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AMAG Pharmaceuticals, Inc. (NASDAQ:AMAG)

Q2 2010 Earnings Call

July 28, 2010 04:30 am ET

Executives

Amy Sullivan

Brian Pereira - President and CEO

Gary Zieziula - EVP and CFO

David Arkowitz - EVP and CFO and CBO

Analysts

Marshall Urist - Morgan Stanley

Geoff Meacham - JPMorgan Chase

Eun Yang - Jefferies

Chris Raymond - Robert Baird

Chris James - MLV

Yaron Werber - Citi

Carol Werther - Summer Street Research Partners

Brian Huang - Needham & Company

Joseph Schwartz - Leerink Swann

Adam Cutler - Canaccord

Juan Sanchez - Ladenburg

Subash Desai - Delaware Street Capital

Operator

Good afternoon my name is Tracy and I will be your conference operator. At this time, I would like to welcome everyone to the Second Quarter Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer session. (Operator Instructions). Thank you Ms. Sullivan, you may begin your conference.

Amy Sullivan

Thank you, Tracy and thank you to those of you that have joined this afternoon. This is a reminder we will be using slides today to accompany our call. And you can access the webcast of the slide presentation at our website which is www.amagpharma.com.

Before presiding with the call please be reminded that the conference call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other Federal Security laws.

Any statements contained herein which do not describe historical facts and forward-looking statements which involve risks and uncertainties that could cause actual results to differ materially from those discussed in such forward-looking statements.

For a full list of risks and uncertainties associated with our business, please refer to our filings with the SEC including our annual report on Form 10-K for the year ended December 31, 2009, and our quarterly report on Form 10-Q for the three months ended March 31, 2010.

On slide three, you will see the agenda for our call. Beginning with our President and Chief Executive Officer, Brian Pereira who will discus some of Amag's accomplishments today. Gary Zieziula, Chief Commercial Officer, will then share his perspective on the commercialization of Feraheme. David Arkowitz, our CFO and Chief Business Officer will follow with a review of our financial results for the quarter, and Brian will close the prepared remarks for the call before we open the floor to Q&A.

I’ll now turn the call over to Brian.

Brian Pereira

Thank you Amy, and thank you to those of you who have joined us this afternoon. Before we dive into the slides, I’d like to provide a broad overview. Start business from two perspectives: Most of our SG&A efforts today are focused on ensuring the successful commercialization of Feraheme in the US CKD market and the Feraheme product revenues, we are reporting today reflects this effort.

Most of the R&D efforts today and in the near future are directed towards expanding the label and the global reach of Feraheme, we expect that these investments will create value over the long-term. As you can see on slide 5, we have made progress on both fronts.

For the second quarter, we reported $18.8 million in total revenue, $16 million of which were associated with Feraheme sales. Our recently announced partnership with Takeda contributed to our revenues this quarter with $1.5 million in amortization of the upfront license fees.

As well as $1 million in reimbursement for expense, associated with our marketing authorization application filing and certain other clinical and regulatory cost incurred by us in this quarter. David will discuss this in more detail when he reviews our financial results for the quarter.

In the second quarter of 2010, we continued the successful commercialization of Feraheme in the US CKD market. Today we report 23% increase in Feraheme net product revenues and a 34% increase in provided demand and utilization, as compared to the first quarter of 2010.

Early in 2010, we targeted hospital and hematology segment as significant areas of growth, for the treatment of CKD patients, and we have done very well in attracting new customers in each of these important segments.

I am pleased to report that as a result of these efforts the proportion of our business derived from the treatment of non-dialysis CKD patients has grown to approximately 70% which positions us nicely ahead of the implementation of the prospective payment systems for ESRD patients also known as the [BUN].

Gary will discuss our commercial progress in greater detail in a few moments.

Major objective for us in 2010 is to expand the global reach and the label Feraheme. During the quarter we made important strides towards this goal. We have filed our marketing authorization application with a European medicine agency for Feraheme for the treatment of iron deficiency anemia in adults CKD patients. And the initiative enrollment in the global registration program for Feraheme for the treatment of iron deficiency anemia, regardless of the underlying cost.

We expect to complete enrollment in these drug, by the end of 2011. Before I turn the call over to Gary I’d like to spend a few minutes just cutting the bundle that was released by CMS on July 26th.

From AMAG’s prospective there were no surprises in the final [room]. However from a dialysis provider’s perspective there are many new [ones] that will take some time to analyze so that they full understand the impact and to determine whether to opt in fully or transition into the bundle over four years.

Providers will need to asses the appropriate choice and mix the pharmaceutical used by (inaudible) and develop new protocols to deflect any changes, for instance in talking with customers we know that many are trying to determine its more intravenous iron use could lower their ESEA requirement.

Providers will also be assessing selections of home versus the incentive treatment for both new and existing patients. In the coming months, providers will determine to operationalize all of these decisions.

Our dialysis customers conduct significant amount of these in the coming week and we will be working with them to determine the best pick for Feraheme in their organisation in a bundled environment.

We do believe that Feraheme can and will play a role in the bundle environment, but this is likely to be a smaller role than Feraheme plays in today in dialysis. Now we at AMAG are in a different place than the dialysis providers, we have been able to plan for this day for many months and feel that today we have out positioned going into the bundle.

As I mentioned earlier today, approximately 70% of Feraheme provider demand is outside of dialysis. We continue to believe that the biggest opportunity for Feraheme today lies in the treatment of non-dialysis dependent chronic kidney disease patients with iron deficiency anemia.

With the goal of expanding the opportunity to all patients with iron deficiency anemia, regardless of the underlying cost.

Our efforts this far in 2010 have enhanced the position of Feraheme in many types of care in which CKD patients receive IVR, I’ll let Gary discuss this further in a moment.

And with the initiation of the IDA registrational program we should someday in the not too distant future have the opportunity to help all patients with iron deficiency anemia irrespective of underlying cost.

That said, I will now turn the call over to Gary

Gary Zieziula

Thanks, Brian. I’ll begin on slide eight, we reported $16 million in Feraheme FRX revenues for the second quarter 2010. This includes $2.4 million and previously deferred product revenues related to our launch incentive program. $50.4 million reflects actual Feraheme utilization by our customers as reported to AMAG. In response to evolving market conditions we offered an additional levy at the end of the second quarter.

And while our target pinpoints the effect of additional rebate had on demand in the second quarter, we don’t believe that this will have a material adverse impact on provided demand in the third quarter. In fact, provider demand for the first three weeks of July is higher than for the comparable period in April.

While wholesale and distributor inventories levels remained flat from the end of the fourth quarter to the end of the first quarter. In the second quarter, we observed a decrease in inventory levels on absolute and relative basis. We ended the second quarter on June 30 with approximately 82,000 grams of Feraheme held at wholesalers and distributors, which is approximately three weeks of inventory based on June demand. As Brian mentioned, for the second quarter there was a 34% increase as compared to the first quarter and provider demand and launch incentive program utilization with continued growth across all segments.

Approximately 70% of the provider demand was outside of the dialysis setting with hospitals and hematology clinics representing the majority of the non-dialysis demand. [Neutralized] back in 2010 approximately 2300 providers have purchase Feraheme with 73% of those providers having purchased under repeat basis.

In the second quarter alone, we continued to add approximately 50 new customers per week and closed the quarter with more than 620 providers having purchased Feraheme for the first time. 68% of which were hospitals hematology clinics.

Moving to slide 9, which most of you have seen before, about 1.6 million grams of IV iron were used in US in 2009 and 8% growth over 2008. IV iron is used by a variety of providers that we have broken out into two groups in the pie chart on the left side of the slide. These groups are dialysis centers, representing 59% and all other setting representing the remaining 41%.

On the right side of the slide, we've identified three key provider segments. Small dialysis organization, which we refer to on a slide at SDO clinic which our physicians practices including nephrologists and hematologist and hospitals.

For the first six months of 2010 versus the first six months of 2009, the total RD iron market measured in grams has grown approximately 9%, with demand from non-dialysis setting growing at approximately 17% and dialysis growing at approximately 4%. The segments that we are targeting are growing significantly faster than the overall market, with the largest growth coming from the nephrology clinics at 60%, hematology clinics at 25% and hospitals at 12%. These segments represent a large piece of the total RD iron market in CKD. And we are pleased with the progress we have made with these providers to date.

On slide 10, you can see the breakdown of provider demand in the second quarter of 2010, as compared to the first quarter of 2010. This exclude launch incentive program utilization. Reflective of the majority of new accounts being hospitals and hematology clinics, these segments have increased on an absolute basis and as a proportion of our business since last quarter. As Brian mentioned, the release of the final perspective payment system for ESRB was in keeping with our expectations, as such, our intent is to work with our customers to retain as much dialysis business as possible.

With that said, we do anticipate the percentage of Feraheme demand from the dialysis segment will continue to decline over the course of the year as we go to total end of hematology clinics and hospitals using Feraheme and increased utilization broadly becomes we believe that the proportion of our business attributable to these segment will continue to increase.

On slide 11, you can see the increase in provider demand on an absolute basis [prior] segment from 4Q, 2009 through 2Q, 2010 this excludes launch incentive program utilization. We have continued to observe quarter-over-quarter growth across all segment with the most significant growth achieved in hematology clinics with a 90% increase, in hospital with 71% increase. As I mentioned earlier these segments are growing faster than the overall market, and I am pleased to report that our growth within these segment in spite off pacing their rate of market growth.

Strategically in 2010, we focused on increasing Feraheme penetration in the hospitals and hematology clinics where CKD patients are often treated. In the Hematology segment one big contract took place late in the first quarter is the primary reason for the growth we achieved in the second quarter and was very willing to see the new types of this contract that we are going to apply.

In the hospital segment, we are continuing to attract new customer today these are turning to be smaller systems and standalone hospitals. Our [integrated] delivery network team consisting of ten professional with broad experience contract in with hospital and lot of health care system is actively working for establish contract with large (inaudible). But the formula involving process we these larger systems and networks is taking longer and as such it will take us a bit more time to get these accounts on board, we anticipate that this effort will bear fruit over the next several quarters.

On slide 12, we show the break down of our customer in our private provider segment. Launched to date, the majority of our customers continue to be nephrology clinics and hospitals.

The hospital segment is still relatively untapped with approximately 8% of the potential customers in that segment penetrated. However, these hospitals represent approximately 25% of all IV iron administered by hospitals in the past 12 months. In the hematology segment, we have 25% of all hematology practices that accounts today.

These are counts tend to be high IV iron users, representing approximately 50% of all IV iron administered by hematology practices over the past 12 months. As we continue our efforts this year, we have two primary goals to process in the hematology segment to increase utilization within our current customers, while we address new customers.

Slide 13, provides an update on our launch incentive program. To refresh our memory, we originally deferred 10.9 million in launch incentive program revenue in the third quarter of 2009.

Point to remember that we only recognize revenue from the launch incentive programs as these customers report their actual Feraheme utilization to AMAG. In total, getting a 14.2 in Q2, we had recognized approximately five million of these previously deferred revenues through June 30th 2010 as our customers reported the utilization. So we now have 5.9 million remaining.

Of the customer that participated in this program, one has depleted its inventory and has begun to purchase sales into normal distribution channel. Two are expected to work through their inventories in the coming months, and other are using at a slower rate. We have one organization that is using its inventory very slowly and then we expect this customer to return iron user inventory at year end.

While this provider’s utilization rate is increasing, they still ended 2Q with approximately 3.5 million of Feraheme inventory. We believe that in light of bundle, this organization was concerned about making the major operational change until they determine which are the [earn] they will use in the bundle.

The decision that they will not be able to make until they have a full understanding of the final [rule]. We believe the best indicator of success for Feraheme is quarter-over-quarter provider demand as the monthly data is still too variable in previously discussed.

I’ll close with slide 14, which shows 34% increase in quarter-over-quarter demand. From the first quarter of 2010 for the second quarter of 2010, this is the way we’ll be measuring our success on a go forward basis.

I’ll now turn the call over to David to review our financial results for the quarter.

David Arkowitz

Thanks, Gray. Now on slide 16, let me review our financial results for the second quarter. Total revenues for the second quarter were $18.8 million, $16 million of which were Feraheme net product sales, including $2.4 million of previously deferred launch incentive program revenues. The remainder of our revenues, were primarily made up by $1.5 million in collaboration revenues related to the amortization of the $60 million upfront payment we received from Takeda which is being amortized on a straight line basis over 10 years. $1 million in additional collaboration revenue that represents reimbursement from Takeda for certain cost incurred by us during the second quarter.

And approximately 200,000 in GastroMARK sales. Our gross to net sales adjustment for the second quarter will be about 27%. This represents an increase of approximately four points from the first quarter and as principally been driven by increased discounts and rebates which was due to greater rebates offered coupled with greater expected achievement by customers. Changes in Feraheme demand by customer segment as well as the benefit in the first quarter from adjustments we made to our prior reserve estimates.

We expected the gross to net sales adjustment will increase over the remainder of this year, as we continue with pricing and reimbursement pressures in an increasingly competitive marketplace, and as customers increase their Feraheme utilization and achieve higher rebates.

Regarding the $1 million of expense reimbursement from Takeda that's included in our revenues for the second quarter, this represents the reimbursement of certain regulatory and clinical trial material cost that we incurred during the quarter.

The most significant of which was MAA filing fees for chronic kidney disease in EU, we expected these reimbursable cost and the related reimbursement revenues will decrease significantly over the rest of the year.

Moving down slide 16, our cost to product sales for the second quarter was approximately $1.9 million, R&D expenses for the second quarter were $14.8 million, as expected R&D expenses increased by about $2.4 million from the first quarter of 2010 as we advanced the first study initiated the global registration program for iron deficiency anemia and incurred start up costs for the pediatric studies which will start enrolling patients shortly.

We expect that R&D expenses will continue to increase by between $2 million and $4 million quarter-over-quarter for the remainder of the year related to this planned clinical development activities.

SG&A expenses for the second quarter were $24 million and were generally consistent with the first quarter of this year. We think that this amount continues to be a reasonable run rate for the remainder of the year.

So in summary, we reported a net loss of approximately $21.3 million or a loss of $1.01 per share. We continue to be in a very strong financial position, with $328 million in cash and investments at the end of June.

During the second quarter we benefited from the receipt of the $60 million upfront payment from Takeda as well as the redemption at par value of approximately $20 million of auction rate securities. With these redemptions, the remaining amount of our auction rate securities at share value on our balance sheet as of June 30, was approximately $39 million. I will now turn the call over to Brian for closing comments.

Brian Pereira

Thank you David in conclusion on slide 18, today as a commercial bio pharmaceutical company AMAG has a firm foundation in place, that provides us with several near and long term opportunities for growth the market opportunity exists for Feraheme within our current label is large, and we believe that the observed advantages of Feraheme are being well received by the US CKD iron deficiency anemia market.

Along with ensuring the commercial success of Feraheme in this market we plan to expand the label and the geographical reach Feraheme by unlocking the value of this asset for iron deficiency anemia patients with and without chronic kidney diseases around the world.

In the past we have made great strides towards achieving these objectives in the last quarter alone we completed enrolment in the phase II imaging studies for patients with peripheral arterial disease which has patched our designation by the FDA and we are in discussion with the agency about the regulatory path forward.

We submitted our MAA to the EMA for the treatment of iron deficiency, anemia in CKD patients. Takeda will be responsible for commercializing Feraheme in several ex-US territories including Europe and I’m pleased to report that this relationship has gotten off to a good start and finally we began enrolling patients in our global registration program for iron deficiency anemia irrespective of underlying cost, which is an important step in the path to broadening the label for Feraheme.

The therapeutic opportunities of Feraheme provide our company with unique growth opportunities upon which we hope to build to targeted business development activities. That concludes our prepared remarks. We will now open the call to questions and answer. Operator, are there any questions?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is from Marshall Urist from Morgan Stanley. Your line is open.

Marshall Urist - Morgan Stanley

I wanted to get some more insight in the comments you made around pricing percent. I was the little confused by the statement only because is that in the dialysis segment specifically where that’s happening?

It would seem like there are, there’s not material (inaudible) pre-dialysis side. So, if something changed or are you seeing. Are you seeing something different in the market place on price that's sort of driving more discounting and is this going to end up to lower (inaudible) utilization as we think out 12-18 months from now?

Brian Pereira

Well Marshall, you are breaking up a bit but I think I caught most of your question. The answer is as you see from our result, a larger and larger proportion of our business is outside of dialysis particularly in the hospitals and the key non-segments.

The pricing pressure there is far less then what it is in dialysis and far less than we it is likely to be in dialysis in the bundle. Our intent is to maximize the availability of therapy into patients in all CKD segments while keeping an eye on the impact of our pricing strategies on maintaining ASP and our gross to net in the long run.

Marshall Urist - Morgan Stanley

The increase in the gross to net debt that you guys are talking about is this something that you will continue to increase going forward as you [Technical Difficulty]. And so is pricing are you being forced into greater discount than you originally intended?

Gary Zieziula

No, we are not being forced integrated discounts than originally intended in fact the gross to net is very much inline with what we have anticipated and I think we anticipate additional discounting going forward. So there’ll be additional impact on gross to net as we project out for the balance of the year, but not beyond the points of which we planned and we are prepared to deal. So, we think we have got a good hand alone the contracting activities is a highly competitive area. We need to contract to play in the different segments and as Brian mentioned we have been very successful in the hematology, oncology space as well as hospitals and we’ll need to continue to discount to be successful going forward.

So, we would expect that the gross to net will increase somewhat.

Brian Pereira

And Marshall to add to that David said in his prepared remarks one of the reasons why the gross to net went up was more of our customers reached higher targets because of larger volumes of demand and that was one of the contributors to the increase in gross to net.

Operator

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

Geoff Meacham - JPMorgan Chase

You guys provided some qualitative comments on hospital, I am kind of wondering if you can offer us any quantitative metrics on [T&T] approvals or progress in the hospital segment.

Gary Zieziula

We can't offer any specific quantitative information because of such a dynamic segment, we think they are changing on a daily basis. I will tell you qualitatively we are seeing that we are gaining formulary approvals everyday, we are getting reports in from the field on, new hospitals were adding Feraheme to formulary, and as I said in my prepared comments early on they tended to be individual standalone hospital, the smaller systems. We know that is a timeline by which hospital follow to consider new products to formulary inclusion. We are doing all the right things to make sure that information about Feraheme and why hospital should improve Feraheme on formulary, is provided all the key stakeholders and decision makers within the hospital setting. And as we are going through this process, we are seeing more and more formulary approvals.

So, we would expect that this activity would ramp up and that we’ll see even greater approvals in the second half of the year because of all the work that we've been doing in the second quarter.

Geoff Meacham - JPMorgan Chase

And just as to follow up to that, and any color maybe on penetration if at all and medium to large hospitals and kind of maybe, could you help us sort of book and best case and worse cast for getting formulary approval that we are talking end of the year or potential mid 2011 or maybe help us with that duration.

Gary Zieziula

I’ll start to comment by saying that this is just anecdotal feedback. We don't have a lot of quantitative data on formulary approval process and how long that will take by hospital and by size of hospital. But we think we are going to see a significant increase in formulary approvals in the second half of the year. Some of those will be large hospitals, we've already had some large hospital improved Feraheme on formulary, and that process will continue on into 2011, so I would be reluctant to give you color on how many precisely in the second half of the year versus the first half 2011, but it’ll be a combination, inclusions and formulary in both half of the year second half of this year and first half of next year.

Operator

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

Eun Yang - Jefferies

Thanks. On slide 10 you have nice to break down Feraheme in terms of the provider demand in different segment of dialysis versus non dialysis, can you actually break down the dialysis versus non dialysis in sales excluding the 2.4 million in deferred revenue?

Brian Pereira

Eun if you see the title it excludes the launch incentive program

Eun Yang - Jefferies

Yeah how about in terms of the sales that you reported a $16 million second quarter Feraheme sales when you exclude the 2.4 million in from the incentive program the remainder in terms of the sales how is it break down between dialysis, versus non dialysis.

Brian Pereira

As I said, may be we are missing the question Eun, this is excluding the launch incentive program

David Arkowitz

The best we can do is when you see there, which breaks out the demand by dialysis as you can see that 31% and…

Eun Yang - Jefferies

multiply. I got it okay

David Arkowitz

I mean pricing is going to be different across the different customer segment so you need to keep that in mind but we don’t break out our revenue by the different customer segments.

Eun Yang - Jefferies

And also David you mentioned on the last call that there was about 25% adjustment or reduction from the whole sale acquisition cost to the net sales can you actually comment on what that adjustment is as of today?

David Arkowitz

So that actually ended up being 23%. That’s the gross to net sales adjustment unit that I talked about earlier but that ended up being 23% for the first quarter. That figure is 27% for the second quarter.

Eun Yang - Jefferies

Okay, thanks. And the last question, the fact that Feraheme has been on the market almost one year, we are coming up to one year, so I'm just wondering whether AMAG has planned to provide revenue guidance going forward at least starting in 2011?

David Arkowitz

This is David again. That’s something we are considering and talking about internally. Yes and you’re right. It's been actually a little bit more than a year that Feraheme has been out in the market.

Operator

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

Chris Raymond - Robert Baird

Thanks for taking the question. I'm just a little curious and confused about the inventory situation. As I recall, last quarter it was a $4 million difference, which and you didn't really see an absolute on a per gram basis inventory draw down, but it was on a week-to-week basis.

And in this instance, we saw an actual absolute gram draw down. I wonder if you can it seems a little odd. I know it's been a year now, but it's still early on and I don't think I've seen a scenario where you've seen a couple of orders in a row where you've seen essentially an inventory draw down. Can you talk about what's going on there? Was it just way overdone in Q4 or what's going on?

David Arkowitz

Chris, this is David speaking. Yes, you are correct. We ended the fourth quarter of last year at about 8800. We ended the first quarter of this year at about 8800. I'm talking grams that sitting with the wholesalers and distributors and we are, and we ended this quarter, the second quarter was about 8200. So you are right.

We’ve seen a draw down and I think its just a function of a new products and customer, the end provider purchasing patterns and the wholesalers getting comfortable with those purchasing patterns and in some cases reacting to it and now reaching a little bit more of a steady state and understanding how those patterns are evolving.

Chris with all that said, as you can appreciate we got a number of wholesalers and distributors out there, they each manage their businesses independently and separately and some tend to carry more inventory than others.

So there is some inherent volatility and variability in it. So, we expect that to move around more in the future as well.

Chris Raymond - Robert Baird

If I could sneak a follow-up in, on slide 13, I don't think you talked to, but you mentioned you've got one provider that's got 3.5 billion of inventory and is likely to return some of that. Should we expect that all of that would be returned or can you maybe give us a little bit of an idea of what to expect?

Gary Zieziula

Chris, this is Gary. The $3.5 million that remains in inventory would be a worse case scenario. And what we have observed recently is that there increase in utilization within this customer and so my expectation is that it would not be the full $3.5 million but it will be some portion of it depending on the utilization between now and the end of the year.

Brian Pereira

And Chris just to clarify. This is from the launch incentive program, this is not like we are not talking about wholesaler inventory here.

Operator

Your next question comes from Chris James from MLV. Your line is open.

Chris James - MLV

Guys, thanks for taking my questions and congratulations on your recent progress. Although the quarter-over-quarter increase in dialysis, I'm just referring to slide 11, the quarter-over-quarter increase in dialysis is only about 8%, which is small on a relative basis, it still represents a large portion of your iron utilization and probably will be for the near term in dialysis as you transition from hospital to hematology segment.

I just wanted to know sort of unfortunately the "winners" in this environment, in this new bundled environment, are going to be the larger dialysis units potentially because they can handle the patient buffer from the various undulations in reimbursement. Can you just help us understand how you're going to increase your penetration in the larger dialysis units?

Gary Zieziula

Chris, this is Gary, I would say that right now we are not thinking about the larger dialysis organizations in a significant way. And having said that we will continue to look at ways that we maybe able to work with one of the larger LDOs if it makes sense for AMAG and the LDO, typically they are very efficient in how they manage their patients, they are very large so they extract significant discount from vendors, pharmaceutical companies etcetera.

So their position in a study in a probably stronger way than many of the other dialysis organizations based on their size and their operational efficiency. So for us we really don't look at the LDO segment has been significant segment for us on going forward basis. It has never been part of our plan for 2010 and certainly if the opportunity presented itself for 2011 based on this new bundle, we would certainly seriously look at that.

So it will be something we look at but we are not considering this part of base business with a high probability recurrence.

Operator

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

Yaron Werber - Citi

Can you give us a sense in the past you have presented the sales by monthly, it’s been unbelievably useful but I don’t see that slide in this set can you give us a little bit of a sense of how sales have ramped up from April to May, June? And then I had a follow up question as well.

David Arkowitz

We are trying to move away from working at sales from end-to-end on a monthly basis just given the volatility and variability but Gary I think a little to it but, we are still seeing the majority of the sales coming in the last month of the quarter, so just some perspective on that in the first quarter we had about 58% of demand came in the last month in this quarter, second quarter we saw a little bit last, but still 55% of the total quarters demand coming in the last month, and again keep in mind the last month is a five week month so there is some natural increase but its also relating to the buying patterns of the end customers.

Yaron Werber - Citi

Is there anyway you can give us the break also in April and May then?

David Arkowitz

April, May in terms of the relative percentages?

Yaron Werber - Citi

Yeah

David Arkowitz

So April was about 19%, May was about 26% of the quarters demand these are all provider demand excluding the launch incentive program.

Yaron Werber - Citi

Okay

Brian Pereira

But having said that Yaron what we are trying to do is as we said on our first quarter call, we are trying to move away from this monthly breakdown and we are encouraging our analyst and investors to look at this on a quarter-over-quarter growth and that’s why Gary emphasized on slide 14, something that we had said last time around and our first quarter call as you may recall he has said that this was the last time we were going to present this on a monthly basis and that’s why we stepped away this time. And I think it makes sense for all of us collectively to look at it on a quarter-by-quarter basis given that as David said, with time, the third month of the quarter will even out with the earlier month other than the five week issue as our ASP become stable as our customers better understand their buying patterns.

Yaron Werber - Citi

And then, launch incentive program wise, I'm calculated there was maybe roughly a 10% decrease in price. This quarter relative to last quarter. am I in the ballpark?

Brian Pereira

No. the pricing was set when we sold those grams to those customers back in September. So, you may see changes because there may be slight differences in the respective prices of the different customers that are participating in launch incentive program. So as utilization changes in the quarter, there might be minor changes but there is no swings to that effect.

We did about 6000, about 6200 of launch intensive program Feraheme in Q2. so.

David Arkowitz

Yaron in case we didn’t say this earlier, all participants who participated in the launch incentive program, did not buy it at the same price. If we didn’t mention this fact earlier,

Brian Pereira

Yeah, that’s what I was trying to say. Sorry.

Operator

Your next question comes from Carol Werther from Summer Street Research partners. Your line is open

Carol Werther - Summer Street Research Partners

I am trying to understand if when you say that 70% of the provider demand is outside dialysis that doesn’t necessarily correspond with the amount of sales or the amount of grams that go to that sector does it or doesn’t?

Gary Zieziula

Well, it does correlate but not exactly. The pricing that we offer to the customers in the different segment obviously is different, so that will have an impact. We see you can’t correlate it precisely.

Carol Werther - Summer Street Research Partners

And then on slide 11, is that on the left hand Y axis that the amount of gram going to each one of these sectors?

Gary Zieziula

Yes. that’s correct.

Operator

Your next question comes from Mark Monane from Needham & Company. Your line is open.

Brian Huang - Needham & Company

It's Brian Huang for Mark Monane. Thanks for taking the question. Regarding 30% of demand home dialysis center I was wondering if how much of that is saving by the launch incentive?

Brian Pereira

This excludes the launch incentive program purchases.

Brian Huang - Needham & Company

And on side line you have some measures for the IV usage in dialysis and a long dialysis centers, I was wondering you have done any market research regarding the order line in the ---

Brian Pereira

We don’t track order line because order line is over the counter prescription and there are too permutations and combinations, too many products in the market in excess so probably one of the hardest thing to crack.

Operator

(Operator Instructions) Your next question comes from Joseph Schwartz from Leerink Swann. Your line is open.

Joseph Schwartz - Leerink Swann

Thank you. I was wondering if you could help us understand a little bit better as far as the different segments go that you outline on page 11 and 12. Why is hematology and hospital segments, why are they outpacing nephrology so strongly? What is penetration there and is all of that CKD or could there be other IDA usage?

Gary Zieziula

This is Gary, Joseph. Well, first f all let me comment on the growth in hospitals and hematology. As we've stated throughout the conference call, we really focused our energies in 2010 on these segments and the growth that we see is reassuring in terms of execution in the field. Now, with regard to penetration it varies. In the hospital segment, our penetration is only 8%, but if you recall from my prepared remarks the hospitals that we penetrated tended to be higher users of IV iron than other hospitals.

Likewise in hematology, I think our penetration there is about 25% of the hematology clinics, but the hematology clinics that we penetrated represent about 50% of the total IV iron in hematology. So the growth there is definitely outpacing the market and we are focusing our energies there to be able to help accelerate that growth even more.

Brian Pereira

And Joe to add that I think the question that you are trying to get to is why are we are seeing this growth and what’s happening out is the CKD, the answer is chronic kidney disease because traditionally the nephrologists didn’t use IV iron in their offices only the large practices and a very small minority of small practices use to treat patients with CKD in their practice.

They would send them to the Hem/Onc infusion center or to the hospital outpatient infusion center. So what Garry and his team are trying to do is practice educating nephrologists to bar testing for iron deficiency and then nephrologists have a choice ideally have more and more nephrologists start using Feraheme in the market and we are seeing a 60% growth in the nephrology offices who are doing that which means our initial efforts seem to have paid off but at the same time those who do not choose to treat CKD patients and send to the Hem/Onc clinics or hospitals in fusion out patient infusion centers to make sure that these CKD patients get treated with Feraheme and that’s why our focus on Hem/Onc clinic and hospital, our own research tells us that approximately half or more of patients in these two settings are indeed CKD patient and that’s why we have carefully made sure that when these patients order for it the Feraheme is available to them.

Gary Zieziula

And Joe just to add to the second portion of your question about the potential for usage outsider CKD we do not have any specific data on the percentage of patients who are given Feraheme for an indication outside of CKD. We are trying to look at that to understand it better I believe that would be a relatively small number and of course we go to great lengths to make sure that field force and those folks who work at AMAG within the customer facing role are only talking about Feraheme or CKD and iron deficient patients.

Joseph Schwartz - Leerink Swann

Great. That's very helpful. Could I just ask you as a follow-up, the additional rebate that you implemented late in the quarter in response to market conditions, can you give us some flavor about what led to that?

Gary Zieziula

Sure. Now this Gary and this is very dynamic market place and very are nimble as an organization and we wanted to listen to our customers and respond to market conditions. There were competitive pricing pressure at that time but we’re hearing a lot of feedback from our customers and we decided to implement the special rebate program in response to that information. So we thought it would the appropriate thing to do. As I said in my prepared comments, we do not believe that this will have a material adverse impact on provider demand for the third quarter.

Joseph Schwartz - Leerink Swann

And was that a dialysis provider?

Gary Zieziula

It was across a number of customer segments. But was not specific to dialysis.

Operator

(Operator Instructions) Your next question comes from Adam Cutler from Canaccord. Your line is open.

Adam Cutler - Canaccord

Hi. Thanks for taking the question. I understand your emphasis on shifting your customer mix away from dialysis and it looks like you're making good progress there, but I'm curious, you talked about how your dialysis customers are still assessing the impact of the bundle and their likely plan. But do you have a sense for how you think those customers are likely to act? And you noted that one of the variables is whether those customers view use of IV irons and Feraheme in particular to provide other cost savings potentially. Are there any pilots that you know of that are ongoing at any of those dialysis customers to try to assess that?

Gary Zieziula

To answer the first portion of your question, really at this point its impossible to say exactly what the dialysis customers will do with regard to bundle and how many will obtain and how many will phase in. Now I have heard some contacts that I have had with the folks that it ranges across the board. So, at this point they are going to be going through the analysis over the next couple of months and they’ll make the decision as they see fit for their organization. We are certainly willing and prepared to help them and provide information so that Feraheme is considered in the mix so to speak.

Now with regard to the second portion of your question, I didn’t hear the full question you asked about pilots.

Adam Cutler - Canaccord Adams

Yeah, so one of the reasons potentially obviously why under the bundle the dialysis providers may use IV irons may be even more IV irons and Feraheme for that matter is the possibility that IV irons and may be Ferheme more than other IV irons could provide other cost savings most likely less use of ESAs. And so I am just wondering that’s been the hypothesis for a long time, is there anybody looking at that to try to asses whether they view that to be the case and whether they may be an incentive even cost wise to use Feraheme under the bundle?

Brian Pereira

Well, Adam I think that’s a very cute question. Here is the answer to that many of our dialysis customers both those who bought in the launch incentive program as well as those who purchased Feraheme used it extensively in the years since launch have looked at their internal data with respect to the impact of Feraheme on maintaining hemoglobin on ESA utilization and on iron utilization. And they have been pleased with the results that there are large number of abstract that they have submitted to the American Society of nephrology since that data is still privileged to this point in time are confidential. We are not in a position to share it, but in terms of your question, yes, they have used this commercial availability of Feraheme as an opportunity to make their own internal judgment with respect to Feraheme.

To expand a bit on what Gary said I mean there are many variables now that will determine the role Feraheme will have in the bundle. One is whether facilities choose to obtain or phase in, second is what the proportion of their patients are going to be on home therapy where Feraheme has a big advantage. Third is how do they handle patients who just start dialysis where both the clinical and economic imperative is to replace IV iron as soon as possible so that they can better optimize the ESA requirement in these patients.

So each organization has its own evaluation method and our role is to work with them as they go through this thought process, and see how large or how small role we intend to play in the new environment. As I said earlier, and this is the comment in general, our intent is to maximize availability of Feraheme but at the same time to preserve Feraheme pricing in the broad market that we are planning to pursue in the months and years ahead.

Adam Cutler - Canaccord Adams

Okay, and I understand the point that it's hard to know what's going to happen with these dialysis customers and obviously we have to do our own analysis on our end but I imagine that it has to factor into your strategic plans and your plans in terms of sales and marketing just how much emphases to continue to put on dialysis customers versus customers outside of dialysis, so how do you go about assessing that given the information (inaudible)?

David Arkowitz

Well as you would recall early in the launch in the third and fourth quarter of last year we shared with you our plan to begin to expand the non dialysis use both in terms of penetration and in the use for customer so that our dependency on the potential pricing pressures in dialysis is less than less. And we have done, I would think a good job if you see in the first quarter after launch 30% of our demand was non dialysis we come to the second quarter of this year 70% of our demand is non dialysis in the non dialysis the discounting is far less than it is in dialysis, particularly in segments such as the hospital.

So our intent has always been to reduce our economy dependent on the dialysis segment that having being said we will careful evaluate our pricing and the extent to which we will play in dialysis, we do have a plan in place the reality is now we’ve got to see how our provider’s partners are going to evolve in terms of their own thinking and then there’ll be a meeting of the minds with some providers and there will not be a meeting of the mind with some providers but our over [arching] concept is to preserve Feraheme as the premium priced iron given all of its clinical operational benefits of the patients.

Operator

Your next question comes from Juan Sanchez from Ladenburg. Your line is open.

Juan Sanchez - Ladenburg

Actually, all my questions have been answered. Thank you very much.

Operator

Your next question comes Subhash Desai from Delaware Street Capital. Your line is open.

Subash Desai - Delaware Street Capital

Hi. I had a question for you. If you look at the new bundling regs, they changed the hemoglobin criteria from being a percentage of patients between ten and 12 to a percentage of patients that are above ten and percentage of patients below 12. How does that change the thinking of these dialysis clinics in terms of maintaining the Hb with a combination of iron and Epo in your minds?

Brian Pereira

Well Subash, you bring up a very important clinical question. Unfortunately, the body has variability and it’s not like a computer program that you can tightly control. Managing patients within a hemoglobin range of 10 to 12 is always a challenge particularly that when you realize that patients will overshoot above 10, above 12 and undershoot below 10. One of the things that one can always control is make sure that patients are always iron replete. Then, in patients who are completely iron replete, then the need to tinkle with ESA doses frequently become less.

Hopefully, that’s something that will be implemented more aggressively in the bundle.

Subash Desai - Delaware Street Capital

But as there's patients now, I'm assuming I've seen both in the clinic and by the nephrologist in their own practice?

Brian Pereira

Yeah, you got to be careful there because for the regs any patient with ESRD all the ESRD, all the drugs listed by ESRD are to be given only in the dialysis unit. For example, you can't have a patient come to nephrologist office and get a shot of iron. The nephrologists can not bill for that.

Subhash Desai - Delaware Street Capital

Okay. And then as a follow-up question, in terms of the nephrology offices that are administering iron, you mentioned that a lot of them send them out to hospitals for iron administration. Do you see now that after about a year that the nephrologists have the comfort to start administering Feraheme in their own offices going forward?

Gary Zieziula

This is Gary. Yes, we are seeing more nephrologists gain comfort administrating Feraheme in the office in fact as I mentioned earlier we are adding roughly 50 new customers a week.

Most hospitals in hematology clinics but there are also nephrology clinics as well. And I think once customers get accustomed to the convenience in use of Feraheme it becomes very easy for them.

So, modest product on the market for about a year reimbursement is not much a concern if it was it launch. A more nephrologists are comfortable with the concept of administrating Feraheme in the office, and we will continue to try to bifurcate for that going forward.

Subhash Desai - Delaware Street Capital

Okay. And a final question, in terms of the imaging study, when are the data due for the imaging study and what can we expect going forward?

Brian Pereira

Well you know that the study is incomplete. Our team is in discussions with the agency we will release the data at the appropriate radiology, scientific conferences, in terms of release the data and in terms of what's the path forward. This were to be to a large extent be dependent on the final analysis of the data. And are there tractions for the agency as to what the agency expectations are with respect to the registration path for Feraheme as an imaging agent. Concurrently we are doing our own business analytics to see whether the potential, the registrational path and the expenses associated with it is justified by the size of the market.

Subhash Desai - Delaware Street Capital

Does that imply that you guys are not convinced based on what?

Brian Pereira

We haven’t done the analysis yet and we are still in discussions with agency as to what’s the analysis they would like to see and the permutations and combinations of the registration path.

Operator

Your last question comes from Eun Yang from Jeffries. Your line is open.

Eun Yang - Jeffries

Well taking the follow up question. In the second quarter has the pre approval Feraheme inventory depleted, so should we assume the gross margin 80% going forward?

David Arkowitz

So it's still has not yet depleted but the benefit in Q2 was lesser benefit than what we had in Q1, so it's working its way down. We are getting close to having depleted but it's not fully depleted at this point.

Operator

There are no further questions at this time.

Brian Pereira

Thank you for joining our call and we look forward to seeing you at investor conferences in the upcoming months have a wonderful rest of the summer.

Operator

This concludes today's conference you may now disconnect.

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Source: AMAG Pharmaceuticals, Inc. Q2 2010 Earnings Call Transcript
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