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Zogenix, Inc. (NASDAQ:ZGNX)

Q4 2013 Earnings Conference Call

March 5, 2014 4:30 PM ET

Executives

Catherine O'Connor - Senior Director, Corporate Communications

Roger Hawley - CEO

Steve Farr - President

Ann Rhoads - EVP and CFO

Analysts

Annabel Samimy - Stifel Nicolaus

Tim Lugo - William Blair

Jason Gerberry - Leerink Partners

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2013 Zogenix’s Earnings Conference Call. My name is Derek and I will be your operator for today. As this time, all participants are in a listen-only mode. We shall facilitate a question-and-answer session at the end of the conference. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to Ms. Catherine O'Connor, Senior Director of Corporate Communications. Please proceed.

Catherine O'Connor

Thank you, operator and thank you all for joining us this afternoon. With me on today's call are Roger Hawley, Chief Executive Officer; Dr. Stephen Farr, President; and Ann Rhoads, Executive Vice President and Chief Financial Officer. Earlier today Zogenix issued a news release announcing the Company’s financial results for the fourth quarter and full year 2013. We encourage everyone to read today’s news as well as Zogenix’s Annual Report on 10-K which we expect to file shortly and will be available on the Company’s website at www.zogenix.com.

Please note that certain of the information discussed on the call today is covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act. We caution listeners that during this call, Zogenix’s management will be making forward-looking statements. Actual results could differ materially from those stated or implied by these forward-looking statements due to risks and uncertainties associated with the Company's business. These forward-looking statements are qualified by the cautionary statements contained in Zogenix's news releases and SEC filings including in its Annual Report on Form 10-K. This conference call also contains time sensitive information that is accurate only as of the date of this live broadcast, March 5, 2014. Zogenix undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call.

Now I would like to turn the call over to Roger Hawley, Chief Executive Officer of Zogenix.

Roger Hawley

Thank you, Catherine, and good afternoon to everyone. Thanks for joining us on our fourth quarter and year-end 2013 conference call. And to those of you who stood by us during a very long and challenging year I particularly want to thank you for your confidence and ongoing support. It was a year that was very different from anything that I’ve experienced throughout my career but one that I’m very proud of the progress that we’ve made.

I’ll begin the call with an update on the introduction of Zohydro ER including the expansion of our leadership team and commercial organization, the implementation of our voluntary Safe Use initiatives and the formation of an external Zohydro ER Safe Use Board. I’ll also provide an update on our migraine business which includes SUMAVEL DosePro and our co-promotion of Migranal. And then following my remarks Steve Farr will provide an update on our development programs including our abuse deterrent form of Zohydro ER and our upcoming clinical study for Relday. Then Ann Rhoads will provide a review of our financial results and then I’ll provide some brief closing comments and open it up to Q&A.

We received FDA approval for Zohydro ER in late October 2013 for the management of pain severe enough to require daily around-the-clock long-term opioid treatment for which alternative treatment options are inadequate. We then raised net proceeds of $64.5 million in an equity offering in mid-November. This provided us the capital to expand our commercial team and to make other investments to support commercial, medical and clinical development operations.

Over the last several months, we have been fortunate to attract a group of talented individuals with significant experience in pain and CNS markets. This includes the expansion of our medical team which we announced in December to include Dr. Brad Galer as Executive Vice President and Chief Medical Officer; Dr. Arnold Gammaitoni as Vice President of Medical and Scientific Affairs and Dr. Marshall Stanton as Executive Director, Medical Affairs. In addition to these talented leaders we hired an experienced medical science liaison team. On the commercial side we hired Rich Micali as Vice President of Sales in early December. Rich has more than 15 years of experience leading sales organizations. The majority of which was Bristol-Myers Squibb. He has experience in the pain space and in building and leading specialty sales teams with an outstanding track-record of success. Rich has been instrumental in leading his team to support the expansion of our field organization from approximately 47 to 150 representatives.

Last week we completed the month long training program including formal certification of each representative. Our entire team will focus on reaching approximately 15,000 pain specialists who are experienced prescribers of extended release opioid products. We just completed our training, compliance and certification meeting for Zohydro ER last week and I was very impressed with the caliber of our entire team and the tremendous commitment we share across this organization to the responsible introduction of Zohydro ER as a new option for people suffering from severe chronic pain who currently use immediate-release hydrocodone products or other extended-release opioids.

During efforts preparing for the launch, we were able to achieve fourth quarter net product revenue on sales of SUMAVEL DosePro of $9 million in a unit basis. SUMAVEL factory sales were up 2% sequentially and we generated approximately 22,000 prescriptions also up compared to the third quarter. Service and other revenue primarily from our promotion of Migranal Nasal Spray was nearly $1 million in the fourth quarter, up from $271,000 generated from two months of the co-promotion activity in the third quarter. We are very pleased with the sequential improvement as it demonstrates our ability to build on a customer relationships and expertise in migraine to drive sales of complementary migraine treatments even with the smaller team during the fourth quarter.

Altogether, total revenue was nearly $10 million in the fourth quarter of 2013. We also added to the product line of SUMAVEL DosePro with FDA approval of the 4 milligram dose in December of 2013 and expect to launch that in the third quarter of 2014.

I will now turn the call over to Steve Farr, who will update on our development pipeline and ongoing progress and our related business development efforts. Steve?

Steve Farr

Thank you, Roger and good afternoon to everyone. Today I will provide an update on our key development programs which include the abuse deterrent formulations for Zohydro ER and our next steps with Relday. First however, I would like to reiterate our responsibility in showing a safe and appropriate use of Zohydro ER. We certainly recognize and understand the public health concerns regarding extended-release opioid products and our responsibility as the manufacturer to balance patient access with a risk of misuse, abuse and unintentional overdose of single entity hydrocodone. In addition to Zohydro ER, Schedule II controlled under the Controlled Substances Act and the FDA’s class-wide extended-release long obtained opioid analgesic REMS program. We have also implemented a comprehensive suite of voluntary initiatives, we originally proposed and discussed with our advisory committee in late 2012.

This includes prescriber, patients and pharmacist education and a broad and vigorous ovarian system under the oversight of an External Safe-Use Board to detect the signals of abuse, misuse and diversion and to take immediate corrective actions. Last month we completed the first meeting of the External Safe-Use Board, a panel of widely recognized experts in pain management, risk management, pharmacovigilance, surveillance, addiction, patient care and law enforcement. We received helpful feedback and recommendations for several components of our surveillance program with respect to controls in production distribution and detecting signals and misuse and abuse. We are implementing all those right now. This Board will provide ongoing independent assessments, interpretations and recommendations regarding the use of Zohydro ER directly through our Board of Directors and through Roger Hawley, our CEO. We believe this is the first time we are scheduled to opioid product would have launched with an expert independent Safe-Use Board in place from the first day of product availability.

With regard to the development of an abuse-deterrent formulation of Zohydro ER, we are making solid progress on two separate projects with a target of having an approved product by the end of 2016. And our first and most advanced formulation approach in partnership with Alkermes is based upon a modification of the existing SODAS technology to introduce abuse-deterrent features into the current capsule dosage form. This new formulation has already been demonstrated to be bioequivalent to Zohydro ER and has the potential based upon ongoing levitra work to mitigate abuse via some common roots of administration.

Our agreement with Altus which we announced immediately after approval of Zohydro ER allows us to pursue another formulation technology now in a tablet dosage form that may have even better resistance to physical and/or chemical means of manipulation as compared to our first approach with Alkermes. Altus is making excellent progress in formulation development towards our goal of a final formulation which meets the product profile. The Altus technology is also associated with new intellectual property, three relevant patterns we issued just last year with additional product specific patent applications in the queue and therefore this would provide a long extension to the IP runway for Zohydro ER. Our immediate plan is to pursue both of these projects in parallel in order to make an informed decision later in development likely next year.

Our other product candidate is Relday, a proprietary once monthly subcutaneous formulation of risperidone for the treatment of schizophrenia. With the recent approval of Zohydro ER and subsequent capsule raise, we made the decision to move into the next Relday clinical trial without a partner. This will be a multi-dose, pharmacokinetic and safety study in patients with schizophrenia which would provide incremental data on the use of Relday over several months of therapy potentially further confirm its potential as a viable product for development in commercialization partners. We believe Relday has many attributes including the ability to achieve therapeutic plasma levels on the first day of dosing. That simplifies the loading regimen compared to all currently available long acting injection products. Relday also provides for a one monthly dosing frequency and no requirement for reconstitution prior to use. We are currently conducting chronic toxicology testing and manufacturing readiness to support the clinical trial which we expect to begin in the fourth quarter of this year.

And now I’ll turn the call over to Ann for a financial update.

Ann Rhoads

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

Total revenues for the fourth quarter of 2013 was $9.9 million, up from $9.5 million in the fourth of last year. Total revenues for the fourth quarter of 2013 include net product revenue on sales of SUMAVEL DosePro and service and other revenues generated from our co-promotion of Migranal. Total revenues for the full year 2013 was $33 million compared to $44.3 million in 2012. Total revenues for the year includes net product revenue on sales of SUMAVEL DosePro and service and other revenues from August to December 2013 generated from our co-promotion of Migranal, while total revenue for 2012 included net product revenue and contract revenue. The net product revenue in 2012 for the full year 2013 was $31.7 million, compared to $35.8 million in 2012.

Service and other revenues for the full year 2013 $1.3 million, compared to $38,000 in 2012. Contract revenue for the full year 2012 was $8.5 million, which included the final amortization of license and milestone payments received from Astellas, the amortization of which was accelerated due to the early termination date of the co-promotion agreement. The Company did not have any contract revenue in the full year 2013.

In 2014 we’ll continue to book revenue in two categories, net product revenue and service and other revenue. Net product will include SUMAVEL DosePro and Zohydro ER revenue, and we’re still in dialog with our external auditors regarding how we will be booking revenues for Zohydro ER. With that a final conclusion on that at this time, we would encourage you to use prescription filled at pharmacy as reported by third-party data sources and the basis for revenue recognition at launch.

Service and other revenue will consist primarily of fees generated from our co-promotion of Migranal. Gross product sales in the fourth quarter 2013 were $14 million up 2% over the third quarter of 2013. This positive growth in gross product sales was achieved despite the fact that we have fewer sales representatives detailing our product during the fourth quarter of 2013, compared to the same period in 2012. Net product revenue for the fourth quarter of 2013 was $9 million.

Cost of sales for the fourth quarter 2013 was $7.1 million, compared to $6 million in the third quarter of 2012. Our gross margin was 21% in the fourth quarter of 2013, compared to 36% in the fourth quarter of 2012, the decrease in gross margin in the fourth quarter of 2013 was impacted by scrap and excess capacity, while the impact from this event was spread over the last two quarters, it is now resolved and will not impact future periods.

Cost of sales for the full year 2013 was $21.2 million compared to $19.5 million in 2012. Our gross margin was 33% in the full year 2013, compared to 46% in 2012 with full year 2013 also impacted by the scrap and excess capacity charges.

Royalty expense for the fourth quarter and the full year 2013 was $341,000 and $1.2 million respectively, reflecting royalties that we paid to Aradigm on the sales of SUMAVEL DosePro. This compared to $357,000 in the fourth quarter of 2011 and $1.4 million for the full year 2012.

Research and development expenses in the fourth quarter of 2013 were $3.4 million, due to a 36% decrease from $5.4 million in the fourth quarter of 2012. Research and development expenses for the full year 2013 were $12.8 million, a 40% decrease from $21.4 million in 2012. These decreases were driven by lower development costs for Zohydro ER and the Relday program.

Selling, general and administrative expenses for the fourth quarter of 2013 increased to $13.5 million as we began preparations to launch Zohydro ER, compared to $11.9 million in the fourth quarter of 2012. Selling, general and administrative expenses for the full year of 2013 were $50 million representing a 1% increase from $49.5 million in 2012.

Other expense for the fourth quarter of 2013 was $21.1 million compared to income of $13.6 million in the fourth quarter of 2012, reflecting non-cash mark-to-market adjustment for the fair value of the Company’s outstanding warrants. The change in fair value was primarily driven by the increase in the Company’s stock price in Q4 going from a $1.85 at the end of Q3 to $3.44 at year-end. Other expense for the full year 2013 totaled $27.7 million while other income in 2012 was not significant on a net basis. In all periods, other income was primarily comprised of non-cash mark-to-market adjustments and the fair value of the Company’s outstanding warrants and interest expense related to our financing agreement. We’ve provided a table with a full description of the other expenses in our press release issued earlier today.

Our net loss for the fourth quarter of 2013 was $35.6 million or $0.28 a share compared to a net loss of $600,000 or $0.01 a share in the fourth quarter of 2012. Our net loss for the full year 2013 was $80.9 million or $0.74 per share compared to a net loss of $47.4 million or $0.59 per share in 2012. Non-GAAP net loss for the fourth quarter 2013 adjusted for certain non-cash items was $0.13 per share it was down from $0.16 per share in the fourth quarter of 2012 and non-GAAP net loss adjusted for certain non-cash or non-recurring items for the full year 2013 was $0.54 per share compared to $0.72 per share in 2012. The non-GAAP financial results are detailed in the table included in our financial results press release issued today which we believe may be helpful in understanding our financial results as it excludes the large change in fair value of our warrants.

We finished the quarter with cash and cash equivalents of $72 million. This includes net proceeds of $64.5 million in a public offering of common stock completed in November of 2013. Because of Zohydro introduction began this week the Company is not providing financial guidance on expected 2014 revenues. As a reminder, while we have 150 sales representatives, we are retaining the same level of STEs for SUMAVEL DosePro in 2014.

Also the Company is not providing guidance on cost of sales or royalty expense, which are largely dependent upon revenue levels. However, the Company expects $110 million to $120 million in combined research and development and selling, general and administrative expenses in 2014. Additionally under other expenses, the Company expects to report interest expense of approximately $8 million in 2014 related to its financing agreement with Healthcare Royalty Partners. The Company is not providing guidance on the non-cash change in the fair value of warrant liabilities which is driven to a large degree by changes in the Company’s stock price or change in the fair value of embedded derivatives.

I’ll now turn the call back over to Roger.

Roger Hawley

Thank you, Ann. For the last four months we’ve been in a period of transforming Zogenix. We are fully prepared and committed to introduce Zohydro ER while meeting all of our required risk mitigation programs and all of our voluntary Safe Use commitments. We have attracted a talented group of experienced new employees to support our commitment to the responsible commercialization of Zohydro ER. We also have a positive outlook on our overall commercial capabilities and are actively in pursuit of additional complementary therapies to market with our sales team.

On the development front we are moving forward to progress our abuse-deterrent formulation development program for Zohydro ER and our preparing for the multi-dose trial for Relday. This gives us a nice balance of commercial activity and pipeline products to support near and long-term growth and to build shareholder value.

I’d now like to turn the call back to the operator to beginning answering questions. Thank you. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will come from the line of Jason Scarberry from Lowe & Partners.

Unidentified Analyst

Hi. Good evening. Thanks for taking the questions, maybe I’ll start with just the -- could you provide a little more color just around what you mean in terms of taking I guess the some measured approach to commercializing Zohydro and how to think about kind of the timing in terms of ramping up some more normalized commercialization efforts? And then just on kind of the negative PR around the launch just kind of curious if you can comment just in terms of your interaction with physicians and how you think that might impact willingness to prescribe the product?

Roger Hawley

Right. This is Roger, good questions and I’ll try my best to give you an answer to what you’re trying to learn here. First off we’ve just been in the market for a very few number of days. What I can say is that we completed intensive training of our team, and we focused on everything that we have been talking about for well over a year now which is our responsibilities to safely launch this product to the appropriate prescribers and to make sure that the appropriate patients are both well informed and treated by prescribers who are fully knowledgeable and aware of how to both select the patients and appropriately use our product.

We have been rather thoughtful if you will about focusing on making sure that we get to prescribers as soon as we possibly can. And we think this has been the right thing to do to make sure that we have an opportunity to reach prescribers before more patients find the way to their offices, we felt that was very important. So you can call it measured or conservative or cautious but we think that’s the intention of what we’ve been trying to accomplish all along. We’ve taken every measure that we could think of that could impact successfully the introduction of this product as well as minimize its potential for abuse and misuse that’s what we continue to do. We’re very proud of how we’ve gone about that and the quality and quite honestly the dedication of the team that we’ve recruited, they were aware of how we were going to approach this market. Many of them in fact I would say the vast majority of them had pain experience including opioid experience, they know that we’re taking what they believe to be a thoughtful and appropriate approach including our handling of their incentive compensation which is not tied at all to prescription volumes or sales dollars. It’s about the appropriate introduction of the product and it’s supporting safety use to tools.

We also believe this is the path towards the long-term success and is the right counter measure if you will although quiet. We think it’s the right thing to do given the publicity. I am not going to into you have all heard it I assume, if you follow our Company there is a well orchestrated campaign about the concerns of people who may have strong emotions and bad past experiences about these products. We fully understand that and we don’t think it’s appropriate for us to be a counter balance to them as far as in the press and our work is to be done in the offices of pain physicians who treat real patients with severe chronic debilitating pain. That’s where what we do matters, and for those who want to I understand their effort, but it’s also what most concerned is about some of the inaccurate or incomplete or even misleading information and quite honestly some fairly at least in my opinion, some fairly inappropriate comments that have been made about the Company and our business practices. So we’re just going to do the best job we can by building a reputation through our employees and through our medical affairs team and through our presence at medical meetings not with the press.

Unidentified Analyst

Got it. And if I can just ask a couple of follow-ups, I guess you mentioned with the Zohydro tamper resistant formulation the decision next year on the three different formulations, is that decision that you make next year ultimately which product to submit an NDA filing on, just wanted to make sure that that’s the decision point. And then as I think about the OpEx number that you guided to for ’14. Are there any one-timer launch cost that we should be thinking about rolling off as we model our ’15, ’16 and beyond? Or this is a good representation of kind of the cost structure on a go forward basis? Thanks.

Roger Hawley

Yes. And this is Roger, I’ll just start out. Always with the launch cost there are always some front-end costs that are one-time including the launch meeting itself. But also as you know the number of physicians that we may need to call on in the future could change, we’re very closely going to monitor who the actual prescribers are. And we’ve a responsibility to get information to them and we will if we see someone that begins to prescribe that we haven’t called on. We’ll make that effort, but there could come a point in time where we see the data and we say that maybe the size of our team isn’t the perfect size.

So we’d be monitoring that overtime so I guess our expense base could change. Having said that you don’t have the normal marketing programs, we’re not expecting a direct patient campaign they’re not allowed to sample. But we’re making commitments to this broad array of both REMS and voluntary safe use programs, which we are going to continue to fund. And we don’t know everything about those costs right now but the work that we’ve done we think those would be ongoing costs and not just the current year, but even in the future years. So we see that being fairly steady in dollar terms if you will and not so much impacted by the growth in revenue over time. But I'll let Steve, well maybe Ann if you want to add any comments on the spending side and Steve maybe you could come back and take the question on the ADT decision.

Ann Rhoads

I think in terms of the OpEx looking forward, I think it’s probably a good number for you to go ahead and think about while our R&D numbers are probably going to move around, all depending on again which abuse-deterrent formulation we decide to advance and the timing for our clinical development on Relday in 2015. But I think for your long-term model, this is probably a good place to be right now.

Steve Farr

Hey, Jason, this is Steve. And just to follow-up on the abuse-deterrence formulation question, just to make a point again that we are pursuing both of these in parallel. So both have the objective right now of going all the way through an NDA submission. But clearly, we will probably make a decision at some stage during developments and most likely next year to select the primary once move forward for a single NDA submission.

As I said before, we're trying to make this a data informed. The Alkermes is approach is ahead because we started that earlier. We only signed the Altus agreement after we got approval at the end of October. So we would like to move both of them through the appropriate in vitro testing to look for how the product can be manipulated both physically as well as chemically and that map will provide us information on whether or not we are going to get any meaningful label claims around prevention of injection abuse or crushing - chewing abuse and also a nasal interpolation.

But the key will always be to take those formulations into a phase I clinical trial where we will assess drug liking via various resource of administration. So I think you should look at 2015 as a year where we have been able to do a side-by-side comparison of these products, certainly with respect to some of those attributes and then make a decision.

Operator

Your next question will be from the line of Annabel Samimy. Please proceed.

Annabel Samimy - Stifel Nicolaus

I wanted to get some I guess explanation of the pricing rationale that you've laid out for Zohydro is little bit different than some of the other narcotics out there -- the long anti-narcotics out there. So, maybe you can help us understand the pricing rationale behind that? And then I'll follow-up with some other questions. Thanks.

Roger Hawley

Yes, thanks Annabel. And you are correct. Our pricing approach is different than has been the customary practice and we looked at what payers and physicians and patients needed and also we believe that the patients who were titrated up on dose and a pricing policy that was per milligram was not really encouraging the best practice and one that we used in our clinical trial program which is to get the physician to listen to the patient and get them stabilized on the amount of medication that met their degree of chronic pain.

We think, if you have just a milligram price and if one patient needs 40 milligrams and the other one needs 20 milligrams, we didn’t feel that based on the actual cost structure of these medications that, that patient should pay double the price for. So, we did take a different approach to the introduction, one that so far the payers have responded favorably to and one that we felt was the right thing to do and fit our overall mission and objective to serve patients and keep, if you will the cost manageable and controllable.

Annabel Samimy - Stifel Nicolaus

Okay, great. And we got some decent updates on some of the launch preparations that you have made. You just recently signed a contract with Humana; I guess it was a couple of weeks ago. Can you discuss some of the other reimbursement negotiations that are going on? What plans do you have on-board already; or is that your only plan and how we should think about that going forward?

Roger Hawley

Annabel, I know that -- I saw the report on Humana and there are may be others that have come out. I'm not going to get into detail specifics on a plan-by-plan basis but I can give you a general flavor. Number one, it’s very early but as we said here today, it’s been encouraging. We have made good progress. We are pleased that a number of plans including some of the larger ones, where we thought might setback and wait, have been interested in learning about the product and having meetings.

So, so far I would say encouraging. Things are happening more quickly than we anticipated. We think that is very good and our approach is to continue to focus just like we did with SUMAVEL. We have contracts in place. We think that are the fastest entry points. We achieved very good coverage on SUMAVEL DosePro. I would say that our problem was not a payer problem. It was more of a consistent resourcing of sales effort over time that was our biggest challenge on SUMAVEL DosePro.

But we do have good access to the payers and quite honestly I think we have a good reputation of working with them and they’ve been willing to see our team. We also brought in some very experienced people and the manage markets team we promoted the leader of that group internally to Vice President role based on four years of very important and impressive accomplishments and we feel very good where we’re at overall with payers. We have some very important clinical discussions underway. So our medical affairs, medical science liaison team are already getting fully occupied and engaged and we find that to be encouraging.

Annabel Samimy - Stifel Nicolaus

Okay. And one more question if I may. So your sales forces full onboard now I guess with the 150 that you have. Is that the size that you've planned?

Roger Hawley

That’s correct.

Unidentified Analyst

And I just want to understand the mechanics behind the sales incentives because obviously we don’t really have numbers point to or sales to point to for their incentives but you mentioned it was they’re going to be incentivized through appropriate introduction of the drug as well as the Safe Use tools. How do you measure that exactly and so where -- I guess it’s a little bit nebulous to me.

Roger Hawley

I know and to be candid, we probably won’t explain all the details of our incentive program, about our team but I’ll give you just in general flavor for it. As you know, the educational component and we have responsibility not just to patients but to prescribers and we’ve also made significant commitment ourselves to pharma system. We’re finding that that is being welcomed and it’s important. Behind each one of those efforts we have a series of tools that our team will be using and also proficiency in that use which we’ve been measuring and monitoring and I mentioned certification of our team.

We also have objectives that can be measured and tracked, that have nothing to do with sales but everything to do with meeting the commitment of introducing those programs, the utilization of those programs, the deployment of those programs and I’ll just give you one example.

We have a patient toolkit that we think is really important to get in the hands of every new patient that’s put on our product. We can measure the distribution of those to offices and then we can also measure uptake and utilization of some of the components that are available in the toolbox.

For example, we are offering every patient a free locking cap -- combination locking cap that fits different sizes of prescription bottles. They can get online and order that for at home delivery without cost and we will be measuring that, monitoring that because that’s one of the indicators if you will that our team has gotten those offices to use the tools that we’ve provided to them, which we think is a comprehensive set of education.

So those are the sorts of measurements. We also have regional sales managers that will be measuring the proficiency of our representatives. We call our reps specialty account managers because that’s really what they are. We're focused on a few number of high prescribing pain centers and physicians who act as pain focused prescribers and that’s their primary targets for their focus of their effort.

And we have a series of management by objectives that each sales representative will be measured on, again having nothing to do with sales results or prescription activity but rather the quality of their work and the completeness of their education and deploying all the tools.

Operator

Your next question is from the line of Tim Lugo, William Blair.

Tim Lugo - William Blair

I guess a question for Ann. We’re pretty far along in the first quarter, 150 reps are onboard. Can you give us some granularity of the step up within expenses in the first quarter or the expenses that you guided to going to be kind of smooth throughout the year?

Ann Rhoads

They’re going to be pretty smooth throughout the year. So again we did have nice cost that we were incurring starting in late 2013. Of course as we were getting ready for this month long training session, the month of January, we did have expenses flowing through they are relative to those new activities. And then the majority of the reps, the 100 that we have added to our team came onboard in --

Roger Hawley

February 1st.

Ann Rhoads

February 1st. So, I think you should be pretty good there as you’re looking throughout the whole year.

Tim Lugo - William Blair

Okay. And at some time during the year do you think you’ll be able to provide us some top line guidance?

Roger Hawley

We will look at each quarter and who knows maybe after the first quarter we feel confident enough in a trend and we feel we know more about where we are at with some of the largest payers by then that we could give guidance. I can’t commit that we'll do that but I am just saying that we will evaluate it before our first quarter conference call.

Tim Lugo - William Blair

Okay, thanks for that. And a question for Steve. For the Relday multi-dosing study, can you go into some more granularity how long will that be, how long will that study to run for how many doses, how many patients?

Steve Farr

Yes. We are still finalizing the details of the protocol right now Tim, but it will be a study which will be at least three months duration, so either three or four doses. We're still working on the details there. We will be running several doses of Relday in parallel and we will be comparing that against a comparative product, probably RISPERDAL CONSTA. And the objective will be to evaluate steady state pharmacokinetics and then to compare that against RISPERDAL CONSTA.

So that’s the primary objective. Of course we will be collecting safety and tolerability data as we go. In terms of the size of the number of patients, they are still to be determined. If you recall from original phase I trial, we enrolled 40 patients. That was a four arm study. We would expect this study to be bigger than that because of the more arms and with respect to overall duration of the study -- because it’s a long acting injection, these studies take a long time to complete. So, we'd probably be looking for about duration of around a year or two, get the final data from that study.

Operator

We have a follow-up question from the line of Jason Gerberry, Leerink Partners.

Jason Gerberry - Leerink Partners

Just the comment about looking at potentially some additional assets to layer onto the existing commercial platform, could you just talk about, it looked like with your cash position, you're kind of monitoring cash closely. So what kind of structures are we talking about in terms of in-licensing transactions? And then just a follow-up on SUMAVEL. I know you're not guiding on gross margin but qualitatively how should we be thinking about SUMAVEL gross margin going forward?

Roger Hawley

Yes, I will take the first one, so just on that potential for business development, we have begun looking at various assets and I can tell you that each and every one of them will take a different shape and size and financial commitments. Some might be co-promotes where there is nothing upfront. It’s just something that put in the bag of our current sales force. Others could be us trying to promote another company's product, much like we are from Migranal from Valeant where the product doesn’t even have a current commercial effort and a feel. So, it’s not really co-promotion.

But again last quarter we generated a $1 million of revenue and we didn’t pay anything upfront for that product. But we're also looking at late stage assets or marketed products and some of you who have followed us for a while know that we've been for the last many months looking for a third migraine product, which we haven’t been able to put in our bag yet but now we get the opportunity to look, continue to look both in the migraine space and the pain space. And so it’s a bigger number of opportunities and there are things happening in the marketplace both in the migraine landscape and with some pain assets.

So there are things that we are looking at. We have had firms that have been willing to tell us that they would be very interested in backing a product acquisition of a small product if the fit were good with our sales team. So, we could take advantage of that. We also, again those of you who have followed us for while know that we have not done anything as far as a bank line of credit in-spite of us using more working capital for the launch of Zohydro, both on finished product inventory as well as accounts receivable from the wholesalers to which we sell our product. We could also put in place working capital line to fund those. So I think we have got a number of options and alternatives and then clearly we'll be looking at the launch performance of Zohydro to see where we're going. We certainly don’t want to get ahead of ourselves. Ann, do you want to add anything on the gross margin?

Ann Rhoads

I think what I would encourage you on SUMAVEL gross margin is to look at where we guided folks in previous years. I think we did have the manufacturing issues that I mentioned in my comments. We are -- again we think that was the one-time event and so as we've mentioned before, high 40s is probably a good target.

Operator

And at this time I'm showing no further questions in the queue. I would like to turn the conference back over to Mr. Roger Hawley for any closing remarks.

Roger Hawley

All right. Thank you and again everyone who has been interested in the company and stayed with us during a very challenging 2013, we appreciate you being on the call. I look forward to our next call where we'll give you more updates on the ongoing launch of Zohydro ER. Thank you very much.

Operator

Ladies and gentlemen, that concludes today's conference. We thank you for your participation. You may now disconnect. Have a great day.

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