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Avanir Pharmaceuticals Inc. (NASDAQ:AVNR)

Q2 2014 Earnings Conference Call

May 6, 2014 4:30 PM ET

Executives

Ian Clements – Head, IR

Keith Katkin – President and CEO

Christine Ocampo – VP, Finance

Rohan Palekar – SVP and Chief Commercial Officer

Joao Siffert – SVP, R&D and Chief Medical Officer

Analysts

Charles Duncan – Piper Jaffray

Jason Butler – JMP Securities

Thomas Wei – Jefferies

Ritu Baral – Canaccord

Carol Werther – Summer Street

Operator

Good day, ladies and gentlemen and welcome to the Second Quarter 2014 Avanir Pharmaceuticals Earnings Conference Call. My name is Philip and I’ll be your operator for today. At this time, all participants are now in a listen-only mode. Later, we will be facilitating a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn your conference over to your host for today, Dr. Ian Clements, Head of Investor Relations. Please proceed, sir.

Ian Clements

Thanks, Philip and, good afternoon everybody. I’d like to welcome you to our conference call to discuss our financial and operating results for the fiscal 2014 second quarter.

To discuss the results, commercial and clinical initiatives, I’m joined today by several members of our leadership team. Our President and CEO, Keith Katkin, our Vice President of Finance, Christine Ocampo, our Chief Commercial Officer, Rohan Palekar and Dr. Joao Siffert, Chief Medical Officer. For the Q&A portion of today’s call, we’ll also be joined by Greg Flesher, our Chief Business Officer.

During the course of this conference call, we’ll be making certain forward-looking statements. These statements are subject to numerous risks and uncertainties and reflect our current expectations and judgments. Examples of these forward-looking statements include statements relating to our expectations for NUEDEXTA sales and revenue growth including market opportunity, future expense levels, the timing and success of future development of AVP-923 for other indications, the potential approval of NUEDEXTA in new markets, the timing and success of the development of AVP-786 and AVP-825.

Actual results could vary materially from the results anticipated by these statements. Investors should read the risk factors set forth in our Form 10-K for the year ended September 30, 2013 and the periodic reports filed with the Securities and Exchange Commission.

Before handing over to Keith, I’d like to remind everyone that we’ll be presenting two-healthcare conferences in the next couple of weeks. On Thursday, this week, we will be in attendance at the Deutsche Bank 39th Annual Healthcare Conference and then Tuesday of next week, we’ll also be presenting at the Bank of America Healthcare Conference.

With that said, I’ll turn the call over to Keith.

Keith Katkin

Thanks Ian, and my thanks to each you for joining us on our call today. Last week, we announced great news regarding the positive outcome of our ANDA litigation. With this opinion rendered, we now have 12 years of exclusivity on NUEDEXTA, which is a $100 million product and growing substantially with no existing or currently planned competition. This is an extraordinary opportunity within the biotech arena.

In addition, taking the annualized $100 million run rate of NUEDEXTA which would be quarter nearly 50% over the prior year, the value of the future cash flows of NUEDEXTA far exceeds our current stock price and market cap.

With clarity provided, we’re taking a number of steps to ensure the continued growth of NUEDEXTA and solidifying Avanir’s position as a leading CNS company.

First, we’re going to heavily invest in NUEDEXTA, both in terms of commercial and research and development, in order to maximize the revenue potential given our 12-year runway. Second, we’re going to continue investment in the rich pharmacology of our dextromethorphan franchise, focusing in on conditions of high unmet need and large revenue opportunities, with multiple value creating milestones coming in the next eight months.

And finally, we plan on being even more aggressive in exploring in-licensing and transformational acquisition opportunities to leverage our commercial and research and development infrastructures. As well as the great news regarding the quarter victory, we have some great initiatives to report on today.

Rohan, will talk about our sales force investment designed to maximize the revenue in the institutional setting and Joao has great news about our agitation Phase II study, where we have just enrolled a 200-patient into that study.

I’ll now turn the call over to Christine, to address our financial results. Christine?

Christine Ocampo

Thanks, Keith. And good afternoon everyone. In addition to the financial results summarized in the press release issued earlier this afternoon, you can find additional information including full-year information and our upcoming Form 10-Q, which will be filed this week.

We reported total net revenue for the second fiscal quarter of 2014 of $26.9 million, as compared to $17.4 million for the comparable period in fiscal 2013. A year-over-year growth of approximately 55%.

Net revenues were comprised of NUEDEXTA product revenue, revenue generated from our co-promote agreement with Merck, and revenue generated from our license agreement with GSK or Abreva. As of the April 2014 expiry of the Abreva patent, we will no longer be recognizing revenue related to Abreva. The third fiscal quarter will be the last quarter where Abreva revenues will be recognized.

For the second fiscal quarter of 2014, we reported record net product sales of NUEDEXTA of $24.4 million. As of this quarter, we will no longer be reporting gross revenues and gross to net. This change is based on the SEC’s preference not to include non-GAAP financial information in our external disclosures, and it is offered consistent with industry practices.

Wholesale inventories as of March 31, 2014 were estimated to be approximately 4 weeks. Gross margin on the sales of NUEDEXTA for the second fiscal quarter of 2014 was 94.4%. R&D expenses were $9.9 million for the quarter ended March 31, 2014, compared with $8.9 million for the same period in the prior year.

In the second fiscal quarter of 2014, R&D spend was primarily attributed to costs associated with our multiple ongoing clinical studies, medical affairs, and AVP-825 approval.

Selling, general, and administrative expenses of $27.5 million for the fiscal second quarter of 2014 increased from $23 million from the corresponding period of the prior year. Sales and marketing expenses for the second quarter were $18.9 million as compared to $16.1 million for the corresponding period of the prior year. The increase was primarily attributable to increased personnel costs, marketing expenses and general corporate cost.

Total operating expenses, excluding cost of goods sold, for the quarter were $37.4 million compared with $31.9 million for the comparable quarter in fiscal 2013. For the three months ended March 31, 2014 and 2013, the company recorded $2 million and $1.8 million respectively of stock-based compensation expense.

Cash used in operations for the quarter ended March 31, 2014 was $15.7 million. Net loss for the second quarter of fiscal 2014 was $12.7 million or $0.08 per share, compared with net loss of $16.5 million or $0.12 per share for the same quarter in fiscal 2013.

As of March 31, 2014, Avanir had total cash, cash equivalents, and restricted investments of $56.5 million. In addition, beginning January 1, 2014, we commenced paying down our debt with a principal payment of $2.7 million during the quarter.

Now turning to operating expense guidance. We continue to expect that our operating expenses will be in the range of $140 million to $150 million, excluding cost of sales and non-cash expenses such as FAS 123 and depreciation. In addition, please note although our P&L format includes cost of product sales and our operating expenses, we do not include cost of product sales in our expense guidance.

R&D expenses are expected to be approximately $40 million to $44 million, including all development programs as well as our medical affairs organization. And SG&A expense is expected to be approximately $100 million to $106 million.

And now with that summary of our financial results, I’ll turn the call over to Rohan. Rohan?

Rohan Palekar

Thanks, Christine. The NUEDEXTA franchise continues to grow as measured by increasing prescription in both segments of our business, growth in the number of physician prescribing NUDEXTA and the number of nursing homes using NUDEXTA for their PDA patients.

Three years post launch, we have established a solid foundation that will allow us to continue to grow the business in the upcoming quarters as we expand our team and continue to invest additional resources into the business.

Net NUDEXTA revenue grew 48% this quarter versus the same quarter in the previous year, a significant growth for a brand in its third year post launch. Growth was 5% this quarter versus the previous quarter in line with our expectations.

Growth was impacted due to three reasons this quarter. First, we saw managed care syringes (ph) that are typically observed in the first calendar quarter as new formularies are set and many patients have to renew their prior authorizations.

Additionally, three Part D Medicare peers made adverse formulary changes for NUDEXTA which were implemented in the first calendar quarter.

Second, the unseasonable winter weather across the Midwest and Eastern Seaboard impacted business as representatives were unable to work for many days as well as physicians and patients were not in the office.

And finally, we experienced higher than expected turnover in our sales force, which we believe was due to the ANDA uncertainty.

We’re now priced many of these issues and focused on growing the business for the remainder of calendar 2014 and 2015. We experienced three of our top four prescription weeks ever post February as the weather issues subsided. And March weekly volume was up over 5% versus the same period in Feb.

We’re actively working with the three plans that made adverse changes to their Medicare Part D formularies to improve patient access. And in April, we had success on improving patient access with two significant Medicare Part D plans.

In addition, we are now planning to add 80 representatives to the institutional segment later this summer to supplement the team of 80 representatives we already have. This expansion will allow us to double our reach of nursing home and more importantly increase our reach in the high target homes.

The new hires were primarily focused on calling on homes with the physicians.

Based on the business lift we have seen from past expansions and confidence that the added resources will accelerate our institutional business with growth starting in calendar 2015, and we believe the expansion will pay for itself in the fiscal 2015 time period.

To remind you, our penetration of the moderate to severe PBA patients in the institutional segment is only 10% suggesting ample growth potential by doubling the size of the sales team.

Now, with 12 years of exclusivity, we are also revisiting the opportunity to expand the size of our retail team as well as funding other high ROI activities such as data generation and direct-to-patient activities to further support the PBA business.

Finally, an update on JANUVIA sales in the institutional setting. This is our second quarter of promoting JANUVIA and we are starting to see good traction as physicians and pharmacists are identifying nursing home residents will be a benefit from JANUVIA.

Revenue from the, co-promote this quarter was $2.1 million up 54% from the previous quarter. The sales numbers are in-line with our expectations and we anticipate that the business will continue to grow in the upcoming months.

JANUVIA offers a unique benefit for nursing home residents relative to sulfone urea’s (ph), and given the use of sulfone urea’s (ph) to manage diabetes in the nursing home, we think that is more business to be had. Importantly, this business has not reduced the number of calls we are making on NUEDEXTA.

In summary, with the 12 years we have now in front of us, we are optimistic about the future of the PBA franchise. We have built a strong foundation and with the low penetration we still have, we expect to see continued growth in the upcoming quarters.

I will now turn it over to Joao to discuss our clinical programs. Joao?

Joao Siffert

Yes, thanks Rohan. First, I wanted to echo everyone’s enthusiasm and I’m looking forward to supporting our PBA business for the long-run.

So, in parallel to the commercial expansion, we’re also investing in the medical affairs front, enhancing the medical support for PBA across neurological specialties, but with increased focus on dementia, TBI and the stroke postulations.

The specific activity though, believe could potential help our efforts in the PBA business, is the PRISM II which is the open label study assessing NUEDEXTA for PBA secondary to stroke, dementia and TBI. The last patient was enrolled into the dementia cohort on April 23, with 129 patients in total.

The TBI and stroke cohorts are still enrolling. We expect to be able to present early results at a meeting over this summer and we’re looking forward to sharing these results when they are available.

Thus far, the safety data is consistent with the safety profile we observed during the development and over the past several years in the marketplace.

Now, turning on to our pipeline, the medicine used with respect to our Agitation Phase II program, as you heard from Keith, we’re delighted to see that we’ve enrolled the 200 patients, which was our original enrollment target. But due to high investigator interest, we’re planning on keeping enrollment for a few more weeks to accommodate all the patients that are already scheduled to be seen.

This plan will anticipate that we will provide, populate and top-line data from the study in the second half of the year. As a reminder, this is 10-week, double blind placebo controlled study with 35 site study in the United States. This study has two treatment arms, AVP-923 or placebo and includes the dose escalation from the 20-10 to 30-10 dose.

We planned the studies that we would have to 90% power to show a 2.5 difference versus placebo in the NPI agitation aggression domain and this has changed from Base Kline (ph), which is the primary endpoint. However, we believe that even a lower treatment difference is likely to be clinically meaningful and would be a potential breakthrough in this area.

If the efficacy signal is clear and consistent across key endpoints, even the lower treatment difference could support a well-controlled Phase III study. In other words, our definition to success will be the ability to proceed with our Phase III study.

Now, going to the AVP-786, which is the deuterium modified dextromethorphan program. So, next up, we will file the IND followed by the treatment resistant major depression disorder Phase II trials, which is scheduled to start in this calendar year.

The treatment resistant depression study like the Alzheimer’s disease have stationed study has been designed to minimize placebo effect and to ensure careful enrollment of study subjects by highly qualified study sites. Patient selection would be vetted by investigators and also by independent experts to ensure only qualified patients enroll.

The study will have two treatment arms and it will compare AVP-786 again, dose escalation with the placebo over a 10-week period using standard endpoints for depression trials.

Now, on to our next pipeline program, which is AVP-825, which is the migraine product. The NDA was filed in January, on January 27, and the acceptance was received late in March. Our PDUFA date is set for November 26, 2014. This is a major milestone for Avanir and once AVP-825 is approved, we will transform Avanir in for multi-product commercial organization.

As a reminder, the NDA has been filed under 505 (b) (2) path which included data from one pivotal Phase III trial for acute treatment of migraine and is also supported by data from Phase II placebo-controlled clinical trial for acute treatment of migraine as well as two pharmacokinetic studies, one of which compared AVP-825 pharmacokinetics with the other sumatriptan formulations.

The Phase III study is being written up for publication and the other studies have already been published. Overall, the submission includes safety data from 222 subjects who received AVP-825 in clinical trials and references from the extensive clinical use of sumatriptan globally over the past 20 years. Our migraine medical affairs team is now established both in headquarters in field and the field, and has begun collaborations with key migraine experts in support of pre-launch activities related to migraine education.

I will now turn the call back over to Keith, for some closing comments. Keith?

Keith Katkin

Thanks Joao. With that great update from the team, I’d like to close the call reiterating our plan and highlighting some of our upcoming key milestones.

Our focus would be to solidify our position as a leading CNS company by first, ensuring the continued growth of NUEDEXTA, second, investing heavily in NUEDEXTA, both in terms of commercial and research and development in order to maximize revenue potential given our 12-year runway.

Third, while continue investment in the Rich Pharmacology of our dextromethorphan franchise, focusing on conditions of high unmet need and large revenue opportunities and with multiple value creating milestones coming in the next 8 months. And finally, we’ll continue to explore – aggressively explore in-licensing and transformational acquisition opportunities to leverage our infrastructure.

In terms of milestones between now and the end of the year, we expect to have continued growth in our NUEDEXTA business and our co-promoted JANUVIA in the institutional setting. We expect to have PRISM up the look, an interim look at our PRISM data over the summer focusing on patients with PBA and dementia.

We’ll have a Phase II proof of concept data read-outs in both our Agitation and Alzheimer’s study as well as our levodopa-induced dyskinesia study in Parkinson patients. We’ll also have our filing of our IND of AVP-786 followed by a Phase II study, and the first patient enrolled for 786 in treatment resistant major depressive disorder.

And finally we’ll have the PDUFA date for AVP-825 in late November, followed by an expected launch in the first half of calendar 2015.

With that summary of the milestones and catalyst, I’d now like to open up the call for questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from the line of Charles Duncan with Piper Jaffray.

Charles Duncan – Piper Jaffray

Hi guys, taking my questions. Congrats on the recent news and clearly a lot going on this year. Keith, my question is related to I guess the sales force, Rohan mentioned that there is some turnover in the sales force that kind of impacted the first quarter. I’m wondering if you could provide a little more color on that.

Keith Katkin

Sure, Charles, I’ll let Rohan go into more detail and thanks for the comments on the litigation, we’re very excited. Rohan?

Rohan Palekar

Hi Charles, thanks for your questions. So, this quarter, I think what happened is given the uncertainty and the overhang with ANDA, there was some angst in the sales force, and we lost about 10% of our long-term care sales force, which historically we’ve never had that issue.

And given the highly promotionally sensitive business we have, when you have an open territory, it takes a hit. Now, the good thing is we were able to, in the month of March, pretty much fill most of these physicians. And we’ve got everyone to saw in training and up and ready to go. So it takes a little bit of time now to rebuild all those relationships with physicians.

Charles Duncan – Piper Jaffray

Okay. Just coming, you mentioned possibly doubling that sales force heading about 80 reps if I heard you correct. Do you anticipate that to impact the productivity of the current sales force at least from an adverse perspective for, do you think that you’ll continue to carry through with momentum with the added sales?

Rohan Palekar

I think there was always expanded at some level of disruption which takes place, because you got to re-dig our territories. And so, there will be a little bit of impact. The way we are setting up this up is, these new hires will be really targeting homes which we do not get to.

So, the reason we are really expanding is, today we would get to maybe about a quarter to home, and so there is a lot of homes we don’t get to. These are nursing facilities which we don’t have a relationship with. And in that instance there will not be a lot of disruption. But any time you change the sales force and the territories that is a little bit of a hit.

In the long run, I think it’s a right decision because it allows us to capitalize and get to more homes and drive the PBA business.

Charles Duncan – Piper Jaffray

Okay. And then my last question, I’ll hop back in the queue is, regarding clinical value of NUEDEXTA and possibly the pricing model around the clinical value. I guess with this recent litigation behind you, it seems like you could take another look at that. What’s your thought about that and is there – are there any plans to do price increases?

Rohan Palekar

I don’t know, we don’t comment on our pricing strategy. But clearly it is something we always evaluate and we take a hard luck, is, what if the opportunities for taking additional price.

One of the considerations in taking any price increase is to look at what could happen from specialty hearing, given that over 50% of our business comes from Medicare Part D. We always have to take that into account to make sure that access is not impacted. But clearly, with the recent news, it is something we are taking a quick – a hard look at whether there is opportunities here on price.

Charles Duncan – Piper Jaffray

Okay. Thanks for the added color. And again, congrats on the recent news.

Keith Katkin

Great. Thanks Charles.

Operator

Your next question comes from the line of Jason Butler, JMP Securities. Please proceed.

Jason Butler – JMP Securities

Hi, thanks for taking the questions and congrats also on the ANDA litigation end. First question on NUEDEXTA and PBA, given the headwinds you saw in fiscal second quarter in terms of reimbursement and the sales force. Do you anticipate a re-acceleration in growth in the second half of the fiscal year?

Keith Katkin

Jason, thanks for your question, it’s Rohan. I am anticipating and we are optimistic we will see a renewed growth. But one of the things is, as you can imagine, some of these managed care plans, we are already working through. We’ve got some wins this quarter, but it takes a while until it translates into increased scripts.

As I mentioned in the earlier response we have backfilled all the vacancies, so that issue has been addressed. But it takes about a quarter to two quarters, until a new employee is fully productive. And I do think the expansion which we will be doing later this summer, of the additional reps in the institutional setting is really going to set us up for long-term growth. So, I’m pretty bullish about what we can expect moving forward.

Jason Butler – JMP Securities

Okay, great. And then, just a couple of quick housekeeping questions. Just in terms of the gross to net, can you comment on whether there has been any significant changes in the gross to net, quarter-over-quarter or if there are any changes in the future that whether you would update us on just the trends per say?

Keith Katkin

Yes, hi, Jason, thanks again for your questions. So, regarding gross to net, obviously we’ve discussed the rational for the change. So, we’re going to move away from making any commentary on gross to net. So you shouldn’t expect to see color on a going forward basis.

We recognized that some people may want a little bit of color for this particular quarter. And so, the gross to net for this particular quarter was slightly below the range that we guided everyone to, of between 24% and 27% and so, slightly below that range.

Jason Butler – JMP Securities

Okay, great. And then, last question, you talked about in the past the need, if you continued with NUEDEXTA pipeline development and other indications, you would need additional funds to do that. Can you talk about what your current view on that is, what your current view on your cash position of it is, and when and if you would need to raise additional funds?

Keith Katkin

Sure, absolutely. And let me start with our current view on our stock price. And I can tell you that we are disappointed in our stock price and the reaction, especially taking into account when you look at NUEDEXTA, you consider the fact that it’s $100 million run rate growing at 50% year-over-year, just looking at the present value of the future cash flow of NUEDEXTA would suggest the stock price that’s much higher than where our stock price is now.

So, given that and given our current balance sheet of almost $60 million in cash, we’re not in any rush to do any TARP type of large financing. That cash is on our balance sheet, would be significant enough to fund us to many of the upcoming milestones that we talked about here on today’s call.

That said, should we see appropriate reaction in the stock price, we would be opportunistic about raises in the future, and whether that comes in the form of straight debt, whether it’s a convertible note or whether it’s equity through an APM or through a structured deal. That remains to be seen. But we are in a very fortunate position that we have access to many different types of capital. But these stock prices were not in any major rush to do that.

Jason Butler – JMP Securities

Thanks for taking the questions.

Keith Katkin

Appreciate it. Thanks Jason.

Operator

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

Thomas Wei – Jefferies

Thanks. I wanted to ask a couple of things just on the agitation and Alzheimer’s study. I guess, unlike pain, this is something that’s a little bit more of a behavioral disturbance in at least presentation wise, seems more closely related to PBA.

Could you just help me of having over simplification of some very complicated neurology here or is it something that you feel is closely related to PBA in terms of pathways affected, and the ability to extrapolate from one setting to the other?

Keith Katkin

Thanks Thomas. I appreciate the question, and I’ll turn it over to Joao to answer that question.

Joao Siffert

Hi Thomas, I do think this is actually a good way to simplify it. In fact, if you look at some of the patients who have dementia, who have PBA, some of these patients also have symptoms of agitation. So there are not always overlapping and they’re not superimpose for sure. They’re distinct entities but they often have – they often coexist in the same patient.

So, I’m not sure if this helps to answer your question but I think this is generally a good analogy. It is the, if you look at Agitation as a sort of a destruction of the controls of behavior, you could view this as PBA analogies but the disruption of the controls of the emotional expression for crying and laughing, which was – will be the definition of PBA.

Here the agitation behaviors were different pacing, belligerence difficult to care for etcetera. So, but it does occur in some settings that are common to PBA and there can be deals simplifying and more of the behavioral, neurological behavioral or nurse psychiatric disturbances associated with dementia. I think that’s a good way to generalize it.

Thomas Wei – Jefferies

Do you know how much of NUEDEXTA is off label use, beyond PBA?

Keith Katkin

No, we don’t have any insights into that Thomas, but obviously we do have a high percent of our business which is prior-off for PBA. So, while we do expect that they, a large portion of our business is likely PBA.

Thomas Wei – Jefferies

And then, just on the sales force expansion if I remember correctly. The last one that you did was in mid-2013 and I think it was from 55 to 80 reps. Can you just remind us, how much bigger of a footprint did that provide you at that time relative to what you were proposing to us now?

Rohan Palekar

So, Thomas, this is Rohan. So, when we made that expansion in long-term care, at the same time we split our sales forces from the retail and into an institutive segment. So, prior to that while there were 55 reps in the long-term care setting, over 50% to 60% of the retail representative’s time was being spent in long-term care.

So, when you really expanded last summer, there was really from a FTE perspective, there was no expansion. So all we did is, we increased the size of the institutional force by making them 100% focused on that.

This expansion truly expands the footprint, so as I mentioned, it will take the reach in nursing homes up from about a third of the homes to double that and close to that 70% of the homes would be covered, 70% of the beds will be covered.

Thomas Wei – Jefferies

Great. That’s very helpful. Thank you very much.

Keith Katkin

Thanks Thomas.

Operator

All right. Our next question comes from the line of Ritu Baral from Canaccord. Please proceed.

Ritu Baral – Canaccord

Hi guys, thanks for taking the question. You mentioned the potential for retail expansion in the future. Can you give us a few more parameters around that, how big you’re thinking about expanding the retail force and what levers will determine when you do that?

Rohan Palekar

Hi Ritu, it’s Rohan. Thanks for the question. So, with the 12 years now we have on exclusivity with NUEDEXTA, we are re-looking how much more we want to invest to expand the retail presence. So, as you know, we have a pretty low penetration of physicians with the existing 72 representatives we have.

And ever since we split the retail sales force about 7 to 8 months ago, we have seen a pretty dramatic growth in the retail business. So, we think by adding additional resources, we can actually accelerate the growth in the retail space.

The original thinking was, we would wait to do that once we have the AVP-825 launch. And what we had mentioned at that point was, when we have the two products, we would expand the sales force somewhere in between 150 to 225 people.

Now, with the news last week, we are revisiting that, should we actually stop accelerating that expansion in retail just on NUEDEXTA and then in due course when 825 comes and gets approved, we expanded to the absolute final number. The beauty of doing that, it really sets us up for the 825 launch, increasing our footprint. Hopefully that gives you perspective.

Ritu Baral – Canaccord

Well, what percentage would you sort of use to prime in the market to what percentage of that increases the projected increase, like 25-75, 50-50?

Rohan Palekar

So, I think the – when you look at the overlap, especially in the neurology space, there is incredibly high overlap in neurology between the PBA physicians we would call on and the 825. Right, so in that case the ratio is much higher, right.

So, obviously, clearly before approval we will not talk about the drug, there will be no pre-approval discussions. But what they can do is profile the physician. In primary care, some of the physicians that’s going to be overlapped, but and then the psychiatry market, those expansions will purely be focused in NUEDEXTA.

So, it kind of comes down to the specialty on how we will set it up. But I could see us easily adding reps who will help drive the NUEDEXTA business in the short-term by easily increasing our sales force by over 50%.

Ritu Baral – Canaccord

Got it. And going to the agitation trial, Joao, you mentioned that the trial is powered at 90% detected difference of 2.5 on the scale but that lower deltas could still be clinically meaningful, what is that level of clinical meaningfulness, like what’s the minimum you would need to show for it to be clinically meaningful to a patient or to a caregiver?

Joao Siffert

Yes, thanks Ritu. There is, the definition of the clinically meaningfully is obviously not done in isolation, it’s not just about a single point in the scale. Although we think even half is much of delta between even placebo could consider – could be considered clinically meaningful.

But the clinical meaningfulness comes also from looking at other endpoints such as the global impression of change and other measures within the trial and caregivers strain, even within the NPI itself, other actually domains of the NPI. If these are parallel, the improvements, these qualitatively go in the same direction, data will give us a much stronger sense of the clinical meaningfulness of the effect.

So, we’ll both of the primary endpoints that also has a variety of secondary influence which are generally also assessing the impact and the ramifications of the agitation behaviors. And those points generally in the same direction, that could be make a picture of very compelling.

And I think, we both internally and also through the expert advisors, we could clearly identify the treatment effect, less than 2.5 that is too clinically meaningful. And that would justify proceeding with Phase III development which is ultimately how we’ll gage the clutch with the strap.

Ritu Baral – Canaccord

Got it. But would something like less than 1 be largely meaningless or is it even lower than that?

Joao Siffert

I bet they’ll be speculating. I think we’ll look at the totality of the data and then we’ll be able to make the clinical assessment.

Ritu Baral – Canaccord

Got it. And any new details on the design of the depression study?

Joao Siffert

We don’t disclose the specifics of the design of that to say that. We’re doing all the things that we think are important for a successful trial, one starting by selecting very carefully in all of the sites, high speeds and highly experienced and bedded by multiple ways. We have a variety of discussions of our site selection. So we’re very – we have already completed site selection and we’re very happy about the sites that have signed up for the study.

We’re looking at patient selection too which is critical especially in depression trials and we’re both bedding them very carefully internally but also we’re getting external bedding. So it’s the second layer of bedding if the patient is included in the trail to make sure that they would be qualified for the study.

And then, we’re doing something we have actually done for the agitation trial which is selecting patients based on one criteria, which is obviously an accepted criteria of disease and severity. But the measurements of the endpoint use a different scale. So that avoids with our rate inflation and trial entry because often times when you’re trying to get through the eligibility criteria, there is magically patients kind of hold from a certain threshold.

And then they get followed during the trial and then magically the score is kind of lower or regress to a mean level. So, this is another way to try and minimize some bias and placebo effect on trials. So, all of these combined are being done to really try to run a very clean and sort of goal conductive trials.

Ritu Baral – Canaccord

Got it. Thanks for taking the questions.

Keith Katkin

Thanks Ritu.

Joao Siffert

Thank you.

Operator

Our next question comes from the line of Carol Werther from Summer Street. Please proceed.

Carol Werther – Summer Street

Thanks for taking my questions. So, I’m just trying to understand the cash used in operations for this quarter versus last quarter. So, is the increase in cash used related to pretty much reimbursement with a donut hole (ph)?

Christine Ocampo

No, it’s not specifically related to reimbursement for the donut hole. And we did, the difference is there was an increase quarter to quarter, it was about $15 million this quarter, about $10 million last quarter. And it’s mostly really just pay-down as accounts payable. And then also offset by an increase in accounts receivable but not specifically to donut hole.

Carol Werther – Summer Street

Okay. And so, is there a run-rate I should be using going forward?

Keith Katkin

I think the best run-rate to use Carol would be, whatever your revenue projections are less our expense guidance of $140 million to $150 million for the year.

Carol Werther – Summer Street

Okay. Thanks.

Keith Katkin

Thanks Carol.

Christine Ocampo

Thanks Carol.

Operator

Ladies and gentlemen, that concludes today’s question-and-answer session in today’s call. I’d now like to turn it back over to Ian Clements, for closing remarks.

Ian Clements

Thanks Philip. And thanks everyone for joining us today and your continued interest in Avanir. We look forward to continuing to provide future updates on the progress that we’re making at upcoming conferences and also on future calls. In the meantime if you do have any further questions or if you’d like to discuss any portion of today’s results, you can call me in the investor relations department on 949-389-6737. Thank you very much again.

Operator

And ladies and gentlemen, that concludes today’s conference. Thank you all for your participation. You may all now disconnect. Have a wonderful day.

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Source: Avanir Pharmaceuticals' (AVNR) CEO Keith Katkin on Q2 2014 Results - Earnings Call Transcript
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