, seven of which are promoted and five of which are growth products.

In the fourth quarter of 2012, Testim revenues accounted for 74% of our total revenues, with XIAFLEX responsible for the balance. By contrast, in the fourth quarter of 2013 our largest product accounted for 47% of revenues and the basket of new products represent a collective 35% of revenues. We are extremely pleased with this diversification and our strong finish to what we believe was a transformative year.

Slide number 11 presents a similar view of the full year revenues for '13, compared to 2012 with total revenues increasing by 32%. The strategic diversification of our revenues can also be seen here by the percentage breakdowns on the right side of each column.

In 2013, we (grew) XIAFLEX and Dupuytren's at a steady rate. TESTOPEL emerged as a strong growth product for us, and Edex continues to be a market leader. We believe that these three products, when combined with the launches of STENDRA and XIAFLEX in the Peyronie's indication provide us with five growth products and position us for continued momentum in 2014.

Please advance to Slide number 12. Fully diluted earnings per share of $0.62 for the full year 2013 represents strong growth of 77% over the $0.35 recorded in 2012.

Slide 13 presents the full year income statement for 2012 and 2013. As I've already discussed total revenues and earnings per share assert my comments on gross margin. Gross margin on net revenues was 75% for the full year 2013 compared to 77% in 2012. The decrease in the gross margin rate is primarily due to cost related to XIAFLEX manufacturing initiatives, which totaled just over $11 million in 2013 offset in part by the inclusion of the acquired higher margin Actient product revenues in 2013.

R&D and SG&A expenses for 2013 were $47.5 million and $208.2 million respectively. The increase in SG&A compared to the 173.5 million from 2012 was driven primarily by added expenses of the acquired Actient operations and an increase in pre-launch marketing and advertising spend related to STENDRA and XIAFLEX in Peyronie's offset by lower advertising spend for XIAFLEX and Dupuytren's and synergies realized.

Based on the decisions taken today, we believe we are on tract to achieve the $20 million in synergies by the end of 2014.

Net income of $30.9 million grew by 80% over the 17.2 million recognized in 2012. As of December 31, 2013 we had $71.2 million in cash, cash equivalents in short-term investments compared to a 121.4 million at September 30, 2013.

For a look at our 2014 milestones, including an update over two new product launches and our 2014 financial guidance, I'll turn the call back over to Adrian. Adrian?

Adrian Adams

Thank you, Jim. Moving to Slide number 14, you will see a sampling of the marketing campaign we have recently launched for STENDRA, our new erectile dysfunction drug. By design, this campaign is different. We believe that it's young, it's fresh and it's focused on STENDRA's rapid onset of action.

To-date, we've been very pleased with the launch, which has targeted urologists and high prescribing primary care physicians. With this focused approach, the 150 person primary sales force can reach 45% of the PDE5 inhibitor prescriptions written in any one year, and with a differentiated product profile, thus far we've seen some excellent early market traction.

We believe that STENDRA is an exciting new product that could impact the PDE5 market dynamics given personally its rapid onset of action, approximately 30 minutes for our product label. Secondly, its ability to take in with food and modest alcohol, we continually hear from physicians that this is a key point for patients. And if you think about real world situations, it makes sense. And thirdly, its favorable side effect profile. STENDRA is a next-generation PDE5 inhibitor designed to be selective to the PDE5 receptor, which may limit off target effects such as headache, flushing and blue or blurred vision.

Turning to Slide number 15, you will see how this profile is driving product sales, while it is very early days we all have only seven date declines from services like IMS and Symphony. New prescriptions and sold prescriptions are trending very strongly. Here on this chart, you will see the new prescriptions a re growing week-over-week on our overall cumulative sold prescriptions are approaching 9500. We are very pleased with this early progress under the anecdotal feedback we've been receiving from leading neurologist and primary care physicians about patient response.

Moving on to Slide number 16, you will see our progress in capturing share in the erectile dysfunction market. These data show only our first weeks of launch with STENDRA has already captured 1.7% of new prescriptions in the overall market, as seen from data released just this morning.

It is especially important to note that our target prescriber base, both urologists and high prescribing primary care physicians that write 45% of all PDE5 inhibitor prescriptions, we have already captured 3.3% of the market. This is exciting evidence about our focus and highly positive roll out of STENDRA appears to be working. Although, clearly, we are still in the very early stage with the launch of STENDRA, we are optimistic that this will be a growth product in 2014 and beyond. We look forward to providing more in depth results on our first quarter call related late in the spring.

Turning to Slide number 17, we've recently logged XIAFLEX and Peyronie's disease. The first and only FDA approved treatment proven effective for Peyronie's diseases. We believe this was a very important milestone not only for Auxilium, but also for the patients and physicians who are lonely and frustrated by the lack of effective treatment options.

As we move to Slide number 18, you will see that our launch strategy is extremely focused and disciplined with approximately 5% to 6.5% patients receiving surgery or verapamil injections each year, and about 400 physicians perform 9% of the surgeries or initial launch focus is clearly defined. Our strategy is to build a week ahead with both leading physician experts and then grow and expand XIAFLEX penetration is the broadest Peyronie's disease market.

To achieve this goal, we focused our early REMS certification on our subset on those 400 target urologists. This core group consists of about 225 physicians, and I'm pleased to report that more than 80% are already certified. In total, we successfully certified 452 physicians and 249 sites to-date where we have seen strong patient demand for treatment.

Turning to Slide number 19, you will see another important measure of our long, successful spa, reimbursement approval by payers. We put considerable effort into ensuring our Peyronie's patients without seeking XIAFLEX treatment will be able to receive and they will be covered by their insurance or Medicare plans.

Our White Glove Auxilium Advantage program is spearheading this effort, so far quite successfully. To-date a decision has already been made that 32% of those 827 patients submitted for reimbursement of the approval with 84% getting approved for XIAFLEX treatment. And on the 68% of patients submitted are currently moving to the process with the assistance of Auxilium Advantage.

We are also very pleased to report that six of the eight Medicare beneficiaries, which include Medicare bill and advantage patients that already formally confirms XIAFLEX for Peyronie's disease coverage at the quality level. This represents 73% of Medicare lives or by 36 million people. Additionally, nine major commercial insurance funds representing a total of about 32 million insured lives have approved patients for treatments and we are making strong progress towards formal policy changes.

Overall it is a very exciting time for the company with two new product launches underway. While we are only a matter of weeks into these launches, we are encouraged by the quantitative and qualitative feedback and look forward to providing more detail than commentary on our first quarter call.

Moving onto slide number 20, before reviewing our 2014 financial guidance, we've also provided some key context and assumptions. The following considerations factored into the developments of our guidance ratings for the year. First, the slowing growth of the testosterone gel market. One of our goals in 2014 is to effectively manage Testim as a mature product within a slowing and now shrinking market.

This market dynamic along with the change in competitive landscape is a key factor in our 2014 net revenues guidance. It is also important to note that our 2014 guidance assumes final approval of Upsher-Smith Laboratories testosterone gel product with a BX therapeutic equivalence rating, although we can't relate the possibility that the product could receive an AV rating from the FDA. Overall, we expect significant reduction in revenue for Testim.

Second, we have two product launches underway that we believe present exciting growth opportunities for Auxilium. We expect that our focus and disciplined product rollouts for STENDRA and XIAFLEX in Peyronie's disease will mean increased SG&A expenses as well as important 2014 revenue growth.

Third, we now have five growth products that should be well positioned to contribute to revenue in 2014. We anticipate strong growth opportunities with TESTOPEL, STENDRA and XIAFLEX in Peyronie's disease and stable growth momentum of Edex and XIAFLEX in Dupuytren's contracture.

Fourth, we are continuing to advance our promising Research and Development pipeline. Our anticipated Research and Development expenses in 2014 are driven by the ongoing progress of our Phase II program in frozen shoulder syndrome on cellulite. We are on track in our Phase IIa trial of frozen shoulder and anticipated date in the first quarter of 2015. In cellulite, we just successfully advance into the second phase of Phase IIa study with enrollments ahead of schedule. Data from not completed trial are also expected in the first quarter of next year.

So, as we turn to Slide number 21, you will see our financial guidance for the full year 2014. For global net revenues we expect to be in the range of $450 million to $490 million, the midpoint of which would represent 90% growth over 2013. After careful consideration we have moved to total net revenues guidance. We fell this is both a simpler and more strategic approach, now that we have a much broader portfolio into our products. We also feel this approach is in the best interest of shareholders as it enables us to focus our efforts on resources on maximizing total revenues and growth potential as opposed to managing to a product by product basis.

We will continue to provide you with color and context around our expectations for key products and to report actual results for products on a quarterly basis. We've also highlighted here our expectations for non-GAAP R&D expenses, SG&A expenses and net interest expense. The 2014 non-GAAP net income, we expect to be in the range of 45 million to 50 million, the midpoint of which would represent 54% growth over 2013. And finally, we expect to realize a gross margin in 2014 between 79% and 80%.

As we move to Slide number 22, you will see how this guidance positions us strongly in our efforts to continue guiding future growth and continuing Auxilium's financial momentum.

Turning to slide number 23, in summary, we believe that Auxilium is strongly positioned and pose a significant growth in 2014. We've outlined out key goals for this year that if achieved will drive this goal.

First, we want to continue on the road of establishing Auxilium as the leader in men's healthcare. Secondly, we will continue to look to successfully launch two exciting new products. Thirdly, we will maximize the value of our current product portfolio including managing Testim, now a mature product in launch of the late stage of the testosterone gel market generally, and driving what we believe are our five growth products.

Fourth, we will advance our promising development programs in frozen shoulder and cellulite, work to secure FDA approval for the 15-minute label expansion for STENDRA on the multicord label expansion to XIAFLEX, and continue to be opportunistic and entrepreneurial around the potential for new corporate developments in licensing opportunities.

And fifth, and finally, we will end up as always to continue delivering strong sustainable financial performance. This is a very exciting time for Auxilium. We believe 2013 was a transformative year and as we ended 2014, our broad and diverse product portfolio strongly positioned us as a leader in men's healthcare and a company poised with future growth.

We will strategically invest our assets to support our launches and the growth of our products and we will remain focused on flawless execution. We thank you for your continued interest and support.

I'd now like to open up the call for your valued questions. Operator, can you please give the instructions?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question will come from the line of Mark Goodman representing UBS. Please proceed.

Mark Goodman – UBS

Yes, good morning. First on XIAFLEX for Peyronie's, I was curious, your thoughts on patient backlog and how many patients you think are out there that are waiting for this? And then, second on STENDRA, can you talk about what's the counter detail if there has been any? And how the primary care doctors that you focused on will kind of pick up have they been doing?

Adrian Adams

Yes. On the first point as it relates to backlog, I think on the call obviously we've presented the progress we are making so far. We are very, very pleased with the evolution of patients into the Auxilium Advantage system. And obviously, I think with this focus on disciplined role, we were well aware as we are moving towards the approval of the product. There are a lot of patients who were in the centers of excellence and around the United States who are at that stage where they would move in towards verapamil injections and surgeries. So, we believe that there is significant interest, significant anticipation, but again, I think we have been very focused in our focused disciplined rollout and developing that beachhead of performance.

So, we are very encouraged with what we are seeing, and in particular some of the progress we've made on the reimbursement side. And we are working very hard to take what we see as being good patient demand and moving through the system.

On the aspect of STENDRA, I think I'm trying to detail. And obviously I think at this particular stage, I think we have been very pleased with the way our promotional message has been received. And clearly, we have been very focused on our target rate of urologists and high prescribing primary care physicians. We have seen obviously movement in our non-target groups as well. And obviously we are being so early in the launch to have a 1.7% market share already at this particular point in time we feel is very encouraging.

And in the end, from a kind of detailing point of view, I think the products in many ways, I think our optimism revolves around the profile itself and that is a rapid onset of action, 30-minute onset of action, a good side-effect profile and the ability to be taken regardless of undue concern on alcohol and food. We think that differentiating profile is one which is resonating well, more certainly within our target groups and also with some of the non-target groups that are responding as a result of our Internet and social media contents.

Operator, can we have the next caller for the question, please.

Operator

Your next question comes from the line of Michael Yee representing RBC Capital Markets. Please proceed.

Unidentified Analyst

Hi, thanks. This is John on behalf of Michael Lee. I am curious to hear, as you were going back to your analysis and estimation for the guidance you have given today. Could you just highlight one or two products had the greatest range of uncertainty in your view, and sort of the biggest swing factor on whether the results come in either towards the high or low-end guidance?

And then, second just to help us some modeling purposes, are there any seasonality trends we should be aware of, especially for newly added products, because since we haven't seen Q1 and Q2 results for this? Thank you.

Adrian Adams

Thank you, John for your questions. I will tackle the first question, and Jim can address the second. Obviously, I think in moving to this kind of aspect of total revenue guidance I think clearly it reflects very important factor that we now a much broader diversified product portfolio. In addition, I think when it comes down to kind of products and which products have greater degrees of uncertainty or a potential for growth etcetera, I think clearly the range of guidance that we have given is a reflection of some of those uncertainties.

I think we've been very, very pleased with what we have seen with XIAFLEX in Peyronie's and obviously with the excellent progress with STENDRA. But obviously in new product launches as you well know, I think they are not easy to predict over the course of time. I wouldn't say that is necessarily an uncertainty, but it's certainly that's gotten into our mind in relation if we have to build in that broad range. I'd also commented on the general market, the testosterone market, which as we mentioned as we moved into 2014 I think a 12.5% decline versus the same period. And I think clearly that is an uncertainty as to what is going to happen within that market during the course of this year. Now, we are hopeful that obviously that will stabilize, but that is one of the greatest levels of uncertainty that we see and the impact of Testim revenues this year, which is reflected in our overall range of guidance.

James Fickenscher

And John, just to pick up on your question about the seasonality, I guess I would start with our existing products Testim and XIAFLEX. I think what we have seen last year is that it is not uncommon to see the first quarter of the year for XIAFLEX referred for Dupuytren's contracture to be a bit lower than what we saw in the fourth quarter. We know that was the biggest quarter of the year for their procedures.

And then, with respect to Testim, obviously we talked about the fact that there was a pretty significant buying at the end of this year, and I combine that with the comments that Adrian has just made about the market in the first quarter and what we are seeing. And I think it's very likely that we will see a significant decline not only for the whole year in Testim, but even in the first quarter as well.

Some of the new products, frankly, we are going to be going through the seasonality with you. At the same time we obviously are having owning these products in the first and second quarter. But I think that if we try to look at them overall, I don't know if there is anything specifically about XIAFLEX and Peyronie's that would have seasonality especially at the launch and obviously standards off to a good start.

I'd mention with STENDRA that we didn't have very much revenue last year. We only put a couple of hundred thousand dollars into the channel. So, I think the decent stocking in the first quarter presumably, I think given the quantity of discounting that we are doing we could also expect a relatively high burst in that reserve and it's going to be a requirement in the first quarter. So, I think that's probably the key products that I would hit with respect to seasonality. I do continue to expect as that's been the case that the fourth quarter will be the strongest quarter for the year.

Unidentified Analyst

Okay, thank you.

Operator

Your next question comes from the line of Salveen Richter representing Canaccord. Please proceed.

Unidentified Analyst

Good morning. This is Andrew on the line for Salveen. You mentioned that you're assuming (whether it will be BX rating) for Testim. If they get the AB rating, is that going to affect the overall revenue you've given? And then, kind of similarly, are you modeling for those continued double-digit growth for some of the Actient products?

Adrian Adams

Well, as you've pointed out I think our best assumption for our planning under the guidance for this year assumes a BX rating for the Upsher-Smith products. In the event, but it is an AB rated part, and obviously we would consider that in any impact it would have on any revisions to our overall guidance. But at this stage, that's our best assumption. As we talked about before we cannot rule out the possibility of an AB rated product, precedents don't point out to that, but clearly I think we'll wait and see what the FDA's deliberations are in that regard.

Unidentified Analyst

Okay. And then, maybe just a follow-up, could you provide a gross to net discount for customer in Q4, and how you see that changing in Q1 with the price increase?

James Fickenscher

Yes. The gross to net was approximately 40% in the fourth quarter. I think we did take a price increase of 9.9% in January of this year. Frankly, I don't think I'd expect a lot of that to come through this year. I think that what we try to do in the end of last year was to broaden our position with respect to managed care plans. We think we've got more lives covered, but that came at the cost of incremental rebates that we were going to need to provide. So I think if anything there is probably upward pressure on that gross to net, in other words, getting worse.

So, I wouldn't expect that we're going to see a lot of that price increase flow through for the bottom line, and it should obviously help us to pay for some of the rebating that we did last year and into this year.

Unidentified Analyst

Okay, thank you very much.

Operator

Your next question comes from the line of Mario Corso representing Mizuho. Please proceed.

Mario Corso - Mziuho

Good morning. Thanks for taking my questions. A couple of things, on Testim, I know you don't want to give guidance, but is it fair to assume a 20% plus type revenue decline for the year? I'm just wondering if you think that's the right way to think about it.

And then, I'm also wondering what your expectations are on the FDA review of testosterone products, whether you see a panel occurring and it sounds like you're not seeing any affect certainly on the injectable side, but I'm wondering if you think that's impacting the gel side of your business?

Adrian Adams

Yes. On the final point -- I'll ask James to comment on the second point. On the final point, obviously I think we've given all the kind of information, broad context and assumptions on Testim (inaudible) deliberations on guidance. I don't want to get to more specific in relation to what we do or do not expect in relation to revenue impact this year. But in fact what we have commented given all the kind of trends within the testosterone market that we do see a significant revenue reduction for Testim this year or that has been built into our revenue guidance, overall revenue guidance. We still represents in the midpoint a 19% increase over 2013. And James?

James Fickenscher

So, in regards to the FDA review of testosterone products -- excuse me; that we'd characterize as part of the drug safety communication, certainly the few directions that we know they will go and some that they could go, in terms of directions we know they will go based on what they've written. They will do a review of the published data, specifically the day-to-day we are referring to. They will likely do a review of their safety database. And as you pointed out, they could call an advisory panel. Now, we've not received any information on that to-date, certainly if they did, and we could participate, we would certainly be sure to participate and provide whatever information they requested and additional information to characterize the safety profile of the testosterone products.

Operator

Your next question comes from the line of Thomas Wei representing Jefferies. Please proceed.

Thomas Wei - Jefferies

Hi, thanks. I guess I'll focus on the XIAFLEX in Peyronie's slide, and its 827 number that you gave. So, can you just remind me, what is your expectation for the number of vials that a commercial patient might use?

Adrian Adams

Well, I think as we've mentioned before, if one looks back to the Phase III and PRESTO studies, then clearly 90% of patients within those studies have six or more vials. As we articulate to them over the course of last year, I think how that transmits to the real world, obviously, time will tell, we're still very early in the stage and whilst we're pleased with the progress that we got at the moment on the reimbursement side as well as patients flowing through the system. It's too early for us to say whether or not what we saw on the trial is going to translate into the natural and real world. What we do know obviously with obviously our key opinion leaders and the trial being a very core part of our target universe is that, clearly, I think they will do what's in the best interest of patients, and we will see over the course of time. But in essence, I think we're still assuming that the overall vial treatment will be closer in line with what we saw in our trials, but time will tell.

James Fickenscher

Thomas, maybe another comment I'd make on that is we're pleased that we've seen 223 approvals for payment by the various insurance companies. Those procedures have really just begun in the very recent past. So, I think that -- and not all of those 223 for that matter begun. So, I think in looking at kind of to the question that we had about the quarters and seasonality, I think this is a process that you get two injections in the first week of treatment, and then there is a six-week period where you don't receive any treatment until the second cycle begins. So, just keep that in mind as well, everyone is modeling how this will kind of rollout during the year.

Thomas Wei - Jefferies

And just so that I understand, I guess when patients enter -- well, first of all, do you think that all patients who want to undergo XIAFLEX for Peyronie's are actually going into your reimbursement system? Is this 827 what you think is the real treatable number for the real backup number, or could it actually be bigger than that?

James Fickenscher

There could be a few patients who are cash paying. We have heard of that, and it's really anecdotal. It is an option. It's not required that they go through the Auxilium Advantage. So, I guess it's possible that there could be physicians out there who say, I'm going to do this on our own. Our view is though and what we've heard from most of our sales reps and physicians is that Auxilium Advantage is a really nice service and they're happy to have us sit on the phone rather than taking up the time from the staff in their office. So I'd think the majority are going to go through Auxilium Advantage, but it's not a required program per se.

Thomas Wei - Jefferies

That's helpful. And then just since you've set up Auxilium Advantage, can you give me a sense if it's 827 -- where there are like 800 patients to submit it immediately, because they were waiting for the opportunity to get this, or has this been kind of slowly building over time and continue to -- you are still getting a relatively steady pace at patients going into this?

Adrian Adams

Well, I mean -- well, certainly I think the awareness and anticipation of the approval and availability of XIAFLEX for Peyronie's was high. And there are no doubts that in our discussions with the opinion leaders and key urologists, I think that there were a number of patients who were obviously waiting for the approval, so they can come into the system. Or absolute priority as you know, when we got approval was to begin the process of immediately getting physicians into the system certified and we've made some very good progress with that as we've shown we're very pleased with those certifications.

And so, at the minute we got that, obviously when you begin the process of lining up patients, who -- some of who were obviously waiting for treatment and others that are just (ahead). So we are very pleased with the progress today. And Auxilium Advantage appears to be very well received in terms of getting that kind of support to physicians, to patients and indeed on the payer side of things. So, I think this progress that we are seeing is certainly something that leaves us to be optimistic. "Optimistic," I think is the right word. And I think, so far so good.

Thomas Wei - Jefferies

And I'm sorry, just at least two last ones in here on this number. From your (Dupey's) experience, when you have people who go into the reimbursement system, how many actually come out and get the actual procedure? I just wanted to understand that's 827 -- what your expectation is for the conversion rate. And could you also for this Auxilium Advantage program and it's 827 number, when did you start collecting patients, like, was it January 1, or was that actually earlier than that?

James Fickenscher

So, Thomas, this Auxilium Advantage program didn't exist at the time that we did group insurance launch. So, we were much more dependent on anecdotal data from physicians saying how long it took patients to get through, and we didn't have the ability to capture real good data on what percentage of patients that got prior authorization actually got treated. I think that's one of the benefits that we'll have while doing Advantage -- but it's too early for us to put a stake in the ground to say what percentage of that have gone through and gotten that approval will actually translate into treatment.

With respect to your question on the patients, again, the patients actually have to wait for the physicians to get enrolled into the REMS program. So, the first -- before we even start the insurance verification, one of the first processes that we have to make sure that we have a complete application and that it's appropriate to start the process. So, as physicians have come online, they've identified patients they've referred them to Auxilium Advantage and they get into the system that way.

Adrian Adams

And I think also, I think you had noted in our call I think, we've obviously as we've evolve with Peyronie's inevitable there are always comparisons with the launch of Dupuytren's. And there were many challenges obviously, in relation to clarification of codes and reimbursement etcetera. Like, well certainly while it's early data I think, because I pointed out in my remarks, the progress we made with the -- on the Medicare side of things, which has being -- certainly leaves us to a significant level of optimism. So, I think there seems to be a strong interest in making sure the patients can get access to this treatment.

Thomas Wei - Jefferies

Well, congratulations. If I'm doing the math correctly, it looks like that almost $20 million backlog number for you. And so, up to a great start. Thank you very much for taking all my questions.

Adrian Adams

Thank you, we're very pleased so far.

Operator

Your next question comes from the line of Gary Nachman representing Goldman Sachs. Please proceed.

Unidentified Analyst

This is Roger, stepping in for Gary. Thanks for taking the question. I have a couple of questions here. So, first is on the SG&A spending. I was wondering if you could bucket out the different components of that, and help us understand how much of that for sales force and what are the elements are in there that we should be thinking about.

Adrian Adams

We don't really break out specific information on that. I think that it, you know how many sales reps we have? We have 150, and primarily a 60 in (inaudible) and 47 in (inaudible). You can probably take those numbers on industry averages with $250,000 per rep and kind of get to an approximation of what the cost of sales force is.

Within this, all the other promotion and advertising support services, etcetera. So, we don't provide that level of detail. But I think overall what I would say is if you look at where we were in the fourth quarter in terms of our total SG&A, I believe it's like $61 million in the fourth quarter. So, when you kind of put that on a run rate, it's slightly below the guidance that we've given. So, what does that say? What that says to me is that in a year where we have this launch going on, we are going to invest appropriately to try to get those Peyronie's and STENDRA to have the best launch that they can have.

Unidentified Analyst

Okay, great, that's helpful. And you mentioned that there's been some significant discounting for some of these newly launched products like STENDRA. I was wondering if you could help us think about quantifying how payback gross to net discount might be and where it might go over time?

James Fickenscher

Yes. We're probably not ready yet to develop that information. But I think, again in the early first quarter, it could be pretty significant as we've given away three free pills and if you look at the pills per TRX right now, we're actually this week we're about 4.3 pills per TRX, that's improving we were below four; which implied that most of the strips were actually free strips. So, it's due to how quickly it evolves, it's a little early for us to try and get concrete information about that RAR. But I don't think we certainly don't view the long-term RAR of this being something that's outrageous. We want to have STENDRA being a profitable product, and I think over time as we start to get repeat prescriptions, they will be pretty happy and they will be pretty normal RAR gross to net discounts on the product.

Unidentified Analyst

Okay, great. That's helpful. And one last question, with the decline in the TRT market, I'm just wondering how much of that you think is over concern, over potential myocardial infarction risk or do you think it's more just overall maturity to category, what are your insights there?

Adrian Adams

Well, I think obviously as we went through 2013, I mean 2012 saw 31% growth, and that growth slowed to just over 1% in 2013. So, there is also -- already during the course of the year a slowing, if you like, in growth, and obviously a flattening out of the overall market. As we also pointed out, as we moved into the early part of 2014, it was actually moved to 12.5% decline. It's very difficult to actually filter out all the different nuances or dynamics that are taking place.

So, I think we are not picking up any specific kind of feedback in relation to broad concerns of the consideration by the FDA, just looking at the overall class, I think the 12.5% decline I think in the first half of the year is something that we certainly noted. We've built that in terms of our commentary around Testim, and potential revenue reduction this year, and also within the guidance range that we have given. That's just one of the uncertainties within the area.

So, I think that is all I would say at this particularly point in time, but it's clearly something we -- and I'm sure our competitors are monitoring on a weekly basis.

Unidentified Analyst

Okay, great. Thanks for the color.

Operator

Your next question comes from the line of Eric Schmidt representing Cowen & Company. Please proceed.

Eric Schmidt - Cowen

Hi, thanks for taking my questions. Just a follow-up on that Testim market question or the testosterone gel market question, do you think that the injectables are stealing substantial share when you look at the overall testosterone replacement market, has that changed much?

And then, I'm wondering also what you think about the growth that we are seeing in injectables, how sustainable that might be?

Adrian Adams

Yes, this is good point. I think you're absolutely right, but if one looks within the body of the overall testosterone market, the injectable side of the market has shown growth versus the overall market. So there has been some switching from gel pellets to injectables, and I think from our point of view, from a strategic point of view and diversification point of view, I think we think the injectable market is a good circuit for the implantable part in the market. And as you can see with Testim pellet, 73% increase in pellets in 2013 versus 2013. We're benefiting from that kind of gradual move towards, all the treatments I think, one of which is a desire to actually have long acting treatment.

So, strategically I think in part of our corporate development and licensing strategy that lead to the acquisition of Actient and in-licensed STENDRA to broad or diversify, and more specifically in the testosterone area I think we'd like to get to a situation over the course of time fast forwarding over the next three to four to five years, where we -- with our leadership position have presence in the oral market, where we have presence in the injectable market, in addition to what we currently got. So, diversification, strategic diversification is obviously a benefit in what is a changing marketplace. I think we are well positioned in this market to be able to leverage all the different components.

James Fickenscher

Eric, maybe one other comment, one or two other comments, when we look at the injectable market, so last year grew about 26% for the full year compared to the 1% that we see on the overall testosterone market, but when we look at the TRXs for injectables, they make up about 34% of the total prescriptions in the TRT market, despite the fact that dollar value is only about 6% or 7% of the total market.

So, what you see is that as it relates to TESTOPEL, even if we get a reasonable share of that market, our pricing is significantly better for TESTOPEL, but it is with the injecatbles. We think that there is good opportunity for us to continue to expand the value of TESTOPEL through that market, even if the overall market and even the injectables were to start to slowdown, there is a lot of room for growth there.

Eric Schmidt - Cowen

Interesting point. Jim, just one a little bit on the cash that's been bouncing around a little bit, and I think it was down quarter-on-quarter. I know you've paid upfront on the STENDRA, but was there anything else involved there?

James Fickenscher

STENDRA was certainly the largest piece that caused the reduction in cash. We also saw, I'd say, fairly typical build in accounts receivable and inventory towards the end of this year. That's pretty normal for us in the fourth quarter. So, I think between working capital increase and payments that we make for STENDRA that was (inaudible).

Eric Schmidt - Cowen

Thanks.

Operator

Your next question comes from the line of Joseph Schwartz representing Leerink Partners. Please proceed.

Joseph Schwartz - Leerink Partners

Thanks very much, and congratulations on such a robust turnaround. I was wondering if you could talk a little bit about the 16% of patients that have not been approved to receive XIAFLEX, what were the main reasons and is it came over at that point, or is there a way to continue to work and get some kind of those patients excess? Thanks.

James Fickenscher

So, Joe, we don't have -- I don't have a lot of details on that. But I believe that what's happening there is that the insurance plans that they have applied to have said no at this point in time and they haven't changed their policy. And that's the type of thing that we saw with Dupuytren's in certain areas. There are some plans that are just going to say it's experimental/investigational, and that's what happens.

Now, we're going to obviously continue to battle for those patients. Our goal is to get 100% coverage the way that we have for XIAFLEX and Dupuytren's right now. That took some time. I think we hopefully have learned how to lobby better than when we did the Dupuytren's launch. So, we will continue to do our best to try to get all plans to approve the product, and certainly to the extent that those plans do allow for reimbursement, those patients definitely come back into the pool at some point in the future.

Joseph Schwartz - Leerink Partners

Okay. And then, can you remind us of the economics of your STENDRA licensing agreement with VIVUS, and how should we -- as we think about modeling a proportion of revenue that goes to Auxilium for those nine and a half thousand prescriptions so far?

James Fickenscher

Okay. So, there is a couple layers of royalties that goes on. The first is to Mitsubishi. Mitsubishi is the company that -- Mitsubishi Tanabe is the company that originated the product and licensed it to VIVUS, we have talked in our 8-K that was filed at the time of the STENDRA acquisition that the royalty rate payable to them is approximately 4% to 7%. And we have a Tier royalty structure, where the royalties go up as sales get higher for what we pay to VIVUS. It starts at a level, that's a range of 7% to 12% royalties and it gets as high as 15% to 20% royalties of the highest Tier.

I do want to point out that when you see our financial statements, the royalties as well as our milestone payments and any sales-based payments that we'd make are all set up as a contingent consideration on the day that we acquired both STENDRA as well as Actient product. So, basically those royalties will run through the balance sheet. From an accounting point of view, you will see the cash paid on the statement of cash flow. But from an income statement and earnings per share point of view, the royalties are not included in the income statement that way.

Joseph Schwartz - Leerink Partners

Okay, thank you for the color.

Operator

Your next question comes from the line of Difei Yang representing R.F. Lafferty. Please proceed.

Difei Yang - R.F. Lafferty

Hi, good morning. Thanks for taking my questions. Just a quick one on STENDRA, could you give us a little bit color with regards to the new prescription, where does it come from, are they coming from the switchover from existing PDE5 patients, or are they coming from new patients?

Adrian Adams

Yes, it's a very good point. Obviously it's relatively early days, but if one looks at the -- I mean it sounds like -- I think your question is precedent, because obviously one of the biggest dynamics in this market, which is very attractive is that 60% of patients switch within one year. More certainly we want to kind of leverage that opportunity. In the early switching data that we've seen, we've seen roughly around about half of the overall switches coming from Viagra, and a significant proportion that remain is coming from Cialis.

So, again I think it's -- we would be very encouraged by that, and I think it gets to good alignment with our overall positioning that this product has a rapid onset of actions. So, the switching data reflects our optimism, and clearly, the market share evolution we've seen with the moving up to 1.7% share already, I think reflects that this product is moving in line with those dynamics.

Difei Yang - R.F. Lafferty

Yes. Thank you and congratulations on a good start.

Adrian Adams

Thank you.

Operator

Your next question comes from the line of David Freeman representing Morgan Stanley. Please proceed.

Unidentified Analyst

Hi, this is (inaudible) calling in for Dave. Thanks for taking the question. Just a quick one on STENDRA, I was wondering if you could provide a little more color around how long do you intend to coupon STENDRA for.

Adrian Adams

Well, I think from a tactical perspective, I don't necessarily want to go into details on that, I mean coupons and vouchers are very important part of our overall strategy. We would see that continuing in at various levels during the course of the year. And clearly I think decision-making about the precise amounts (inaudible) will be dictated by the progress that we see clearly. They are essential parts of the overall promotional bag of tools, so to speak. And now, they're working very well for at this particular point in time. And as we evolved into that kind of 45% of PDE5 prescriptions, I think we will utilize all the different resources that we feel are necessary to continue what is like good market share revolution at this point in time.

Unidentified Analyst

Thanks.

Adrian Adams

Operator, I think we have time for one more call, and then we're probably going to have to wrap it up.

Operator

Your final question comes from the line of Greg Fraser representing Bank of America. Please proceed.

Greg Fraser - Bank of America

Good morning folks, thanks for taking the question. What's the latest on your business development priorities? It seems like guiding towards getting deals done are in vogue these days, I may have missed it, but I didn't hear comment on BD. So, what's your latest thinking in there?

And then, a quick one for Jim on the guidance; is there a tax benefit built into the net income range?

Adrian Adams

Well, I think I'd add one kind of simple commentary on corporate development and license. And clearly, I think -- I'm very pleased with where we are at this particular point in time. I think 2013 was a very successful year for us from a corporate development and licensing perspective. And with the diversification on the kind of platform that we have right now, I think we're approaching business development from the point of view that we don't have to do anything else. I think seeing a lot of expectations and execution against that in the five growth assets we got, are very important.

That said, in the corporate development and licensing world, you have to be opportunistic, you have to be nimble and you have to be entrepreneurial. So, in the event that we see something that makes sense strategically, financially, and from a shareholder value perspective, then we will interact on that. We want to maintain the momentum that we have and clearly deliver share holder value in the short, medium and long-term. And that's driving our overall views on corporate development and license.

In the natural world, the business world, I think if opportunities come up, I think we have to look at things at that time, because obviously it's rather dynamically we can say will assess that in three, six, nine months time; it's nimbleness. And that's what drives corporate strategy, corporate evolution, and it's certainly what's given as the progress we've seen in 2013, and we want to continue that.

James Fickenscher

And on your question about taxes, we have almost no taxes. I would just call it, minimal or a little bit for some state taxes here and there on some of the Actient acquired business in our guidance.

I do and also the comment, Greg, that -- so our approach to what we do with the non-GAAP tax number is until such time as we're actually going to be recognizing taxes from a GAAP point of view. We're taking the approach that we wouldn't recognize taxes on the non-GAAP. And they know it. I don't know if that's subject interpretation for different people, but that's kind of the methodology that we'll take.

I'll also mention that as you know, we have a large deferred tax asset that's still on our balance sheet. From an accounting point of view, GAAP point of view, what will happen is that at some point in time as we become sure to use those deferred tax assets, we actually will not keep the evaluation on the books. And as a result, there'll be a large tax credit. And then, following that, since we're pretty much completely U.S. Company right now, you would expect that we would then have an effective tax rate of about the high 30's just below 40%.

So, it's too early to know if we'll release that evaluation reserve this year, but we did not include the release of that reserved in those numbers either. I think that release on our mind is an accounting issue, and we would -- out for non-GAAP net income as well.

Greg Fraser - Bank of America

Okay, thanks for that.

James Fickenscher

You are welcome.

Adrian Adams

Thank you very much, and thank you all for joining us this morning. We're very pleased with where we are at this particular point in time, and obviously look forward to updating you our continued progress in corporate milestones on our next call and throughout the year. Thank you so much, and you have a great day. Thank you.

Operator

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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