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Executives

Amy Sullivan – VP, Corporate Communications & IR

Brian Pereira – President and CEO

Gary Zieziula – EVP and Chief Commercial Officer

David Arkowitz – EVP, CFO and Chief Business Officer

Analysts

Yaron Werber – Citi

Geoff Meacham – JP Morgan

Mark Monane – Needham & Company

Marshall Urist – Morgan Stanley

Chris Raymond – Robert W. Baird

Eun Yang – Jefferies

Chris James – MLV

Joseph Schwartz – Leerink Swann

Carol Werther – Summer Street

Jason Aryeh – JALAA Equities, LP

AMAG Pharmaceuticals, Inc. (AMAG) Q3 2010 Earnings Call Transcript October 28, 2010 5:30 PM ET

Operator

Good afternoon. My name is Simon and I will be your conference operator today. At this time, I would like to welcome everyone to the AMAG Pharmaceuticals Third 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, Simon, and thank you to those of you who have joined us on the call. I would like to remind everyone that we are using a PowerPoint presentation to support our discussion today and the length of the webcast of the presentation is available on the Investors section of our website at www.amagpharma.com.

This presentation will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For a full list of risks and uncertainties associated with our business, please refer to our filings with the SEC, including our 2009 10-K and our most recent 10-Q for the three months ended June 30th, 2010.

On Slide 3, you will see the agenda for our call, beginning with our President and Chief Executive Officer, Brian Pereira, who will present brief introductory comments and provide an update on the post-marketing safety profile for Feraheme, as well as the status of our interactions with the FDA. Gary Zieziula, our 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 the restructuring that we announced today. And Brian will close the prepared remarks for the call before we open the floor for 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. I'll begin on Slide 5. The third quarter was a challenging period. We are disappointed with the decline in Feraheme revenues and the decrease in overall demand from the second quarter. Gary will provide greater details on our quarterly sales performance in a moment. But at a high level, sales in dialysis have declined faster than we can grow the non-dialysis CKD business and sales were affected by safety concerns.

Safety is our number one priority and our obligation to patients and the professionals who treat them comes first. Slide 6 outlines the post-marketing safety profile of Feraheme. Of the estimated more than 155,000 patient exposures through October 4th, 2010 in the post-marketing environment, 146 cases of serious adverse events have been reported, which is an estimated per exposure reporting rate of less than 0.1%. These 146 cases include all serious adverse event reports, irrespective of causality and include 10 deaths in patients exposed to Feraheme.

As a reminder, the per patient serious adverse event rate reported in the U.S. package insert is 0.2%, all of which were considered drug related. While we believe the estimated reporting rate of serious adverse events reported by exposure in the post-market environment is consistent with the per patient serious adverse event rate contained in the U.S. package insert, life-threatening and fatal events, including hypersensitivity and cardiac events, have been reported after Feraheme administration.

We estimate that 155,000 doses of Feraheme have been administered to patients. That estimate is conservative as we have assumed that only 70% (inaudible) since launch has been administered to patients. It's important to remember that as with any newly marketed drug, the safety profile of Feraheme has and will continue to evolve as more patients are exposed to Feraheme.

That said, moving to Slide 7, Feraheme was added to the FDA DARRTS list for potential serious cardiac disorders. We requested a meeting with the FDA to discuss the DARRTS listing, which took place in late September. We are currently in discussion with the FDA concerning label changes. The updated label will include serious adverse events observed in the post-marketing environment. Additional label changes that are the subject of ongoing discussion include, among other things, a boxed warning to highlight risks observed in the post-marketing environment and an extension of the observation period following Feraheme administration.

I will now turn the call over to Gary for a review of the commercialization of Feraheme.

Gary Zieziula

Thank you, Brian. I'll begin my remarks on Slide 9. As Brian mentioned, the third quarter was a challenging period for us. We had $15.1 million in Feraheme net product revenues, which is $900,000 lower than the second quarter. These results are disappointing to us. Revenues for the quarter include $2 million in previously deferred product revenues related to our launch incentive program, which is actual Feraheme utilization by our customers as reported to AMAG.

There were several factors that contributed to the decline in sales in the third quarter. With a bundle just around the corner, we began to see our sales increase in the dialysis segment decline in the third quarter and it's important to note that even with this decline, dialysis accounts for approximately 42% of the business.

As Brian mentioned, we were not able to grow our non-dialysis CKD business fast enough to compensate for the decline in dialysis. The overall IV market contracted by 6% on a grams basis as compared to the second quarter, which was unexpected and which we cannot explain. Yet, the market grew year-over-year.

We did not offer an additional end-of-quarter rebate in the third quarter, so we didn't see the magnitude of the end-of-the-quarter spike in demand that we had experienced last quarter. We also did not see a big drop in provider demand in the first few weeks of the fourth quarter as has been the case in previous quarters.

And finally, we believe that safety concerns in the market led to decline in demand for nephrology practices. All of these factors culminated in an 11% decrease in provider demand and launch incentive program utilization as compared to the second quarter of 2010.

From the launch of Feraheme in mid-July last year through October 1st, 2010, approximately 2,800 providers had purchased Feraheme, with 75% of those providers having purchased on a repeat basis. In the third quarter, more than 465 providers purchased Feraheme for the first time. Feraheme inventory decreased by approximately 600 grams from June 30th with approximately 7,600 grams of Feraheme in inventory at wholesalers and distributors as of September 30th, 2010. This would equate to approximately three to four weeks of inventory, based on September demand.

On Slide 11, you can see the changes in provider demand in grams by segment from the fourth quarter of last year through the third quarter of this year. We have overlaid launch incentive program utilization on the dialysis segment, shown as the lighter shade on the bar chart.

In the nephrology segment, we believe that safety concerns in the marketplace had a negative impact on demand. Although we remain the market leader for IV irons in the nephrology segment, this segment will remain the smallest segment of the overall IV iron market, as the number of providers that buy and bill are limited to a few hundred clinics and we do not anticipate that this will change in the future. We remain focused on increasing Feraheme penetration in hospitals and hematology clinics where the majority of Stage 3 and Stage 4 CKD patients are treated.

In the hematology segment, one big contract win that took place late in the first quarter is the primary reason for the growth achieved in the second quarter. We were able to grow slightly in hematology in the third quarter, while the overall IV iron market hematology declined 8.4% in the third quarter of 2010.

In the hospital segment, we grew 6% in the third quarter versus the second quarter, while the overall IV iron market declined 7.2% in this segment. Now, we are actively working to establish contracts with larger hospital systems, but the formulary and buying process takes time. However, we are making good progress with over 25 hospital system contracts in place, the majority of which haven’t executed in the third quarter. We activate that effective pull-through of those contracts will generate increased sales in the quarters ahead.

And as mentioned earlier, the dialysis business for Feraheme has started to decline in the third quarter as dialysis centers prepare for the bundle. We fully expect further decline in this segment in the fourth quarter.

As I mentioned earlier, all of these factors we discussed contributed to an 11% decline in total demand for the third quarter. Please note that the IMS data to be released tomorrow will reflect a 5,200 gram return from a launch incentive program customer. Remember, in September 2009, IMS picked up a significant number of launch incentive purchases, even though those sales were not recognized by AMAG at that time. We have excluded the returned grams from the third quarter 2010 demand data on this chart to accurately reflect provider demand in the period.

Now, Feraheme has a broad label for the treatment of iron deficiency anemia in adult patients with all stages of chronic kidney disease, including those not on dialysis. The majority of CKD patients are non-dialysis with about 18 million patients with late stage, Stages 3 and 4 of chronic kidney disease. This is the patient segment that we are targeting since physicians are most comfortable initiating therapy for CKD patients on Stages 3 and 4 with iron deficiency anemia.

More than 1.6 million of these late-stage CKD patients are estimated to have iron deficiency anemia and currently, only a fraction of these patients are treated with IV iron. Our goal is to expand the number of CKD patients that are diagnosed for IDA and ultimately treated with IV iron.

Iron deficiency anemia in the majority of these CKD patients is treated at site of care other than the nephrology office, particularly at hospitals and hematology, oncology clinics. We plan to educate hematologists and referring nephrologists on the importance of identifying iron deficiency anemia in patients with CKD, as defined by a GFR of less than 60 ml per minute. It is important that patients do the appropriate tests to know the underlying cause of the anemia. As advocated by the expert panel to review the TREAT study, we believe that patients whose anemia is caused by iron deficiency should be treated to replete their iron levels first before starting with an ESA.

In summary, our opportunity and our challenge is to grow the non-dialysis CKD business. Once the update to the package insert is finalized, we will be in a better position to determine the implications for the U.S. market opportunity for Feraheme in the future.

I will now turn the call over to David to review the financial results and the restructuring plan.

David Arkowitz

Thanks, Gary. I will quickly review our financial results for the third quarter of this year, as well as the restructuring plan that we announced today.

Now, on Slide 15 and I'm going to review our financial results for the third quarter. Our total revenues for the third quarter were $16.9 million, $15.1 million of which were Feraheme net product sales, including $2 million of previously deferred launch incentive program revenues. The remainder of our revenues was made up of $1.7 million in collaboration revenues related to the amortization of the $60 million upfront payment that we received from Takeda earlier this year, combined with reimbursement of certain collaboration expenses, and then $100,000 in GastroMARK sales.

We expect that our gross to net sales adjustment for the third quarter will be about 28%. This represents an increase of approximately 1 point from the second quarter. A gross to net sales adjustment is expected to increase over the remainder of this year, as we continue to contend with pricing and reimbursement pressures and as certain customers achieve higher rebates. We expect that this adjustment will increase by no more than a couple of points in the third quarter from its current level.

Our cost of product sales for the third quarter was approximately $2.3 million. The increase from the second quarter of 2010 in light of the decrease in Feraheme sales was primarily due to the expensing of certain costs caused by reduced manufacturing activity as we aligned our production volumes with Feraheme sales levels.

R&D expenses for the third quarter of 2010 were $14 million. R&D expenses decreased by about $800,000 from the second quarter of 2010, primarily due to the reversal of stock compensation expense and the reduction of certain accrued compensation costs, partially offset by increased spending on clinical trials. The reductions in stock compensation and accrued compensation are in part related to the restructuring that we announced today.

SG&A expenses for the third quarter of 2010 were $18 million, which is – which was a decrease of $6 million from the second quarter of 2010. The decrease is primarily due to the reversal of stock compensation expense, the reduction of certain accrued compensation costs, and decreased spending on market and promotion – marketing and promotion related activities. Again, the reductions in stock compensation and accrued compensation are in part related to the restructuring that we announced today.

In summary, we reported a net loss of approximately $17 million or a loss of $0.81 per share. We continue to be in a very strong financial position with $308 million in cash and investments at the end of September. This is a decrease of approximately $20 million from our June 30, 2010 balance.

During the third quarter, one of our launch incentive program customers returned $1.9 million of Feraheme inventory to us. Let me just remind everyone that this return has no impact on our income statement as Feraheme purchased under the launch incentive program is reflected as short-term deferred revenues until the product is administered to patients.

This return was not unexpected, as we noted this during our second quarter call that we had expected this customer to return any unused Feraheme inventory by year-end. Early in the fourth quarter, the same customer returned to us an additional $1 million of Feraheme that it had purchased under launch incentive program, leaving them with approximately $400,000 in Feraheme inventory today.

On Slide 16, I will review our restructuring plan. Today, we have implemented a restructuring plan to reduce our operating expenses. The decision to implement this plan was a very difficult one. Our restructuring plan includes a 24% reduction in our workforce, which is 68 positions. The majority of this workforce reduction is expected to be completed during the fourth quarter of this year with any remaining positions eliminated during the first half of next year.

As a result of this workforce reduction, we have estimated that our cash expenses on an annualized basis will be reduced by $12 million, made up primarily of wages and benefits. We expect to incur approximately $2.7 million in restructuring charges, almost entirely comprised of employee termination benefits. We expect that the majority of this amount will be recognized in the fourth quarter of this year.

In addition to the reduction in our workforce, we continue to prudently manage our expenses. And as a result, we expect that our total operating costs and expenses for the fourth quarter of this year, excluding stock compensation and restructuring charges, will be at or below the level for the third quarter.

I'll now turn the call back to Brian for closing remarks.

Brian Pereira

Thanks, David. In conclusion, this was a [ph] challenging period for AMAG. Today, we have implemented a restructuring plan to reduce expenses. Additionally, we have taken a close look at our business and have decided to solely focus on the therapeutic program for Feraheme. As such, we are discontinuing our imaging program.

Our global IDA is continuing to enroll as planned. We are working diligently to bring to closure labeling discussions with Agency and will provide an update after this is complete.

On that note, I'll open the call to Q&A and turn it back to the operator. Operator?

Question-and-Answer Session

Operator

(Operator instructions) We'll pause for just a moment to compile the Q&A roster. And your first question comes from the line of Yaron Werber with Citi. Your line is open.

Yaron Werber – Citi

Yes, hi. Thanks for taking my question, guys. I'm going to have a few questions. One, help us understand why are – you mentioned that the annual savings is only going to be about $12 million. Why is it only $12 million?

David Arkowitz

Yaron, this is David. Thanks for the question. The $12 million basically represents the wages and benefits associated with the 68 positions that are eliminating. We are looking at other costs as well.

Yaron Werber – Citi

When do you think we might understand the – what else may or may not be done?

David Arkowitz

So I think once we have – once we get the final label, we will then be in a better position to share with all of you the U.S. market opportunity and the business outlook that we see for Feraheme and for AMAG. And at that point in time, we'd look to provide some kind of visibility as to our future spending.

Yaron Werber – Citi

Where – how – the most obvious question is how realistic is it? Do you think that you will get a black box?

Brian Pereira

This is Brian, Yaron. We are in discussions with the Agency on the broad issues regarding updating the label. As I said in my call, there are several post-marketing events that have occurred that will come into the label. These have – these are events which are similar to those that already exist in the labels of the other IV iron on the market. However, based on our evaluation of the post-marketing safety data, we do not believe that boxed warning is warranted for Feraheme. At this time, we are in discussions with the Agency. So it's hard to handicap what the outcome is.

Yaron Werber – Citi

And if you do get a black-box warning, what do you think the outlook for the brand is, because this is really a question of – in many ways, it's going to be a question of existence for the brand at that point? The whole convenience benefit at that point is going to be dramatically damaged. Do you agree with that?

Brian Pereira

Well, not quite, Yaron. Feraheme has, as you know, unique characteristics. It's two doses of 500 milligrams, each can be given in 17 seconds. Obviously, if Feraheme does receive a boxed warning, it will make the commercial effort more challenging. But I must remind you that in some segments of the IV iron market, the dominant IV iron used even today is dextran, which has a black box – has a boxed warning.

So I would say that we need to wait until this plays out, at which time we will be in a better position to assess the U.S. opportunity and our strategy going forward.

Operator

(Operator instructions) Thank you. Your next question comes from the line of Geoff Meacham with JP Morgan. Your line is open.

Geoff Meacham – JP Morgan

Hi guys, thanks for taking the question. Another question on safety here. I'm wondering if you can help us out with the direction of the adverse events over time. Obviously, as you get more patients on, they are declining, but I'm curious though if – more recently, if that flattening out, if you just help us with that, that would be great. And I have one follow-up.

Brian Pereira

Yes, sure, Geoff. If you recall, on February 5th, we provided a safety update. And at that time, there had been 35,000 exposures and there were 40 cases of SAEs reported. Today, as we said, there are 155,000 patient exposures October 4th and there are 146 cases of serious adverse events reported. So, the number of exposures has gone up about four to fivefold and the number of reported adverse events has gone up about three to fourfold.

Now, remember, as I said in my prepared remarks, our estimation of the number of patient exposures is a bit conservative. We have used 70% of the products sold as the number of exposures to date.

Geoff Meacham – JP Morgan

And then just a follow-up to that, do the serious cardiac events follow that same pattern?

Brian Pereira

We haven’t broken this down in terms of the types of events.

Geoff Meacham – JP Morgan

Okay. And then last question here. You guys mentioned you have a number of hospital contracts in place, I think 25. Can you talk a little bit about the size of these contracts and maybe an update on your status about penetration in some of their larger accounts – larger hospital accounts?

Gary Zieziula

Yes, Geoff. This is Gary. We do have contracts that were signed with hospital systems, 25, as I mentioned in my prepared remarks and they vary in size and scope. The hospitals who have purchased Feraheme since launch number approximately 900 in total. The opportunity for us is obviously to penetrate the hospitals where we have formulary acceptance and currently, we have formulary acceptance at about 350 hospitals. So we are looking to penetrate formulary and increase utilization of Feraheme in those hospitals where CKD patients are treated and we expect to be seeing that in the quarters to come.

It's difficult to give you an estimate of how much of the overall IV iron market in the hospital segment we capture with the contracts that we've recently signed. But we are expecting to see increases in our hospital business over the next several quarters.

Geoff Meacham – JP Morgan

Okay. Thanks.

Operator

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

Mark Monane – Needham & Company

Hi, good afternoon and thanks for taking my question. I have one question and a follow-up. You nicely outlined four reasons why you think sales might have declined. Was this in a particular order that you listed it in or do you have a relative contribution of the – some of these issues?

Gary Zieziula

Mark, this is Gary. They were not listed in any particular order in terms of priority or contribution to the decline. Each had an impact and it would be difficult to attribute a specific amount to each of the four factors I mentioned, but all play the role.

Mark Monane – Needham & Company

Okay. And then with regard to safety, when one is dealing with safety one often has to deal with eliminating a negative or trying to disprove a negative, which is hard for – it's hard to do in the real world. I was wondering if Brian, as a physician could comment on this and also what feedback you've gotten from physicians concerning the safety concern question.

Brian Pereira

Yes, I think you put it well, Mark. As you have rightly pointed out, we are dealing with a population which has high comorbidity and a high secular mortality rate. So, causality is hard to determine in this environment. I must again say that with respect to post-marketing environment versus clinical trials, in clinical trials as one principal investigator and a clinical research team who collects the entirety of the information and can accurately provide to the sponsor the timing of the event and the likelihood that it was related or not.

In the post-marketing environment, despite out best effort, it's hard to pinpoint one health care provider who is responsible and the information that we get is often times incomplete despite our best efforts. So that – the 30,000-foot-view qualitatively as Gary has pointed out, the types – first is, all of us are aware that IV iron are associated with adverse events and sometimes serious adverse events. And that's why in our label, we have a 30-minute observation period and the requirement that trained personnel and equipment be available to handle this – these events, albeit rare.

The ability of physicians to accept this risk varies. As Gary has said, in environments where folks see these not infrequently such as the Hem/Onc offices, hospital infusion centers, and dialysis clinics, folks are more used to these events. In nephrology offices where by and large the only injectible that clinicians have been using thus far is – has been ESAs. People are not quite used to seeing or handling serious adverse events in the office.

So Gary pointed out that in terms of our own outlook, irrespective of what the ultimate label turns out to be, we see that practices such as Hem/Onc offices and hospital infusion centers where a lot of CKD patients are being treated would probably be the place wherein we will be focusing most of our efforts. There are large nephrology offices who have been using other IV irons in the past and are comfortable with managing these serious adverse events who probably will continue to be a supporter, then grow. But the small dialysis – small nephrology clinics wherein folks had recently come on board and have seen an occasional serious adverse event maybe a little more reluctant, and this is just qualitative.

Mark Monane – Needham & Company

Thank you for the added information.

Operator

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

Marshall Urist – Morgan Stanley

Yes. Hi guys, thanks for taking the question. So, the first one is, I know this got asked, but I'm still not clear on what answer is. So is what is that the FDA is concerned about in terms of the error safety database? Is it the absolute number of events that they – serious cardiac events that they are seeing or has there been a change in the pacing, not just from the beginning of the year to now, but from 1Q to 2Q into 3Q in terms of the number of events that they are seeing and specifically, is that what's concerning them?

Brian Pereira

If you note, FDA put us on the TSI in the DARRTS system or that – in late August, but we were informed about this decision much earlier which suggests that this was based on their analyses of the first quarter data this year. Again, this is speculative. We can't say with absolute certainty what prompted the FDA to list Feraheme.

Marshall Urist – Morgan Stanley

Okay, great. Thanks. And then second question is just your comments or evidence that the IV iron market contracted sequentially. I know you guys said you can't explain it, but could you talk about what you are seeing, where is that contraction coming from if we think about the various sub sectors of the overall iron market between dialysis and non-dialysis and across sort of dextran's versus the other products on the market? And then, why aren’t we seeing a positive impact of lower ESA usage on iron at this point?

Gary Zieziula

Marshall, this is Gary. Let me try to answer the first part of that. I don't think I could shed much light on the ESA portion of your question, so I'll leave that to the end. But with regard to the overall IV iron market, the contraction that occurred in the third quarter was a bit of an anomaly. The – we look at IMS data routinely on a quarterly basis and the market has been growing slowly and steadily over time. So, this quarter was a bit of an anomaly as I said in my prepared remarks. We don't know exactly the reason for that.

I will – I want to say that the decline, the 6% decline actually varied across the board. The biggest decline occurred in nephrology was over 20% in the third quarter versus the second quarter. Now keep in mind that nephrology is the smallest segment within the IV iron market, but there were declines in the Hem/Onc segment. I mentioned 8.4% across the board in the hospital segment, plus a 7% in that particular segment. Feraheme grew slightly, as you recall from the slides or my comments, 6% growth in hospitals in the third quarter. In hematology, we were relatively flat, we grew 1%. I want to say that based on the IMS data, all the other IV irons in the Hem/Onc space and hospital space experienced decline in the third quarter of 2010.

So that's the third quarter. Again, we think it's bit of an anomaly, we can't really explain it, and we do believe that the market will continue to proceed on a growth pattern that was similar to what we observed before the third quarter. And again, I'll defer any comment on ESA use, as I just don't feel prepared to make a comment on that. Brian, I don't know if you have –

Brian Pereira

Yes, this is Brian. It's hard to say what the role of ESA use is. As you have seen from the secular behavior of ESA use, ESA use seems to be declining in the non-dialysis CKD, as well as in dialysis. And we don't know at this point in time what the balance (inaudible), because we expect that folks will move towards treating iron deficiency first before using ESAs. But on the flipside, if you use less ESA, you are driving towards lower hemoglobin targets and could potentially use less IV iron. At this point, I would say this is largely theoretical. Over the next couple of quarters, we will have better visibility.

Marshall Urist – Morgan Stanley

Okay, great. Thanks. And then just one last one. When you roll up the number of factors for the fourth quarter in terms of new hospital contracts, the slowdown in the market, some of the pricing stuff you guys talked about, and then also sort of declining dialysis sales, should we – should it be the expectation to have sequentially down revenue again next quarter or are the new contracts going to be enough to see some sequential growth?

Gary Zieziula

Marshall, this is Gary. At this point, we would be reluctant to offer any guidance on the fourth quarter until we have finalization of the label. Once we have that, we will be in a much better position to provide guidance on where we think we will end the year and certainly our plan is to provide guidance at the JP Morgan Conference in January. There are a lot of offsetting factors.

I will tell you that the commercial organization remains resolute in its belief on the value proposition of Feraheme. The morale of the team is extremely good, they are very motivated, and in fact, we just finished a series of plan of action meetings across the country that both Brian and I attended and the mood is extremely positive and quite honestly what we see in terms of sales for the first three weeks of the fourth quarter is extremely positive, very strong.

Now, I want to caveat that by saying it's only three weeks of the quarter and we have a long way to go. And again, I think the most important factor that has to play out is the label finalization as several of us have already mentioned. Once that, in fact, is finalized, we will be in a much better position to provide some guidance on the fourth quarter and then 2011.

Marshall Urist – Morgan Stanley

Okay, great. Thanks for [ph] questions.

Operator

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

Chris Raymond – Robert W. Baird

Just one question. I'm a little confused about one of the things you mentioned in your commentary about the – one of the primary drivers of decreased use – utilization being safety concerns. Knowing obviously that you've got a surveillance system that's showing essentially issues that are in line with the label, yet you do have this issue with the FDA. What is really the mechanism of that? What's the genesis of the concern among physicians? Are they aware of the FDA AERS database? Is that really the driver or was there maybe sort of a word-of-mouth thing going on between docs? Thanks.

Brian Pereira

Marshall, I think both Gary and I will offer pieces of color on this. I'll take the first shot. As you know, in 2010, the separation between the investor community and the prescribing community has continued to narrow. Physicians today read their medical business journals more often than they did in the past and when events such as listings of the drug on the TSI or a company withdrawing from an investor conference because of ongoing discussions with the Agency, it tends to I would say go viral and many physicians are well in tune with what's happening on the investor side. And hence that to some extent does contribute to prescribing patterns.

Now, again, as I said, I hope that with the label being finalized, with us being able to speak more freely with the prescribing docs and in the not-too-distant future once we have comparative data of Feraheme versus the other IV irons, we will be able to provide folks far more clarity.

And Gary has a couple of comments as well to give you a more complete picture.

Gary Zieziula

So Chris, from a business perspective, safety, we feel definitely played a role in our performance in the third quarter, particularly in the nephrology segment and there were two large nephrology clinics that actually decided to stop using Feraheme in the third quarter, relatively early in the third quarter and we felt almost the immediate impact of that.

Now, that was either the result of having an adverse event occur in a clinic or hearing about an adverse event occurring in a neighboring clinic. As you can well imagine, it's a close-knit community and when nephrologists have an experience – a bad experience and maybe have not had a significant experience up to that point in time using a relatively new product, they become concerned and in several cases, clinics stopped using Feraheme and moved to other products. We haven’t seen that occur in other segments as much as in nephrology segment.

So, to your question, we do have specific examples where safety played a role in impacting the business in the third quarter as was stated in our remarks.

Chris Raymond – Robert W. Baird

Thank you.

Operator

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

Eun Yang – Jefferies

Thanks very much. So, based on the way you guys have commented, is it fair to assume that the label finalization is coming this quarter?

Brian Pereira

I would expect to have resolution on the label in the not-too-distant future. But certainly, our expectation is within this quarter, but I think that's too large an interval. We are trying our best to work with the Agency to bring this to closure as soon as we can.

Eun Yang – Jefferies

Okay. And then given this safety concern, how do you think this may impact your current ongoing Phase III trials in IDA?

Brian Pereira

Our IDA trials are ongoing, they are enrolling well, and they have not been a subject of discussion with the Agency.

Eun Yang – Jefferies

But how about the enrollment rate? Do you think that it could slow down?

Brian Pereira

We have not seen any change in the enrollment rate. They are on track.

Eun Yang – Jefferies

And then, one quick question to David. You guys did not provide a rebate at the end of the third quarter. Is there any reason why you didn't versus you did in the second quarter?

David Arkowitz

Eun, I'm going to pass that on to Gary.

Gary Zieziula

Thanks, David. Eun, we did not provide a rebate at the end of the third quarter. Just to provide some context and a little historical perspective, we did offer the special rebate program at the end of the second quarter, primarily in response to a competitive threat from another IV iron that had an unusually high ASP for the third quarter. So we felt compelled to offer the special rebate at that time. We did not believe it was necessary to offer a special rebate program at the end of the third quarter for competitive reasons and hence, we didn't.

And as I stated earlier, what we are seeing as a result in the early fourth quarter, sales are much stronger than what we've seen in the previous first month of prior quarters. So again, we feel like we made the decision – the correct decision and obviously as we look at the future, we will continue to look at the business and make decisions about rebates and special offers on a case-by-case, but we are comfortable with the decision of not offering a special rebate at the end of the third quarter this year.

Eun Yang – Jefferies

Thank you.

Operator

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

Chris James – MLV

Hi guys, thanks for taking my questions. Of the 146 patients with SAEs, did you describe what's the breakdown in dialysis versus non-dialysis? And could you give us a little bit more insight into these patients – the patients – the 10 deaths in terms of their mean hemoglobin and ESA use?

Brian Pereira

We don't have that breakdown here. That's I think far too much detail at this point in time. As I said earlier in the call that these are sick patients with a high morbidity and mortality rate, we felt that providing a high level view of the event rate should suffice at this point in time.

Chris James – MLV

Thanks for taking my question.

Operator

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

Joseph Schwartz – Leerink Swann

Thanks. I had a question similar to the last. I was curious about the 10 deaths, because it – on the surface, it wouldn't seem like the overall level of SAE would justify this is not a concern, but perhaps the severity is what the FDA has detected. So is – how does – the 10 deaths amongst 146 SAE and 155,000 exposures, how does that rate mortality rate compared to the overall death rate in the CKD population and also, what do you know about other IV irons?

Brian Pereira

Well, I think Joe, that's an important question that can bring all of the pieces of information into context. So, let's start from the highest level. Overall, the mortality rate in dialysis patients is 23% per year. In CKD patients, it varies based on the stage of disease. Those who have more advanced stages of disease, that's Stages 3 and 4, it is closer to the mortality rate in dialysis and as you would expect, it's lower.

As a frame of reference, you would recall two-and-a-half years ago, in February of 2008, we provided you information on our clinical development program. In our clinical development program, among the 2,000 plus patients – subjects who were enrolled, who had received about 2,800 doses, there were 31 deaths. And the mortality rate was 1.1% in Feraheme-exposed patients and 2.8% in oral iron exposed patients. This provides you a context that these are sick patients.

The 10 deaths in patients who were exposed to Feraheme have occurred from the same day to several weeks after administration. So again, as I said earlier, in the post-marketing environment, both for SAEs and deaths, it's very hard to ascribe causality.

With respect to what is the state of affairs with other IV irons, we have no direct head-to-head studies and so, it's hard to address this. But similar events are highlighted in the package inserts of all the existing IV irons of the market.

Joseph Schwartz – Leerink Swann

Okay, that's helpful. Thanks. And for a follow-up, I was wondering if you are finding that you are hitting a ceiling with any accounts who are unable to sign broad contracts for Feraheme since it lacks a broad label at this point including other IDA? Since you are focusing primarily on the hematology and hospital segments, it would seem like at some point, this might be an issue. I was wondering if that's the case yet.

Brian Pereira

Well, we are focusing on the CKD label at this point in time. We have ongoing trials which we hope to complete by the end of 2011 which will give us a broad IDA label. Those trials are enrolling well. Our expectation is that when we get the broad label, folks who have already used it in CKD will then expand its use to the broad IDA indication.

Joseph Schwartz – Leerink Swann

Okay, great. Thank you.

Operator

(Operator instructions) Thank you. Your next question comes from the line of Carol Werther with Summer Street. Your line is open.

Carol Werther – Summer Street

Thank you. Brian, I'm still trying to understand – I mean, if the serious adverse events there within your label, I – I'm having a hard time trying to figure how you might end up with a black box. The other – I mean, can you help me a little bit – like what is the FDA seeing that they are concerned about?

Brian Pereira

Well, we can't speak for the FDA, but we believe that their concern was that some of the events that we have seen in the post-marketing environment haven’t been explicitly listed in our label. And as to how the FDA is going to approach IV irons as a class, it's not ours to speculate, I guess.

Carol Werther – Summer Street

Okay. Thank you.

Operator

Your next question comes from the line of Jason Aryeh with JALAA Equities, LP. Your line is open.

Jason Aryeh – JALAA Equities, LP

Hi, Brian. When we spoke about a month ago, you had mentioned to me that it was incumbent upon the company to prove the investor community wrong that you could as a single-product, standalone, small company go up against much larger companies in this space and compete and then sell in market successfully. I think that with an AE rate of less than 0.1%, less than half the label and a best-in-class drug to now less than five quarters into the launch, see declining sales makes me think that clearly we can't compete. And I'm wondering when might the company and Board look to move in a different strategies direction.

Brian Pereira

Well, Jason, I think you raise, I think, an intellectually sound issue. The first point is that I would stay away from using the term declining sales. I think we have had a confluence of events in the third quarter that led to a drop in sales. We need to put the safety issues – we need to put the safety issues in the right context. We have got to get the label resolved with the Agency and then, we will have our opportunity to make the best determination in terms of the path forward and the size of the opportunity that is ahead of us and how do we get to it.

As every responsible management and responsible board, we will evaluate as to how do we best meet the expectations of the shareholders. I want us to be careful that a temporary challenge does not throw us off our game and I think all responsible management teams have to take temporary challenges in their stride and overcome and move towards success. We are going to do our best. The first step right now is to get the discussions with the FDA resolved.

Jason Aryeh – JALAA Equities, LP

Brian, thank you for that. A quick follow-up. The stock was recently trading now or so ago at cash. So seeing that Feraheme is worth nothing U.S. or rest of world, clearly cash being the asset of the company at least as perceived by the market here and I think, the cost-cutting while a positive, is underwhelming. How do you see the burn going forward from the existing Phase IIIs and when do you see that ending and what else might you do to protect that precious asset?

David Arkowitz

So, this is David. So, we are very focused on minimizing our cost on a go-forward basis and I think you see some of that in our third quarter results and as I talked about, we are going to be taking further actions, both from – we talked about the headcount, the positions that we are removing, but also we are looking very carefully at all our expenses and I talked about how in the fourth quarter we expect our operating costs and expenses, when you exclude stock compensation, restructuring charges to be at or below the level that we experienced in third quarter.

But in terms of what this means going forward, we really need to finalize our label and then we will be in a good position to determine what the outlook is, what the market opportunity is, and what the appropriate spending level is, given that potential.

Operator

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

Yaron Werber – Citi

Yes. Hi, thanks for taking my follow-up. Guys, if I may, I just wanted to get your thoughts as to how do you think these new events or these new occurrences which are – which were not known at the time in which you filed and got approved, any sense as to how would that impact the potential for approval and outlook in Europe?

Brian Pereira

Well, Yaron, a couple of comments I'd like to make. One is that many of the types of events that we observed in clinical trials have been observed in the post-marketing environment, but were not explicitly listed in our label and we plan to update that – our label to reflect that.

With respect to Europe, the review is ongoing and I don't believe it's appropriate to speculate. First, let's see how the resolution of our discussions with the U.S. FDA pans out before trying to answer that question. At this point in time, that's where it is.

Yaron Werber – Citi

Fair enough. Thank you.

Operator

Your next question comes from the line of Geoff Meacham with JP Morgan. Your line is open.

Geoff Meacham – JP Morgan

Hi guys, thanks for the follow-up. So, a little bit different way to ask the previous question. When you look at the SAEs, I know it's exploratory, but is there any defining future among the patients who've had a cardiac event?

Brian Pereira

To be honest, Geoff, we have cut it every which way to identify with the data that we have. As you would, as any responsible organization, we will try and see if there is any particular patient type, any particular dosing paradigm, any site of care, and we don't see any specific pattern. These are sick patients in general. So it's very hard and we have tried our best.

Geoff Meacham – JP Morgan

And that's on a background of pretty high comorbidities obviously?

Brian Pereira

That's correct. I mean, as I said earlier, dialysis patients have a 23% annual mortality rate and a 10% rate of cardiac arrest each year. So, we are dealing with a patient population which has very high morbidity and mortality, particularly cardiovascular, and the Agency is aware of that.

Geoff Meacham – JP Morgan

Okay. And then last question, do you have sense of the drug that made the DARRTS list, which ones don't have a black box?

Brian Pereira

We haven’t done that analysis. There have been many products which have been on the TSI list for a long while. I think different organizations approach this differently. As I said earlier, for us safety is our priority. When we got listed, we reached out to the Agency to find out what is the basis.

Operator

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

Eun Yang – Jefferies

Thanks for taking the follow-up question. Regarding the cardiac disorder event, in the clinical trials, the incident rate, the incident was less than 1%. So now these events keep coming up, and it sounds like it could be reflected in the label. Should we assume that the cardiac events that are you seeing in post-marketing is approaching 1% or over 1%?

Brian Pereira

Well, in the post-marketing environment, there is no percentage cutoff, Eun. When you observe events in the post-marketing environment, you list them. If you look at the labels of the other IV irons of the market, all of these events are listed in their – many of these events are listed in their labels.

Eun Yang – Jefferies

Okay, fair. Thank you.

Operator

Ladies and gentlemen, at this time, we have reached the end of today's conference call. I now turn the call back over to Ms. Sullivan.

Amy Sullivan

Thank you, Simon, and thank you to everyone on the call for joining us tonight. Carol and I will be here for quite some time. If you have any additional questions, please feel free to call.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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