Zogenix's (ZGNX) CEO Roger Hawley on Q2 2014 Results - Earnings Call Transcript

Aug. 5.14 | About: Zogenix, Inc. (ZGNX)

Zogenix, Inc. (NASDAQ:ZGNX)

Q2 2014 Earnings Conference Call

August 5, 2014 4:30 PM ET


Catherine O’Connor – Senior Director, Corporate Communications

Roger Hawley – CEO

Steve Farr – President

Ann Rhoads – EVP and CFO


Derek Archila – Leerink Partners

Akiva Felt – Oppenheimer & Co

Tim Lugo – William Blair

Jane [ph] – Stifel Nicolaus

Difei Yang – R.F. Lafferty & Co

Tim O’Connell – Insight Investments


Good day, ladies and gentlemen, and welcome to the Second Quarter 2014 Zogenix’s Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I’d now like to turn the call over to your host for today, Ms. Catherine O’Connor, Senior Director of Corporate Communications. Ma’am, you may begin.

Catherine O’Connor

Thank you, operator, and thank you all for joining us this afternoon. With me on today’s call are Roger Hawley, Chief Executive Officer; Dr. Stephen Farr, President; and Ann Rhoads, Executive Vice President and Chief Financial Officer.

Earlier today Zogenix issued a news release announcing the company’s financial results for the second quarter 2014. We encourage everyone to read today’s news, as well as Zogenix’s Quarterly Report on Form 10-Q, which will be available on the company’s website at www.zogenix.com.

Please note that certain of the information discussed on the call today is covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act. We caution listeners that during this call, Zogenix’s management will be making forward-looking statements. Actual results could differ materially from those stated or implied by these forward-looking statements, due to risks and uncertainties associated with the company’s business.

These forward-looking statements are qualified by the cautionary statements contained in Zogenix’s news releases and SEC filings, including in its Annual Report on Form 10-K. This conference call also contains time sensitive information that is accurate only as of the date of this live broadcast, August 5, 2014. Zogenix undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call.

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

Roger Hawley

Good afternoon, and thanks Catherine. Thanks to everybody for joining us for our second quarter conference call. I’m going to get started with an update on Zohydro launch and our commercial activities. Steve Farr will give you an update on development of next generation and future formulation of Zohydro ER and our pipeline activities. And then, Ann, will review our financial review for the second quarter. I’ll make some very brief closing remarks, and then we’ll get to Q&A.

During the second quarter, we continued to execute on launch of Zohydro ER and successfully completed the transition of SUMAVEL DosePro to Endo. It was the first full quarter in the launch of Zohydro. And the feedback we have received from physicians and patients who are experienced with the product has been overwhelmingly positive. All indications point to the product providing clinical benefits as expected.

There were 10,300 Zohydro ER prescriptions in the second quarter of 2014, the first full quarter of the launch. Then in the first four weeks of July, that is, into the third quarter, which included the July 4 holiday week, we generated approximately 4,100 prescriptions, which represents growth of 74% over the first four weeks of the second quarter.

This is a very positive trend, and including July, we now have almost 50,000 prescriptions since launch and with continued steady uptake with our targeted prescribers week-over-week. We added almost 1,950 new Zohydro prescribers during the quarter. And through July, we now have nearly 2,800 prescribers, who have experienced with the product.

Our overall execution has been excellent, and has shown a positive impact. I’m very proud of this steadfast dedication to responsibly commercialize, educate and conduct surveillance to ensure that the appropriate use of Zohydro ER is as planned and as we’ve committed.

We take all of our responsibilities very seriously, as it helps protect everyone involved, including protecting access for people suffering with chronic pain. We will not turn our backs on the rights of patients to gain access to our product or to our responsibilities to the communities.

At this stage of launch, we are pleased that 75% to 80% of prescriptions are being reimbursed by payors, including some Medicare reimbursement under prior authorization. We’re actually getting more Medicare prescriptions than we expected at this stage, and this is very encouraging sign for 2015, as we’re focused more on Medicare coverage next year.

Last Friday, we learned that Express Scripts, also known as ESI, will be excluding Zohydro ER from their National Preferred Drug Formulary impacting about 24% or an estimated 18 million to 20 million lives in the Express Scripts’ covered lives. And that will begin in January of 2015.

We did not have advanced notice of this specific decision, but the same week, we did just conclude a successful contract with ESI for the broader coverage of Zohydro ER, so we will focus our efforts within those books of business, representing about 75% of the covered commercial lives for which we are contracted for, which are not part of the National Preferred Drug list.

Discussions regarding the partial ESI exclusion are now underway, but we have already learned that patients who specifically need the product can be approved under a prior authorization. We’ve also just started adopting a new national support service to assist with the automation and processing of prior authorization request for Zohydro ER.

So despite this disappointing news and the way it was disseminated, we still believe we’re in a good position to expand adoption of Zohydro in the larger part of the ESI book of business, and we are meeting and even exceeding our expectations for successful contracting with other key payors.

We also have very good information systems, with which our specialty account managers can understand the payor coverage in their territories at a physician level. This was an unexpected outcome as I’ve said, but we have a very large market opportunity, so this is about focusing on where we can help patients and have coverage.

We ended the quarter with approximately 190 employees in our full commercial team. As is always the case, during the early phase of the launch, we’re evaluating both territory viability and managing territory performance, particularly in light of some of the challenges we faced in certain states like Massachusetts, and adding a 110 new sales representatives prior to launch.

This review and assessment process is nearly completed, and some territories are now being considered for backfill and the optimal size of our sales force will also be determined by the outcome of co-promotion discussions now underway.

In states where we faced some political headwinds, we have worked closely with local officials and medical boards to educate them on the accurate scientific and medical facts about Zohydro ER. Our commitment to physician, patient and pharmacy education, and our voluntary initiatives, which go above and beyond the class-wide FDA REMS for Extended-Release/Long Acting opioids.

I am pleased to report that these efforts had a positive impact in almost all of the cases. To us, this reflects the state’s good logic and their intentions to focus on updating prescribing guidelines and relevant educational needs, which will actually help produce, misuse and diversion of the entire class of Extended-Release opioid products and not singling out Zohydro ER as Massachusetts chose to try to do.

As announced last Friday, our Chief Commercial Officer, Scott Shively, departed Zogenix to pursue another opportunity, and we wish him success in his new endeavors.

Our commercial leaders and their teams remain fully engaged, carrying out planned activities and continuing to drive growth. I have already assumed a direct leadership role with sales, marketing, managed care and trade teams to support and direct the commercial success of the company.

We have a very experienced and confident team, and I look forward to helping them to continue to serve the prescribers and pharmacists who work hard to help people suffering with chronic pain.

Also during the quarter, we completed the sale of SUMAVEL DosePro to Endo for $89.6 million in cash, $20 million in potential milestone payments and a $7 million interest-free working capital advance to support the ongoing manufacturing of SUMAVEL for Endo.

We are now beginning to realize the strategic benefits of this transaction, which include allowing our commercial team to focus their efforts on Zohydro ER. We are seeking a co-promotion product for our sales force, which would effectively complement our call point and our focus.

Continuing with the rapid development of the next generation Zohydro ER, with abuse-deterrent properties and an additional formulation with even more advanced technology, Steve will give you an update there.

This also allowed us to retain ownership of DosePro, our needle-free delivery technology, and to eventually leverage our DosePro manufacturing capacity. We believe DosePro’s technology has significant potential for future development to expand our own product pipeline in pain and CNS disorders along with broader applications for potential partners that could license the technology for their own products.

The addition of a potential co-promotion product for our sales force continues to be a key area of focus for the company, we have been making very encouraging progress looking at opportunities. There is a significant opportunity for future leverage of our sales force with additional products as evidenced by our ongoing successful co-promotion of Migranal for Valeant.

We have been working on potential opportunities that fit our desired product profile, and call point, that fit throughout the quarter and we hope to be able to announce co-promotion deal in the near future that provides good alignment with our current focus on pain specialists.

In addition, we are beginning discussions to seek partner to co-promote Zohydro ER in 2015. Our ideal partner would adopt the responsible commercialization initiatives we’ve employed to show the appropriate uses of product by the right prescribers and the right patients.

Based on the level of interest expressed so far, we believe we’ll have an update on the progress of those discussions by the end of the year.

I’d now like to turn the call over to Steve Farr.

Steve Farr

Thank you, Roger, and good afternoon to everyone. Before jumping into an update on the development of the abuse transformation of Zohydro ER, I want to begin with a brief summary of our experiences with respect to the safe use of Zohydro ER during the last quarter.

In contrast to the media and political predictions regarding the anticipated levels of misuse and abuse of the product, to-date we have seen just the opposite. The Chairman of our External Safe-Use Board commented recently on the output from our Comprehensive Surveillance System and I quote, “the data to-date are very encouraging and demonstrate emerging positive trends around the appropriate use of Zohydro”.

We are looking forward to sharing these data with the FDA on the scientific community in the next few months, because we feel that vindicates the effectiveness of our voluntary initiatives focused on education to prescribers, pharmacists and patients.

On a much larger and broader scale, a recently released report from the CDC on opioid prescribing has shown dramatic decline in overdose tests in certain states, notably New York, Florida and Tennessee, which mandates best clinical practices in terms of the use of drug prescription monitoring programs, patient selection and education.

We strongly support comprehensive approaches to addressing the current account challenges of prescription drug abuse.

In July, and after having met with the FDA, we announced our plans to submit a supplemental new drug application or an sNDA by October of this year for a next generation formulation of Zohydro ER Extended-Release Capsules that make it difficult to abuse by injection or nasal administration.

We are making excellent technical progress and remain on track to submit our data to the FDA for a potential approval decision in early 2015. We will continue to characterize the product’s abuse-deterrent properties with a goal of further amending the labeling for Zohydro ER during 2015.

In parallel, we are aggressively pursuing our final step in the development of an abuse-deterrent formulation of Extended-Release hydrocodone under our collaboration with Altus Formulation. The innovative tablet formulation incorporates multiple features to maintain the Extended-Release property of hydrocodone when crushed or chewed reducing one of the ways in which opioids are abused through oral ingestion as well as other features to address abuse by injection or nasal administration.

We are currently scaling up the GNP manufacturing of these final tablet formulation candidates to commence a PK study, pharmacokinetic study later this year or early next year to establish by equivalence to the approved formulation of Zohydro ER. This is an important milestone because assuming these data are positive, it greatly simplifies the remainder of the clinical development program.

We are aiming to conduct the required Phase 1 pharmacokinetic and safety studies, as well as the Human Abuse Liability Studies in the second half of 2015 after further scale-up to support registration batch manufacturer of the new tablet formulation.

A new drug application submission is being targeted for the first half of 2016, which will reference the approved NDA with Zohydro ER with respect to previous findings of safety and efficacy.

Now let me switch to Relday, our proprietary once-monthly subcutaneous formulation of risperidone for the treatment of schizophrenia. Relday has several preferred attributes, including the ability to achieve therapeutic plasma levels on the first day of dosing, which simplifies the loading regiment compared to all currently available Long-Acting injection products.

Relday also features once-monthly administration and no requirements for reconstitution. These product characteristics are being shown to make it a compelling product candidate in the large and growing market for Long-Acting injectable antipsychotic products.

During the quarter, the chronic toxicology studies in both rat and dog were completed with audited reports on schedule for submission to the FDA by mid-October. In addition, our CMC partner, Direct, is conducting the GNP manufacturing all clinical trial supplies for the 20-week multi-dose clinical PK and safety study and we’ve got release in September.

We remain on track to begin patient enrollment in the fourth quarter. However, we may elect to initiate the study in early Q1 of next year if this timing optimizes enrollments and retention of patients by voting the end of the year holiday period.

We expect to report top line data from this study in the third quarter of 2015, and if the results are positive initiate a Phase 3 study in the first half of 2016.

Finally in mid-July, we announced a new and significant patent for our DosePro needle-free delivery system that now extends our DosePro intellectual property portfolio until 2032. This is aligned with our strategy to retain all of manufacturing and development of DosePro in the sale of SUMAVEL DosePro to Endo. We continue to believe DosePro represents an excellent opportunity for our licensing to potential pharmaceutical partners and for internal development of new products.

This new product extends our IP detection for these assets, and reinforces our expertise in the area of needle-free delivery technology.

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

Ann Rhoads

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

Before I begin, I want to remind everyone of some of the changes to our financial reporting this quarter as a result of the sales of SUMAVEL DosePro to Endo in May of this year. Following the sale, the company will no longer report net product revenue on sales of SUMAVEL DosePro, and will instead report contract manufacturing revenue consisting of the supply of SUMAVEL DosePro to Endo under the company’s supply agreement.

Total net revenues for the second quarter of 2014, was $9.2 million, up 2% from $8.9 million in the second quarter of last year. Total revenue for the second quarter of 2014 includes net product revenue on sales of Zohydro ER and SUMAVEL DosePro, contract manufacturing revenue and service and other revenue.

Net product revenue on sales of Zohydro ER for the second quarter was $2.4 million. The company began commercializing Zohydro ER in March of 2014, with recognized revenue based on product dispensed through patient prescriptions as estimated by Source Healthcare Analytics.

Zohydro ER gross factory sales to wholesalers was $4.8 million for the second quarter. And as of June 30, 2014, the company had $7 million in deferred revenue for Zohydro ER sold to wholesalers, but not yet dispensed through patient prescriptions. Gross-to-net sales deductions will be recorded at the time these prescription units are dispensed.

Our net product revenue on sales of SUMAVEL DosePro for the second quarter of 2014 was $3.4 million, compared to $8.9 million in the second quarter of 2013, reflecting the mid-quarter sale of the business to Endo. Contract manufacturing revenue on sales of SUMAVEL DosePro to Endo under the company’s supply agreement for the second quarter of 2014 was $2.2 million.

This excludes the transfer of SUMAVEL DosePro finished goods inventory to Endo at the closing of the transaction, which was accounted for a part of the sale of the SUMAVEL DosePro business.

Service and other revenue in the second quarter 2014 was $1.1 million, which was primarily comprised of the fees from Valeant Pharmaceuticals for the company’s co-promotion of Migranal Nasal Spray.

Our product gross margin improved to 59% in the second quarter of 2014, compared to 48% in the second quarter of 2013. This increase in product gross margin was primarily due to product mix as higher margin Zohydro ER consisted of a higher proportion of net product revenue in the second quarter of 2014.

The cost of manufacturing services for SUMAVEL DosePro supply to Endo during the quarter or during the second quarter of 2014 was $1.9 million.

Research and development expenses in the second quarter of 2014 were $4.1 million. It’s a 15% increase over the second quarter of 2013, primarily due to an increase in development expenses for Zohydro ER abuse-deterrent formulations and Relday development expenses.

Selling, general and administrative expenses for the second quarter of 2014 were $24.5, a significant increase from the second quarter of 2013. The increase in selling, general and administrative expenses was primarily the result of the launch of Zohydro ER, including expansion of the company’s sales force and the addition of its medical affairs team. It also reflects the implementation of the FDA required Extended Release/Long-Acting opioids REMS program and the company’s voluntary initiatives to support the responsible commercialization of Zohydro ER.

A net gain on the sale of SUMAVEL DosePro business was booked in the second quarter. The aggregate consideration received by the company was $89.6 million. The net gain on sale was calculated as the difference between the allocated consideration for the SUMAVEL DosePro business, in accordance with the authoritative accounting guidance of $80 million, and the net carrying amount of the assets transferred to Endo. The undelivered elements of this transaction were deferred and will be recognized as contract manufacturing revenue based on proportional performance of contract manufacturing services under the supply agreement.

Impairment of long-lived assets of $800,000 was booked in connection with the sale of the company’s SUMAVEL DosePro business.

Other income for the second quarter of 2014 was $7.9 million, compared to other expense of $900,000 in the second quarter of 2013, reflecting non-cash mark-to-market adjustment for the fair value of the company’s outstanding warrants.

Our net income for the second quarter of 2014 was $62.9 million, or $0.45 per share on a diluted basis, compared to a net loss of $13.3 million, or $0.13 per share in the second quarter of 2013. Non-GAAP net loss for the second quarter of 2014 adjusted for certain non-cash or non-recurring items was $0.19 per share, compared to $0.13 per share in the second quarter of 2013. The non-GAAP financial results are detailed in the table included in our financial results press release issued today.

We finished the quarter with cash and cash equivalents of $81.2 million, compared to $50.7 million as of March 31, 2014. Additionally, restricted cash of $8.5 million as of June 30, 2014, consisting of the portion of the proceeds from the sale of the SUMAVEL DosePro business to Endo required to be held in escrow until May of 2015.

As we stated in May, the company did complete the sale to Endo for $89.6 million and subsequently repaid its outstanding debt of approximately $40 million to HealthCare Royalty Partners. Also at closing, Endo provided Zogenix a working capital advance of $7 million to support the manufacturing operations for SUMAVEL DosePro.

Now, I’ll review our updated financial guidance for the remainder of the year where it reflects changes in the business as a result of the Endo transaction and the current outlook for Zohydro ER commercial activities.

First regarding net product revenue. We expect to continue on a sell-through revenue recognition methodology on Zohydro ER at least through the remainder of 2014. We expect the $240 average net selling price per prescription for Zohydro ER for the remainder of 2014, and we expect no further net product revenue for SUMAVEL DosePro.

For contract manufacturing revenue, we expect to continue to manufacture and supply SUMAVEL DosePro for Endo with a corresponding high single-digit effective mark-up rate over manufacturing cost, reflecting recognition of revenue deferred at closing of the Endo transaction.

For service and other revenue, we expect continued fees from Valeant Pharmaceuticals for our co-promotion of Migranal Nasal Spray.

And now turning to cost of goods and product gross margins. We expect product gross margin of approximately 80% for Zohydro ER, which includes the manufacturing fee of 15% on Zohydro ER net product revenue, plus internal manufacturing overhead and other costs.

And for the cost of contract manufacturing, the cost of supplying SUMAVEL DosePro to Endo will be at our actual manufacturing costs as outlined above and as detailed in our supply agreement.

Regarding royalty expense, we expect to pay 6% royalty on Zohydro ER net product revenue. And on the operating expense line, specific to research and development and selling, general and administrative expenses, we expect full-year spend of $110 million to $115 million, which is $5 million lower than the previous high-end of our guidance. Within this guidance we anticipate $50 million to $55 million of expenses during the second half of 2014 with the third quarter being slightly higher than the fourth quarter.

And for interest expense, we will no longer have interest expense associated with the HealthCare Royalty Partners debt, which was repaid during the second quarter.

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

Roger Hawley

Thanks, Ann. And look, we’re just five months into the launch of Zohydro. And for those of you who follow us closely, we faced some unexpected challenges. In spite of that, I think we’ve really accomplished a lot. I’m really proud of how the team has handled the number of obstacles that we weren’t really expecting.

The second half of the year is going to be really exciting. We have six goals. We’re going to continue to educate our physician, patients and pharmacists on Zohydro to drive product adoption. We’re going to continue to support appropriate patient access for Zohydro in all states. We seek to secure a co-promotion right for a second pain-related product to better leverage our sales force and enhance our market opportunity.

We’ve plan to submit an sNDA for our first abuse-deterrent formulation of Zohydro ER by October. Number five, we’ve planned to commence the Relday multi-dose clinical trial in the fourth quarter unless we choose to let it slip into Q1. And number six; we are beginning discussions for co-promotion partners for Zohydro ER with the goal of selecting a partner by the end of the year for implementation in 2015.

We know if we accomplish these goals that will create significant shareholder value and position the company for improved results for 2015.

And now, I’d like to turn the call over to the operator to begin question-and-answer session. Operator?

Question-and-Answer Session


Thank you sir. (Operator Instructions) Our first question comes from the line of Jason Gerberry of Leerink Partners. Your line is open. Please go ahead.

Derek Archila – Leerink Partners

Hi everyone, this is Derek calling in for Jason. I just had a question. So what kind of promotional issues and strategies are you trying to do to stimulate some demand for Zohydro right now? You’re still early in the launch. So I just wanted to get a sense of what you guys are doing?

Roger Hawley

Yes, our basic strategies are unchanged from launch. We really think we had a good game plan with good material and a good solid execution. The one thing that we’re really just beginning is our speaker programs. And we have trained speakers and I think we’ve now completed, I believe right at 50-some programs completed and well over 100 already booked, and those will run through the balance of the year.

We’ve actually been getting a keen interest in those programs and had good attendance. So we plan to continue those as long as they keep working.

We are focusing on reimbursement. You know that the first few months many plans cover the product. Now we’re beginning our contract efforts fully. And other than the surprise from ESI, we’ve actually been making great progress there.

I did mention that we are also adding a national service to help speed the processing of prior authorizations, and we’re rolling that out right now. We’ve also began to form a network of preferred pharmacies that have a special focus on supporting patients with chronic pain. Many patients nationwide not just for our product, but for other products are facing some challenges getting pharmacists to fill a prescriptions for chronic pain medications. So we’re trying to do more and we have a pharmacy locator system, which helps patients fine.

Other than that, it’s the basic blocking and tackling of a product launch. And again we’re pleased with the material and our educational campaign. Our safe use programs have been launched and have been very well received are being utilized and we plan to continue all of them.

Derek Archila – Leerink Partners

Perfect, thank you.

Roger Hawley

You bet.


Thank you. Our next question comes from the line of Akiva Felt of Oppenheimer. Your line is open. Please go ahead.

Akiva Felt – Oppenheimer & Co

Great. Thanks for taking the questions. You mentioned the opportunity to leverage the sales force. If we look at other commercial opportunities, can you maybe give us any more specifics there on the type of product profile that you’d be looking for, and how that measures with the sales force review that’s going on at the moment? Thank you.

Roger Hawley

Yes, sure. As far as product fit, basically what we’re trying to achieve is call point overlap. So where the other product is being prescribed and how that would overlay to the physicians that are on our call list, who are current sales force deployment. So you’re basically trying to leverage efficiency on as many calls as you can that you’re already making for the primary product. And you want to offer good support and a good fit for the other company where you’re trying to sell their brand.

So it’s really about call point utilization and targeting. And quite honestly, a therapeutic fit for example, if it’s a pain or even a CNS product that we have interest in long-term, that’s also a benefit both to us and to the company with the other product. So we’ve looked at a number of products and we’ve narrowed it down to the ones that we think are the best fit and we’re now trying to conclude an agreement.

What I was talking about on reviewing of our current sales force, we hired 110 new representatives all at once at a month of training and then we went to a launch meeting. We also faced some real challenges in certain areas with Zohydro launch, mainly because of the negative media and some political coverage in certain geographies.

So we’ve been doing two things there. We’re looking at the actual viability of the territory based on the current situation in the field of reimbursement, and if you will, any reputational damage that was done to the product in that area. And then we’re also looking at the actual performance of the new members – well, actually all members of our sales team in selling this product.

And as you see with any team, sometimes some of the people you hire don’t end up with the skills that you would have hoped that they brought to the job. And so we’ve had some people who left the company, because of their own performance expectations. So both of those have been underway.

We’re now about to complete that process. We’re also in discussions, and we expect soon to have decisions on co-promotion product. And at that time, we will then make a final decision on the size and nature of the territories to complete territory design and to backfill any open territories.

Akiva Felt – Oppenheimer & Co

Is it possible to leverage the REMS infrastructure you have in place with the co-promote agreement?

Roger Hawley

It depends on the products. So for example, one of the things we like is if we could get another pain product, there is a certain amount of infrastructure that you have to put in place to sell an opioid. And certainly selling another product that’s a controlled substance, we could benefit from that as well, and we have been looking specifically at products that fit including that sort of overlaps.

So we certainly aren’t discouraging taking hard look at pain products. And if we could leverage all of our infrastructure, that’s even better.

Akiva Felt – Oppenheimer & Co

Okay. And then I wanted to ask a question on the Express Scripts situation. Just trying to better gauge the impact here. You mentioned the ability to work around the exclusion list using prior authorization. How is that going with that work? I think my understanding is that the prior authorization is a hoop to go through for drugs on formulary, but is this a different situation where it’s not on formulary but yet you can still work around using prior authorization?

Roger Hawley

Right. Myself and the leader of our managed markets group spoke to the executives of ESI right after this became public, we weren’t actually aware of that. We read about it before we became aware officially. So we hadn’t had any discussion with them. And when we did speak with them about why the product was excluded and the fact that it was the only Extended-Release hydrocodone product approved on the market today and we pointed out the product profile and even what the FDA has had to say in defense of their approval of Zohydro, and we shared that with people we spoke to.

And their response was that any patient who has a physician who thinks that they need hydrocodone that they responded well to it, and that they needed to continue on a hydrocodone product for chronic pain, he said, they would just have to submit a prior authorization form.

So that’s right now about all we know. We’re actually having further discussions with them this week to see if we can learn more. And then as I said, the principal focus for us will be on the rest of the Express Scripts business, if you will, the other 75% of the lives that they manage through offering their PBM prescription services for other accounts and other clients. So that’s the business that we’ll be principally focused on.

Akiva Felt – Oppenheimer & Co

Okay, thanks Roger.

Roger Hawley

You bet.


Thank you. Our next question comes from the line of Tim Lugo of William Blair. Your line is open. Please go ahead.

Tim Lugo – William Blair

Hi guys, thanks for taking my question. I guess out of total 10,299 scripts this quarter, how many are going to be impacted by Express Scripts’ decision? And will you be able to go back to Express Scripts once the TRF is approved in early 2015?

Roger Hawley

Yes. Tim, I don’t actually have the breakdown of that number. It’s hard to get by detailed plan. You’ve literally got to get it down to a plan level. In other words, Express Scripts processes a lot of prescriptions that aren’t in that national formulary book of business.

So it’s very hard for us to give an estimate of that overall impact. What I can tell you is that we think its 18 million to 20 million lives overall in the commercial book of business. And that represents about 25% of their overall activity. What I can’t tell you is this, where our prescriptions, if you will, pro rata to their total business. I just don’t know the answer to that.

Tim Lugo – William Blair

Okay. And I guess going back to them after the TRF is approved?

Roger Hawley

Ask that again, I’m not sure I understand the question?

Tim Lugo – William Blair

Once the tamper-resistant formulation is approved, does that start a new discussion with Express Scripts and…

Roger Hawley

Well, we would certainly try. I can’t speak on their behalf. I can’t tell you that – I know they say their formulary is for 2015 and it won’t be effective until January. But like I said, we’re just having actual meetings with them about this topic. I think the next meeting with them is the end of this week. So there is just not a lot I can tell you.

As I said, this sort of caught us off guard because it was on Wednesday that we got back a completed and signed contract with Express Scripts and there hadn’t been any mention of this, but as I now understand it, that they have this group of external experts in their field about determining which products could be included or maybe – which product should be excluded from their formulary. And that seems to be done by this outside group without a lot of detailed communication or at least explanation about why we were excluded.

Part of it as I understand it, is related to a practice now that seems to be coming more widespread, where not only are people bidding additional rebates to get preferred like tier-two on a formulary, but they are encouraging companies to bid even bigger rebates in order to exclude companies, or in other words, to limit the number of people on tier-three.

And so that’s a practice that, to be candid, I didn’t know was being used and I am not sure it’s being used in great frequency, but it’s part of these formularies that are, if you will, looking to exclude products.

Tim Lugo – William Blair

All right. Well, thank you for the color on that. And I guess a question for Ann. SG&A spending was down quarter-over-quarter about $3 million. It sounds like there is a resizing going on in, or at least a reassessment of the size of the sales force. You also have a co-promote, which could obviously lessen some extent as well. Where should we be modeling SG&A over the next few quarters?

Ann Rhoads

Well, I think Tim, I’ll go back to where we were in the guidance, and I’m not going to break it up specifically, but I think if you look at both R&D and SG&A for the rest of the year and kind of somewhere in that $110 million to $115 million range for both categories combined. And I think that will be a good indicator for where we currently expect the expense run rate to be.

Roger Hawley

Yes. And Tim, I could just add on this whole thing about co-promotion and sales force sizing.

I don’t know where we’ll shake out. So on just – on the exact number of territories. I am guessing in the 125 to 135 rep range, somewhere around there. We have had parts of the country for example, New England, we just haven’t done well with the product. There is a huge amount of press and not just the legal actions with State of Massachusetts, but just at lot of negative press up there.

So we’ve cut back territories in some parts of the country. So this wasn’t so much about trying to reduce expenses. It’s trying to put our resources where we’re most productive, and to invest in the territories where we can actually continue to grow our business. And that’s what that’s all about. So I think we’re probably going to end up in that 125 to 135 rep count and that would be with a co-promoter or without. So that’s sort of where we’re at right now.

Tim Lugo – William Blair

All right, thanks for the details.


Thank you. (Operator Instructions) Our next question comes from the line of Annabel Samimy of Stifel. Your line is open. Please go ahead.

Jane [ph] – Stifel Nicolaus

Yes, this is Jane [ph] for Annabel. I have a couple of questions. One is in regards to you expenses, which is you’ve talked about it couple of times a little high. The R&D expenses. Are there any thoughts going down on the other programs until you – the flow down on the other programs until you get the ADF formulation out?

Roger Hawley

Well, the other program is really Relday and we said other than potentially sliding the start of the clinical trial into Q1. Now, we’ve reviewed that internally and with our board, we think getting the data and being – the point of both having data and CMC readiness in Q3 of next year and began all of our partnering work on that program. We think it’s great global potential with that product, and the trial itself isn’t that expensive. So delaying it, we don’t think serves any purpose.

Jane [ph] – Stifel Nicolaus

Okay. And let me ask another question about automation – let me ask you another question. The question I had was the automation of prior authorization. Can you give me a little more color on that?

Roger Hawley

Yes, we’ve entered a contract with a new service that has – and I don’t want to give a lot of details here for just competitive reasons quite honestly. But it’s a very impressive system for assisting and the processing of those prior authorizations. So it’s just a service that – it’s much like checking for reimbursement status on behalf of the patient and we would do that for prior authorizations as well.

So really automates it and simplifies it and speeds up the timeline for getting back a response from the plan. And as I mentioned, we’re getting more Medicare business than we thought. I think it’s around 17%, 18% of our total scripts are prior auth Medicare.

And so because of that, we’ve had quite a few prior auths and we just want to streamline and make it fast and simple and where that everyone can track where it’s at.

Jane [ph] – Stifel Nicolaus

And is it more of the white glove service with an actual individual that you’re talking to, or is it more online whereas the person is more responsible for getting their information in there?

Roger Hawley

Well, it’s actually conducted normally by the office. But it is online. It’s a computerized system. And it minimizes the patient involvement in the process.

Jane [ph] – Stifel Nicolaus

Okay, thank you.

Roger Hawley



Thank you. Our next question comes from the line of Difei Yang of R.F. Lafferty. Your line is open. Please go ahead.

Difei Yang – R.F. Lafferty & Co

Thank you for taking my question. Just to feel quick ones. Back to the ESI, the exclusion that when they say that there is a possible pathway going through prior authorization, did they make it clear that was unique to Zohydro or that’s applicable to…

Roger Hawley

No. We weren’t talking about any other products, so I can’t tell you whether that’s unique or if that’s done with other products. It’s not – I mean at least prior authorizations are not unusual in other systems where you’re quote not on formulary for them still to handle prior authorization. So that didn’t necessarily surprised me any, but what surprises that we were off formulary, having just signed a contract for the overall book-of-business with Express Scripts.

Difei Yang – R.F. Lafferty & Co

Yes, thanks. And Roger maybe, if you’ll help us to understand a little bit more if fast forward six to eight months where Zohydro will started to see competitive products in the market, basically it’s a single entity, your Extended-Release hydrocodone. How would you see the marketplace will be like?

Roger Hawley

Yes, well we’re obviously aware of the progress of Purdue and Teva with their filings. And what we don’t know specifically, the PDUFA dates. We have an estimate of when that would happen.

What we have no insight into is the approvability of those products, or when they’ll come to market if they are approved. So it’s very hard to say, as far as a general comment about competitive landscape, I would just say this. It’s a very large market and the hydrocodone class has the largest number of patients using the hydrocodone molecule. Often times having a competitive product involved actually can help grow the market.

We’re not afraid to compete that it’s rare. I think the pain market itself has been one of the few others. In a category been limited competition within a molecule, but many of those were the beginning of an ER formulation in that molecule itself.

We have a very different situation here. We estimated that there are approximately 2.4 million patients using hydrocodone chronically. So it seems to me there is adequate room for a competitor and there is plenty of business potential. There are a lot of prescribers of hydrocodone and lot of patients already using it chronically. So having a competitor isn’t anything new or unusual in our industry in general.

Difei Yang – R.F. Lafferty & Co

Yes, thank you. And so my last question is with regards to the Chief Commercial Officer. So when you think about the new replacement candidate, what would you think would be an ideal candidate for this job?

Roger Hawley

Well, right now I’ve decided I am the ideal candidate, because I’ve already assumed those responsibilities and we just say we have a relatively small company and one product. And we’ve already had a great game plan in place, and a solid group leaders in all of the functional areas of commercial. So I have no problems stepping in as the Chief Commercial Officer.

We’ve rearranged some other responsibilities within the company that were reporting directly to me and Steve Farr and others here are assuming some of my previous workloads. So right now, I don’t plan to hire a Chief Commercial Officer. We might revisit that next year.

Difei Yang – R.F. Lafferty & Co

Thank you very much for the color.

Roger Hawley



Thank you. Our next question comes from the line of Tim O’Connell of Insight Investments. Your line is open. Please go ahead.

Tim O’Connell – Insight Investments

Hi good afternoon, Roger.

Roger Hawley

HI Tim.

Tim O’Connell – Insight Investments

So there seems to be some haze in us over Zohydro’s exclusivity that it was granted by the FDA on approval on single entity hydro and whether that applies to all formulations or only to non-ADT formulations or whether that would apply to like produce version. So can you comment on that and on second part of that is, do you see a situation even if producers approved and marketed. That third B, that Zohydro could be pulled from the market considering that you have an sNDA on file or do they, in a sense, have to prove their abuse-deterrents as they did with Oxycontin 2. So I guess I’m just looking for some color clarity etcetera on this exclusivity issue.

Roger Hawley

Yes, thanks Tim. It’s a question that a lot of people I know have on their mind. So I’ll tell you what I know and what I don’t know. First off, we know that we were granted three-year exclusivity with the approval of our product and it was quote characterized as new product and we did clinical trials for our indication of chronic pain, and we have a BI or Q12 dosing.

We were the first company to ever complete a hydrocodone clinical study showing efficacy. And so we know what we have and we know that from historical precedent, normally having a product that would be for the same indication with the same molecule and the only difference is the duration of the dose, that product would not be allowed if you will to avoid the exclusivity gained by the first party.

So what’s different here and I think if you will the haze or the rain is about this is this issue of the ADT claim. And to be honest, there is no real precedent there. So I cannot give you clarity or a view one way or the other. All I can tell you is we have exclusivity based on our NDA. The FDA historically hasn’t made these things really clear about what is the limit of your exclusivity. And description or the scope, if you will, of the NP designation or new product exclusivity, it’s not really articulated very clearly.

So the way we interpret this is that at the time of the FDA having an NDA, which is approvable, they will have to make that decision. And that’s a decision that they will have to make. And specifically on the grounds that they would make it, I can’t really comment on that.

The other thing I could say, your question about withdrawal of the product. It’s our view that unless our product is experiencing some abnormal abuse and misuse of the product, which quite honestly so far we’ve seen no sign of that and therefore we’re pleased that although we’re only five months into this, we’re actually very pleased with the profile that we’re seeing, and we have fairly extensive surveillance tools and a group of outside experts who are looking at all the data that is available.

So we believe in what we’re doing. We believe it’s worked thus far. We think things at the states are doing on pill mills and on the use of prescribing guidelines on the use of prescription drug monitoring systems, on the role of education. We think all those things really make a difference. And as Steve mentioned earlier, that CDC report shows what simple changes in a state can make to overall abuse and misuse of products.

So we personally don’t think that while ADT is a great advancement, and one that we’re working on as we said in two different formulation approaches, we think there is one small part of an overall system that needs to be pulled together by our industry, by pharmacists, by prescribers and by the states who regulate it, by law enforcement, all of this needs to work together to form a safe overall system.

So that’s where our efforts are. We’re doing all of that. And focusing on our market of product and we’re really pleased with the results that we’ve been achieved so far. So we do not expect our product to be polled based on the data that are available today.

Tim O’Connell – Insight Investments

Okay. That’s very helpful. And then I want to follow-up with another question. There is a lot of significant news on this call, and the biggest one to me was that you are now entertaining co-promotes for Zohydro after you got approval last fall, I think you went through that process and determined it was to go it alone was the best option. So now that seems to have shifted back to entertaining those co-promotes again. So can you, kind of, give me any thoughts on that process, and why you decided to entertain these co-promotes again versus Zohydro?

Roger Hawley

Right, you bet. And good question. We specifically wanted to take control of this brand at launch .We had a number of required responsibilities of REMS that we wanted to make sure we’re fully in place and operational. We also voluntarily elected to run with a fairly comprehensive set of voluntary safe use initiatives. We also had tried that before, but we were confident that it could make a difference and that our team could execute and implement.

It was just really difficult to ask another company to do all of that at the launch, but given the success that we’ve had and the track record that we’re establishing now and the controls that we have in place, we’re confident it can be expanded quite easily to work with another team. Our organization, the people in the field have found that the things that we’re doing matter, and they are respected and appreciated by pharmacists, patients and prescribers.

So we’re much more confident now that we have everything in place that is working, that are surveillance tools are working, our Safe Use Board, all the additional things. And so now particularly, although we don’t know the date, we expect that at some point the DEA will eventually act on the FDA support of the recommendation to reschedule all hydrocodone from three combination products from three to schedule two where we’re at today.

When that happens, we think covering more physicians and making sure that they are aware and educated about schedule 2 opioids and Extended-Release opioids which they may not be riding today, we have a responsibility to educate more of those prescribers.

We’re watching the number of prescribers that aren’t on our target list, and we’re following up with education of each one of those physician, either via rep calling or through a mail service or a drug information department.

But as that lists becomes longer, we really believe we could benefit from an additional partner on the product. Also because we’re advancing ADT and submitting our sNDA on the Alkermes Formulation by October, we think that 2015 is a good time for us to bring in a partner. We would also have the Altus Formulation going in at the end of – or in the ‘16 and hopefully approved by the end of ‘16 or very early ‘17.

So we just think it’s the right time to look for a partner, and we’ve got much more definition for them to look at.

Tim O’Connell – Insight Investments

So would the likely co-promote partner there – would it be different call points, or it would seem there like the likely ones would there’ll be a lot of overlap there. So the idea being these must be going [ph].

Roger Hawley

Yes, they would definitely be different call points, Tim.

Tim O’Connell – Insight Investments


Roger Hawley

We’re not going to overlap in the same offices.

Tim O’Connell – Insight Investments

Okay. All right, well thanks for answering those questions.

Roger Hawley

Okay. Thanks Tim.


Thank you. Our next question comes from the line of [indiscernible] Securities. Your line is open. Please go ahead.

Roger Hawley



Please go ahead sir. Sir, please ensure that your line is not on mute.

Roger Hawley

We can’t hear you.


And we appear to be having technical difficulties with your line sir.

Roger Hawley

Why don’t we go to the next question if you have one in queue?


I am showing no further questions. And I’d like to turn the conference back over Mr. Roger Hawley for any closing remarks.

Roger Hawley

All right. Thank you. Sorry about that confusion at the end there. And we’ll try to follow-up on that question, if we can. Thanks for joining the call today and that’s it. Thanks.


Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the call. And you may all disconnect. Have a great day.

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