DARA Biosciences' (DARA) CEO Chris Clement on Q2 2014 Results - Earnings Call Transcript

| About: Midatech Pharma (MTP)

DARA Biosciences Inc. (DARA) Q2 2014 Earnings Conference Call August 13, 2014 9:00 AM ET

Executives

Jim Polson – IR

Chris Clement – President and CEO

David Drutz – Executive Chairman and Chief Medical Officer

Dave Tousley – EVP and CFO

David Benharris – VP, Sales, Marketing and Business Development

Analysts

Matt Kaplan – Ladenburg Thalmann

Jason Napodano – Zacks Investment

Operator

Greetings and welcome to the DARA BioSciences second quarter 2014 earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. I will now turn the conference over to your host, Mr. Jim Polson, Investor Relations. Thank you, sir. You may begin.

Jim Polson

Thank you, Operator. Good morning and welcome to the DARA BioSciences second quarter 2014 earnings call. Thank you all for joining us on the call this morning. I would like to begin by reminding our listeners that remarks made during this call may contain forward-looking statements that involve risks and uncertainties.

Forward-looking statements on this call are made pursuant to the Safe Harbor provisions of the Federal Securities laws. Information contained in the forward-looking statements is based on current expectations and is subject to change and actual results may differ materially from forward-looking statements.

Some of the factors that could cause actual results to differ are discussed in reports DARA files with the SEC. These documents are available on the DARA website at www.darabio.com and we encourage you to review these documents carefully.

Joining me on the call today is Chris Clement, DARA’s President and Chief Executive Officer; Dr. David J. Drutz, Executive Chairman of the Board and Chief Medical Officer; Dave Tousley, Chief Financial Officer; and David Benharris, Vice President Sales, Marketing and Business Development, who will be available for the Q&A portion of the call.

Chris will begin the call with opening comments and review of the key progress and results made during the quarter followed by an update from Dr. Drutz regarding our development asset KRN5500. Dave Tousley will conclude with a review of the second quarter financials. We will then open the call up for your questions.

It is now my pleasure to turn the call over to Chris.

Chris Clement

Thanks, Jim, and good morning, everyone. I’m very pleased to welcome you to our second quarter 2014 earnings call. As always, we appreciate your time, interest and participation in this event.

As you likely saw in our press release last night, this was a solid and significant quarter of progress for DARA. DARA reported record net revenues of $409,400 for the second quarter based on gross product sales in excess of $500,000 as compared to net revenues of $76,900 for the year-ago period, a year-over-year increase of 432%. The increases in revenue were primarily attributable to the newly expanded commercial sales organization of 20 sales representatives deployed nationwide who have been in their territories since January of this year.

We are encouraged with our success thus far in generating interest in prescriptions across all the products in our portfolio and we’re particularly pleased with the very positive trends for Gelclair.

In addition to progress on the commercial side, other notable and important highlights include a second orphan drug designation for KRN5500 for the treatment of multiple myeloma further enhancing the potential value of our key development asset. Additionally, we successfully completed a public offering that added $11.3 million after expenses to our cash reserves which will allow us to aggressively drive our business operations going forward.

We also recently completed a management transition, affording us the necessary efficiencies and focus to execute our long-term growth strategy. Further, we continue to evaluate new product opportunities to further enhance our supportive care portfolio with the goal and vision of positioning DARA as the leading oncology supportive care company.

Finally, we continue to diligently evaluate partnership opportunities for KRN5500 to maximize the value of this asset in both the CCIPN and multiple myeloma market segments where we have been granted orphan designation.

As DARA continues to evolve and grow into a successful commercial oncology supportive care company and with the encouraging traction we are beginning to see with product sales, the management team and the board felt that the timing was appropriate to transition the chief executive responsibilities.

In my role now as CEO, I will leverage my significant commercial experience and focus on the strategy and implementation of our marketing plans to ensure success in establishing each of our products in the market.

The marketing and sales team that we have assembled all have significant experience in successfully launching and building specialty pharmaceutical products. We have unique products. We have an enthusiastic sales force and an experienced management team for us to build DARA into a leader in oncology supportive care.

David Drutz will continue in his role as Chief Medical Officer and has assumed the role as Executive Chairman of the Board. David’s efforts and focus in overseeing the development pathway and options for KRN5500 will be critical as we progress through the partnering process and prepare later this year for meeting with FDA relative to our remaining clinical development program.

In addition, David will continue to support our commercial sales efforts, meeting with key opinion leaders, various nurse associations such as the ONS practicing physicians and other care givers in providing needed education on the importance of supportive care and value of the DARA products in meeting some of those unmet needs.

David’s leadership as CEO has accomplished much over the past couple of years as DARA has evolved into a focused supportive care company. I look forward to continuing to drive progress with David, our board, the management team and our dedicated employees to create significant value for our shareholders.

Let me turn specifically to the second quarter. We were pleased with the rollout and integration of our sales team into their new territories. To remind you, the sales team has been in place since January of this year and thus far they’ve been very successful and effective in establishing and building important relationships with their target offices and institutions.

Our sales reps are gaining regular access to these key offices both in terms of reach to their targets as well as frequency to access. Frequency of regular access is a good indicator of the sales team building solid and sustainable relationships to facilitate usage of our products.

I also believe that our unique portfolio of products providing benefit across the spectrum of problems seen in a lot of cancer patients is a differentiating feature over competing companies who may have a more limited product offering which then helps facilitate our office access.

Our unique product portfolio, coupled with the personal outreach of our sales reps in volunteering their time and joining local and regional chapters of supportive care and other relevant organizations is proving to be beneficial in building these important relationships with the caregivers in each territory.

Supportive care, while a crucial element to favorable patient outcomes, has stood in the shadows over the years as much of the focus and attention has been on the treatment side of the disease. As DARA establishes its identity in supportive care, we are very active in raising awareness of the importance of good supportive care through participation and education at national and regional oncology meetings, nurse association meetings and town hall style meetings.

Our activities in this regard reflect a similar focus by ASCO and other oncology professional organizations on the critical area of oncology supportive care, not only for those patients undergoing current active cancer therapy but also for the growing number of cancer survivors who were left with lingering side effects of their successful treatment, including but not limited to painful peripheral neuropathy.

In fact, we have hosted over 400 in service educational programs during the second quarter, including 26 offsite educational speaker programs including many regional O&S meetings, catering to healthcare professionals in the medical oncology and radiation oncology fields. An interesting and creative initiative in particular was educating patients who have oral mucositis on how to institute good oral hygiene, which we supported with an innovative smartphone app that provided tips and guidance for these patients.

While we’re excited about the potential of our entire product portfolio, let me take a few minutes to provide you with an update and insights specifically on our two key products, Gelclair and Soltamox.

Gelclair performance is starting to accelerate as the sales team continues to raise awareness and educate nurses and physicians on the benefits of this product. In addition, we are seeing an increase in formulary approvals at major medical institutions such as Northwestern, Ohio State University Medical Center and USC, to name just a few.

We anticipate further acceptances of major institutions in the second half of the year as Gelclair gets presented for consideration at those centers. Our market research indicates a preference for Gelclair among caregivers and patients over competitive agents because it’s very easy to use, convenience, has demonstrated excellent efficacy in an expedient manner from the painful sores of oral mucositis.

We’ve also observed increased traffic to the Gelclair website, which is more than doubled over the last quarter. In addition, interest in our patient-oriented app for oral hygiene is increasing.

Turning to Soltamox, sales of the drug continue to increase but, frankly, not at the level we had expected. But this product is somewhat more niche than Gelclair. We need to continue to raise awareness and interest with repetition of message in key offices.

We still believe that there is significant market opportunities with Soltamox based upon market research we have conducted and the findings from our capture registry. Both the registry and the market research indicate that a segment of the existing tomaxifen patient population may choose Soltamox when presented with the option.

In addition, we have heard directly from a number of patients very thankful for the availability of this drug given their inability to tolerate the tablet product. Soltamox was also recently added to the FSS or the federal supply schedule now opening up the VA and other government agencies for this drug.

As we continue to execute on the marketing plans for both Soltamox and Gelclair, we believe both products we benefit from unique and creative marketing programs, which I will briefly outline for you.

A comprehensive, non-personal integrated digital campaign with a well-known and successful partner to help drive product demand through targeted media, such as e-newsletter, mobile messages, surveys and other interactive programs have begun in the third quarter. These digital programs will be very complementary to our personal sales calls and educational programs.

Our recently instituted no coupon, no co-pay, no hassles program resolves any concern over costs or fulfillments of the prescription to qualified patients and helps to ensure that patients who would benefit from these products will have access to them.

Beyond Gelclair and Soltamox I mentioned earlier, we have seen nice uptake in demand for the other products in our portfolio, particularly Aquoral and Ferralet. We have also recently completed market research on all the products in the portfolio which indicate an interest and as well as a willingness to prescribe among physicians going forward.

What I believe is important here is that the caregivers see value in the features of each of our products relative to competitive agents. This will allow us to effectively position these products in the market.

I mentioned earlier that I thought an important differentiating feature of DARA is the portfolio of products we currently offer the market. We believe that this portfolio approach is a strength and, thus, we plan on adding additional supportive care products to our mix. As such, we continue to search for and evaluate products we can acquire or license that can be monetized in the near term.

This focus on acquiring additional products is a high priority for us and we will be diligent in that effort.

So in summary, on the commercial front, we are pleased with the progress our sales team has made in a relatively short period of time in terms of establishing and building key office relationships and gaining regular access to key accounts. While this positive traction is nice to see, we now need to significantly drive revenues for all of our products and firmly establish DARA as the oncology supportive care company.

Before I conclude and hand the call over to David, I wanted to briefly address our recent capital raising efforts. Early June, the company conducted a registered public offering of approximately $12.5 million of units consisting of 12,500 shares of series C1 preferred stock which is convertible into a total of approximately 11.3 million shares of common stock.

The purchase agreement also included five-year and 13-month warrants to purchase an aggregate of approximately 11.3 million shares of common stock at an exercise price of $1.67 per share. The offering resulted in net proceeds of approximately $11.3 million.

Consistent with our recently completed capital raise, this funding will be primarily focused on our ongoing business operations, continuing to drive our commercial sales efforts and providing flexibility as we evaluate new product opportunities in supportive care as well as pursue partnership opportunities for KRN5500.

In summary, our team here at DARA believes that oncology supportive care is a very attractive and important area of strategic focus because there is significant unmet medical need across the spectrum of therapeutic areas that comprise the oncology supportive care space.

As such, we believe there is a significant market opportunity for our portfolio products and it remains a key strategic priority to identify longer term growth opportunities to end license other supportive care products.

Our team remains focused on building a strategy that will provide us with long-term sustainable growth. We feel confident in our strategic plan we have in place as well as having a right team to execute that plan.

Not only do we have a solid portfolio of commercial products, we believe we now have the momentum, the right sales strategy, the resources to drive and harness the demand that we believe that exists in the marketplace.

When coupled with what we believe to be an extremely valuable and high-end potential development asset in KRN5500, we think we are uniquely positioned in the oncology supportive care market and have the opportunity to create a significant value for our shareholders.

I will now turn the call over to David for an update on KRN5500. David?

David Drutz

Thank you, Chris. Good morning and thanks to all for joining us. I’d like to spend a few minutes talking about what’s going on with our lead development asset, KRN5500 which I’ll now simply refer to as KRN.

As a reminder, KRN is a novel, non-opioid, non-narcotic intravenous compound that is being readied for partner-based phase 2B clinical development. KRN was previously awarded fast track development status by the FDA in 2011 based on a successful phase 2A clinical trial in cancer-related neuropathic pain. Fast track provides a pathway to expedited drug development and consideration for priority review.

Earlier this year, DARA also received orphan drug designation for development of KRN in patients with cancer for the (parenteral) treatment of painful, chronic chemotherapy-induced peripheral neuropathy or CCIPN that is refractory to conventional analgesics.

Orphan drug designation provides DARA with seven years market exclusivity from the time of approval, (Acts) credits, waiver of (PDFA) fees and access to federal grants. During the second quarter, we announced that the FDA had granted orphan drug designation for a second indication, the treatment of multiple myeloma.

This allows us to approach the actual treatment of this hematological or blood malignancy. It is noteworthy in this regard that up to 20% of myeloma patients suffer from intrinsic neuropathy, an incident that increases to the range of 75% in patients treated with neurotoxic drugs such as Bortezomib, also known as Velcade, or (solidomide).

We believe this myeloma specific orphan designation enhances both the visibility and the future market opportunity for this valuable pipeline product.

The favorable consideration of myeloma as an orphan indication was supported by a comprehensive publication in 2012 by an independent group of academic investigators, which demonstrated its therapeutic potential based on this effect on both myeloma malignant cells and the bone marrow osteo class that permit bone invasion by this destructive disease.

As we have previously reported, a priority of the KRN program has been to secure a development partner to undertake, manage and fund the future clinical trials and ultimate worldwide commercialization of this asset.

We’ve engaged with a firm to identify and evaluate the breadth of both pain oriented and oncology oriented companies with the expertise to develop this novel drug. We are proceeding in a careful and systematic manner and are pleased to date with how that process is proceeding.

The company’s planning to meet with the FDA later this year in order to discuss the clinical pathway forward for KRN in the context of the orphan and fast track designation which we believe will be helpful in identifying the most efficient and cost effective way to further develop this drug.

We will update the progress on our efforts to maximize KRN’s value accordingly as events unfold.

With that, I will now turn the call over to Dave Tousley who will provide an overview of our second quarter financial results. Dave?

Dave Tousley

Thanks, David, and thank you all for joining us this morning. Net revenues for the second quarter of 2014 were $409,400 compared to net revenues of $76,900 for the second quarter last year. The significant increase in sales of Gelclair was responsible for the majority of this increase as Gelclair had just launched in April of 2013.

Our cost of sales for the second quarter of 2014 increased $82,500 from the second quarter of 2013 reflecting significantly higher sales with a much higher proportion of Gelclair sales.

Sales and marketing expense increased $480,000 from $888,000 for the three months ended June 30th last year with $1.4 million for the corresponding period this year primarily as a result of the expansion of the sales force to 20 reps, which expansion became effective in early January 2014.

Our research and development expenses decreased $197,000 from $509,000 for the three months ended June 30th last year to $312,000 for the corresponding period this year primarily as a result of formulation and API manufacturing costs associated with the KRN5500 program incurred in 2013 while none had been incurred this year.

Our general and administrative expenses decreased by $149,000 from $1.25 million from the three months ended June 30th last year to $1.1 million for the corresponding period this year primarily as a result of a decrease in professional service fees.

Our other income and expense decreased by $83,000 from $66,000 of income for the three months ended June 30th last year to an expense of $17,000 for the corresponding period this year primarily as a result of $125,000 in license revenue related to the DB959 which was recognized during the second quarter of 2013 offset by $43,000 in related expenses while none was recognized in the corresponding period this year.

At the end of the second quarter this year, our principle sources of liquidity were our cash and cash equivalents, which totaled approximately $15.9 million. As of June 30th, we had networking capital of approximately $14.5 million.

As Chris mentioned, during the second quarter, we raised net proceeds of approximately $11.3 million after placement agent commissions and other offering expenses through a public offering of approximately 12,500 shares of preferred stock which is convertible into approximately 11.3 million shares of common stock and 13-month and five-month warrants to purchase an aggregate of approximately 11.3 million shares of common stock at an exercise price of $1.67.

With this financing and based upon our current operating plan, we believe that we now have sufficient working capital to continue our operations at least through 2015. I’ll be happy to answer any questions you have during the Q&A and I’ll now turn the call over to Jim.

Jim Polson

Operator, we are ready to open the call up for questions. Thank you.

Question-and-Answer Session

Operator

Thank you. At this time, we will be conducting a question-and-answer session. (Operator instructions) Our first question is coming from Matt Kaplan of Ladenburg Thalmann. Please proceed with your question.

Matt Kaplan – Ladenburg Thalmann

Hi, good morning, guys.

Chris Clement

Hello, Matt.

Matt Kaplan – Ladenburg Thalmann

A few questions, starting off first and maybe giving us a little bit of sense in terms of your partnering discussions with KRN5500, where are those now and what do you think you need to drive those forward to be able to start the phase 2B development program?

Chris Clement

Okay, so as David mentioned earlier, we have engaged with a firm that is doing a very comprehensive and systematic outreach to companies that are doing development and have expertise in both the oncology and in the chronic pain areas. So this is very extensive, very comprehensive and we’re not just looking at US companies. We’re looking at global companies, big pharma, small pharma, biotech. We’re doing this in, as I said, very systematic and thorough manner.

There have been a lot of companies that have expressed interest. They are reviewing data right now. It proceeds from initiating the contact to providing follow-up information if that party is interested. If it then progresses beyond that, it moves to a more comprehensive diligence process. So but we are running the gamut right now of companies that are reviewing various levels of data from non-confidential to more detailed diligence. So that’s where the process stands at this particular point.

It’s difficult to say exactly when that process will conclude but I can tell you it is as thorough and comprehensive as anything that the company has undertaken in the past.

Matt Kaplan – Ladenburg Thalmann

Okay, fair enough. And in terms of just staying with 5500 for a minute, your meeting with the FDA later this year, what are some of the I guess questions or proposals that you want feedback on from the FDA, specifically maybe give us a sense in terms of the potential clinical development pathways forward of the product and the trials that you’re…

David Drutz

Yeah, hi, Matt, so this is David. Sort of armed with two orphan designations and a fast track, the question for us is what’s the most efficient way to move this product up through to commercialization? So one of the things we want to explore to them is how to use those tools in order to best develop this drug.

Before we got the second orphan designation for multiple myeloma, we were thinking of this drug solely in the context of being a drug for neuropathic pain. The clinical trial that was accomplished and published indicated that it seemed to work in a diversity of types of chemotherapy induced neuropathic pain because the patients in that published trial had been exposed to taxings, platinums, myeloma drugs, all of which carry a burden on the nerves.

So as we began to think about it, we wondered whether we might be able to identify one disease in which the drug might be developed, at least as a beginning and multiple myeloma emerged for a number of reasons but particularly because it wasn’t done by us. An independent group of academic investigators really doing extensive in vitro and in vivo animal studies with a very good model of myeloma demonstrated that the drug had great promise to actually treat myeloma

So how do you think about… myeloma itself carries a big burden of nerve damage as I mentioned in the call. The disease itself damages nerves but the drugs that are used to treat the disease, especially (Velcaid), really damage the nerves.

So here you had a single disease with nerve damage characterizing it. I think, but I do not know, that the difference in treating pain and the difference in treating myeloma is really a function of the dose that’s used. We already know from the phase 2A published study that it’s really a very, very low dose of KRN, which is sufficient to deal with the neuropathic pain.

And based on the extrapolation from animal data in the published paper, it would suggest that a fairly high dose of KRN may be necessary to treat myeloma. So as we work with the FDA, we’re going to try to understand whether we should be developing the drug within myeloma or go for a broader cut.

Matt Kaplan – Ladenburg Thalmann

Now, would the high dose also address some of the data that you have from the neuropathic pain aspect as well in these patients?

David Drutz

Yeah, presumably it would. Presumably it would. There was a certain amount of dose ranging done in the published study, so we know that the higher the dose that we gave within the limited range of doses that were actually tested in that study, the higher the dose, the better the pain response.

Matt Kaplan – Ladenburg Thalmann

Okay, good. So what you’re saying is you have feedback from the FDA in terms of potential path forward and perhaps multiple myeloma either as a treatment or as a treatment for the underlying disease or a treatment for the neuropath pain.

David Drutz

Exactly. This drug reminds me from way early in my training, my career, because (inaudible) even my career is what happened with methotrexate. Methotrexate started out as a cancer drug. It was a good cancer drug, fulfilled a big role.

But more recently and in a much lower dosage it was found to be a drug for rheumatoid arthritis. In fact, it’s emerged as the (demark) for the treatment of rheumatoid arthritis. So we think that the potential within KRN might be interesting as well.

Matt Kaplan – Ladenburg Thalmann

And just one last question on 5500, in terms of your plans to move it forward, that will be done in the context of a partnership or will you move it forward into a phase 2B on your own?

David Drutz

Well, everybody we’ve talked to, potential partners, have said, guys, we really need to know what the next program looks like. We need to know and, by the way, we’d like to be involved in it. So we’ve got to have this conversation in order to be able to engage the partners and really put deep thought into this.

Chris Clement

Yeah, I think, Matt, we are not in a position at this point to advance KRN5500 into phase 2B and beyond by ourselves. I mean, so that’s why this partnering exercise is an important one, obviously to scour the range of potential partners that are out there.

But we believe with multiple orphan designations, with the fast track status, as Dave had mentioned, there’s a lot of opportunity to create value here and we’re looking at all of those options. But in terms of the resources that we have right now, as we mentioned in the call, those are going to be directed towards advancing our commercial business.

Matt Kaplan – Ladenburg Thalmann

Okay, very good. And then just a few questions on your commercial business and perhaps (up ending) your pipeline there, can you talk about the development effort that you have in the supportive care space looking at bringing additional products into your portfolio on the supportive care side?

Chris Clement

As we go out, I think I also mentioned one of the things that we find extremely valuable to us when we go into these offices is the fact that we offer a portfolio of products and that’s important because in different offices, it’s not always the same product that’s going to be, what I call, the door opener, the one that’s going to get you in the door and then allow you to broadly sell the portfolio.

What we’re finding is that a lot of these nurses and other caregivers in these oncology offices, they struggle with trying to keep up with how they’re going to treat a lot of these side effects and a lot of the problems caused by the disease and the treatment.

So to the extent that you have a broad portfolio and you can go in and help these offices with multiple products, they are very grateful about that and they remember who you are and that’s one of the differentiating features I think that we’re beginning to see.

So as we look across the spectrum of supportive care, there are a lot of areas that no products exist today. (Inaudible) is a good one. I wish we had one in our portfolio right now and we don’t. But things that resonate in helping these caregivers treat the side effects that a lot of these cancer patients are having, anything that we add to our portfolio is going to be synergistic and it’s going to only enhance the differentiating component that we feel is important.

We have a very thorough process underway right now and we are currently evaluating several real-time opportunities that we think would be beneficial for us. So that process is also underway.

The one thing to remember with these supportive care products, we don’t need to have blockbuster type products here. We can find niche products that fit into the portfolio, things that support the other products but also bring real value to the caregivers and enhance the overall strategy that we’re looking to build, which is to make DARA the oncology supportive care company.

So process is underway, looking at real live opportunities at this point and we’ll keep you posted as things evolve.

Matt Kaplan – Ladenburg Thalmann

Any goals from a number of products per year or this year or next year that you bring in as… any metrics that we can?

Chris Clement

That’s difficult to say. Honestly, I don’t think there’s a limitation on the number of opportunities. I mean, obviously we need to titrate them in a way that we can commercialize them and make sure that we can position them appropriately. But we think the kind of world is our oyster out there and we think that over time the more products that we add, it’s only going to enhance our value and importance in these oncology offices.

It’s kind of unique that a lot of companies are limited by the number of products that they can put in their bag. In our particular case, I actually think that we become more interesting and more efficient the more products that we have across the portfolio.

So we don’t have a limitation in all honesty. I think we’re looking at the right products that fit the right niche and, as I said, that would bring real value to patients out there that seriously could use the help.

Matt Kaplan – Ladenburg Thalmann

Now and then shift the gears in terms of comment on your current products that you have now. It seems like you’re having some success with Gelclair in terms of driving those revenues. What’s your sense in terms of what’s going on and what you can do translate some of the success that you’re seeing with Gelclair to Soltamox and spark those revenues as well?

Chris Clement

Yeah, I mean, I think just to back up for a minute, I think we’re seeing nice increases across the entire portfolio of products that we have. But Gelclair certainly has done extremely well and I think part of it I think we benefit from the fact that Gelclair had been on the market previously and now we’re making people aware of that again. We’re reinstituting formulary approvals where it had been before. It had a very favorable image. It continues to do so.

The drug, as I said, is extremely user friendly. So patients like it, caregivers like it. The formularies, the hospitals like it because it’s easy and convenient to use and it provides very good efficacy. So we think we’re going to continue to have great success with Gelclair across the board.

With Soltamox, Soltamox is going to appeal to a smaller portion of patients, those patients that have troubles in swallowing tablets or don’t like them or simply want an option. So it’s kind of a more niche type of opportunity.

But what I can tell you is that the patients who need Soltamox, they are incredibly grateful and thankful and reach out to us. And so we know that there’s a market out there. We know there’s an opportunity out there and we know that the physicians don’t really have any objection to putting the patients on Soltamox.

So I think right now we have to stay the course. We are seeing increased traction. It’s just not what we originally thought, what the uptick we thought it was going to be. But the market research and some of the uptick that we’re seeing leads us to believe that we will eventually get there. But we recognize it’s a little bit more niche in that regard but we think the strategy that we have in place is the appropriate one.

Matt Kaplan – Ladenburg Thalmann

It doesn’t change your perspective on the peak sales potential for the product or?

Chris Clement

No, I think we still see the ultimate potential but we need to continue to build every month. We’re seeing increasing number of prescribers, increasing number of prescriptions. So it’s one foot in front of the other at this particular point and then we get a little wind behind our back and we think we’ll get to where we ultimately want to be. But it’s just taking a little bit longer and the uptake just wasn’t as rapid as we thought it would be.

Matt Kaplan – Ladenburg Thalmann

And I guess can you break out the sales for us in the quarter of Soltamox and Gelclair?

Chris Clement

Yeah, I mean, if you went into the queue, we haven’t broken out revenues. We haven’t done it at this point. I mean, clearly, Gelclair is in the lead here but as we go forward and as we gain a little bit more experience and results on the products, we’ll consider doing that down the road. But at this point, we haven’t disclosed any.

Matt Kaplan – Ladenburg Thalmann

Fair enough. Thanks, guys.

Chris Clement

Thanks, Matt.

Operator

(Operator Instructions) Our next question is coming from Jason Napodano with Zacks Investment. Please proceed with your question.

Jason Napodano – Zacks Investment

Good morning, guys.

Chris Clement

Good morning.

Jason Napodano – Zacks Investment

Congrats of a good quarter, clear progress there. Just wanted to talk a little bit about the no hassle program that you guys instituted earlier in the year. I’m wondering if you can provide maybe for us some color on things like fulfillment rates or prior authorizations, things like that, and then what the average out of pocket expense for a patient on Soltamox or Gelclair is for a month.

Chris Clement. Yeah, Jason, I’m going to ask David Benharris to give you that briefing.

David Benharris

Jason, just at high level, what we can say is that around d90% of the patients that go to full for either product, their out of pocket expense is zero. So the program works. It’s a program that’s very seamless to the patient as well as the pharmacist at the retail counter. It’s at all the major chains, the largest chains across the country, I should say, that have implemented.

So if you go in with a prescription for Gelclair for a month’s supply, your co-pay would be tier three generally, $60, $70, $80 for that prescription. It would be mitigated down to a zero co-pay. You don’t need a coupon. You don’t need any process. You don’t need to wait to submit anything. As a patient and as a pharmacist, you don’t have to do an extra step. There’s no special instructions. There’s no extra processes. It’s just implemented through their system through our vendor.

So at this point, what we’re seeing… and we’ve got a couple months data… is that the prescriptions are for the most part at zero for folks, as I said over 90%, based on our business rules, so it’s clearly a very good opportunity for healthcare practitioners to prescribe our products in a way that are easy for their patients, both from an access perspective and an expense perspective and for the patients, they vary.

We get a lot of emails back from healthcare practitioners as well as patients thanking us for having these products available to them in a readily accessible fashion at a very easy to afford opportunity for their pocketbook.

So we’re very pleased with it for this point. It’s only a couple months that we’ve been out in the field with it. But as we continue to see the results come in, we see growth in our retail business not only for our own product but relative to the other products in the space.

Jason Napodano – Zacks Investment

Okay, and as far as your guys’ growth margin, the 2013 was kind of all over the place but it looks like the past two quarters at least have been pretty consistent and you had a good growth margin number here in the second quarter. I’m wondering just going forward what should we think about in terms of the gross margin line and where that could end up in the coming quarters or even next year.

Chris Clement

Yeah, well, the gross margin going forward should as sales rise and the volumes go up, we should see that coming down somewhat. I mean, there are some fixed costs that will be spread amongst higher units. So that would follow there.

One thing I will say is that during the quarter, we did move some expenses up into net sales that are related to growth fee for service as well as co-pay. Previously they were immaterial but those have been charged against net sales now.

Jason Napodano – Zacks Investment

Okay, when you say gross margin coming down, you mean cost of goods coming down?

Dave Tousley

Cost of goods, yeah, the reclassification there has been between cost of goods and up into net sales.

Jason Napodano – Zacks Investment

Okay, so gross margin…

Dave Tousley

… and the cost of goods lower.

Jason Napodano – Zacks Investment

Okay. So gross margin should be trending up you would think in the coming quarters.

Dave Tousley

Well, yeah, as volumes go up the margin should come down.

Jason Napodano – Zacks Investment

And then just in terms of the trajectory, I’m wondering when you guys think you’ll be comfortable maybe providing some guidance even if it’s only looking out over a quarter.

Chris Clement

Yeah, Jason, right now we’re focusing on making sure that the metrics that are important to us, making sure that our sales team are calling on the right targets, that they’re getting in there with the frequency that we want them to, that they’re selling a portfolio of products, to us, those are the fundamentals right now and we want to get that… we want to make sure that we continue to see that progress.

I think right now we feel we have a good toe hold and have really built very good relationships. So I’m really impressed with how the reps are getting into these offices and have built these solid relationships and they’ve done it not only by getting in there with an interesting portfolio of products but they’ve done it by becoming true members of their community as well, donating their time, joining the local chapters of these different societies and things, really personally getting engaged.

So I think as we move out into the next quarter or two and we continue to see those kinds of metrics in terms of calls and call averages and that kind of stuff, I mean, those are the things that are going to be good indicators for us.

And once we see that and we’re comfortable with it, then we’ll consider down the road of giving some level of guidance. But to do so now, I think would certainly be premature. We need to continue to look at the metrics that as I just mentioned them to you.

Jason Napodano – Zacks Investment

Got you, okay. And then just the last question on KRN, I’m wondering after the FDA meeting later in the year, supposing you come out with decent guidance on a path forward, how quickly do you think that you would proceed or be ready to proceed into a phase 2B study? I’m thinking specifically about product supply manufacturing, things like that.

David Drutz

Well, the CMC is sort of running… actually, we have product ready to go into clinical trials. I think… what’s the timeline on that, Chris? It’s within a couple of months we should be ready to go right into clinical trials. So we paid a lot of attention, if this is answer your question properly, Jason, we’ve paid a lot of attention to this and we would be ready to go very soon after we understand the pathway.

Jason Napodano – Zacks Investment

Got you, okay. All right, guys, thanks for the update.

Chris Clement

You bet. Thank you, Jason.

Operator

Thank you. At this time, I’d like to turn the floor back over to Mr. Clement for any additional or closing comments.

Chris Clement

Thank you. Thank you, Operator, and thank you all for joining us this morning for our second quarter call. As we mentioned throughout this call and the questions, we are encouraged to date with the traction of our commercial sales strategy and we remain committed to building upon this positive momentum generated in the first half of the year.

We believe this growing success is attributable to the breadth of our product portfolio and the value it brings to both patients and healthcare practitioners alike. We continue to proactive examine and enhancing our sales strategy bolstering our existing product portfolio and maximizing the value of our key development asset, KRN5500, with the ultimate goal of creating sustainable growth and value for our shareholders.

Thanks again and I look forward to providing you with future updates on our progress.

Operator

Ladies and gentlemen, thank you for your participation. This concludes today’s teleconference. You may disconnect your lines at this time and have a wonderful day.

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