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AVANIR Pharmaceuticals (NASDAQ:AVNR)

F1Q11 (Qtr End 12/31/2010) Earnings Call

February 3, 2011 9:00 am ET

Executives

Brenna Mullen - Investor Relations

Keith Katkin - President and CEO

Christine Ocampo - VP of Finance

Randall Kaye - Chief Medical Officer

Analysts

Ritu Baral - Cannacord

Matt Duffy - PGR Research

Carol Werther - Summer Street Research

Thomas Wei - Jefferies

Operator

Good morning. My name is Sarah and I will be your conference operator today. At this time, I would like to welcome everyone to the AVANIR Pharmaceuticals Fiscal 2011 First Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be question and answer session. (Operator Instructions) Thank you Ms. Mullen, you may begin your conference.

Brenna Mullen

Thank you and good morning everyone. Joining me on today's conference call is Keith Katkin, President and Chief Executive Officer, Christine Ocampo, Vice President of Finance and Dr. Randall Kaye, Chief Medical Officer.

I will begin the call by addressing our forward-looking statements. Following this, I'll turn the call over to Keith Katkin.

As a reminder, the statements made on this call represent our judgment as of today, February 3, 2011. Our remarks and responses to questions during this conference call may constitute forward-looking statements, including plans, expectations, and financial projections, all of which involve certain assumptions, risks, and uncertainties that are beyond our control and could cause actual results to differ materially from the expected results expressed in our forward-looking statements.

These forward-looking statements include, but are not limited to AVANIR’s ability to successfully market and sell NUEDEXTA in the United States, the safety and efficacy of NUEDEXTA, the long-term commercial potential for NUEDEXTA, including the estimates of market size, the timing and the cost for initiation of new clinical studies for NUEDEXTA, advancing the European regulatory status of NUEDEXTA, as well as statements regarding our financial ability to support the initial launch of NUEDEXTA and other activities, anticipated expenditure levels, and future reimbursement coverage for NUEDEXTA.

We encourage you to take the time to review our recent filings with the Securities and Exchange Commission, which present these matters in more detail as well as related risk factors. AVANIR disclaims any intent to update any forward-looking statements made during this call.

Now I will turn over the call over to Keith Katkin.

Keith Katkin

Thank you Brenna and good morning everyone. Thank you for joining us on our fiscal 2011 first quarter earnings call. It is incredibly the second time in AVANIR as we are conducting this earnings call live from our national launch meeting with our entire sales force and commercial team after almost two months of physician call activity focused on PBA disease awareness. The team is excited and very eager to get out and start selling NUEDEXTA next Monday, February 7th.

Now, I would like to turn today’s call but I’ll provide a brief overview of our business before turning the call over to Christine Ocampo, who will review our financial results, followed by Dr. Randal Kaye, who will provide and update on NUEDEXTA development program and our medical affairs activities.

The first quarter of fiscal 2011 was a significant turning point in the history of AVANIR. We opened the new fiscal year with the FDA approval of NUEDEXTA the first and only treatment for pseudobulbar or PBA, marking an important milestone for the many patients in the U.S. currently suffering from the debilitating episodes of PBA and accelerating their transformation into a commercial enterprise fully equipped to deliver what we believe will be a successful launch.

Earlier this week we were extremely pleased to announce that NUEDEXTA is now available by prescription in retail pharmacies across the country and that our dedicated sales force will commence physician promotional activity on Monday February 7th. This truly an exciting time at AVANIR as we are on the cusp of seeing our hard work and perseverance over the past several years culminate in the launch of NUEDEXTA.

In the past quarter we focused on market development and commercial readiness and as a result, I am delighted to announce that our commercial organization is fully staffed, trained and ready to support the launch of NUEDEXTA. The commercial team has significant sales and marketing experience and a collective track record of success to help ensure a strong launch for NUEDEXTA.

Since we are building a new market in therapeutic category, we continue to educate physicians, neurologic patients and their caregivers in order to change the established behaviors and ensure patients of PBA are properly diagnosed and treated.

In order to do so, we continue work on our PBA Disease Awareness campaigns for both our target physicians and neurologic patient audiences.

In addition to our sales team educating healthcare providers about PBA and the impact it has on patient's lives, we will also be employing tactics such as print and digital advertising, representation at medical conferences and partnership initiatives with leading patient advocacy groups.

For example, the Brain Injury Association of America and the National Stroke Association have both released results of survey conducted amongst their constituents on the prevalent and impact of PBA. The Multiple Sclerosis Association of America, a national non-profit of charity, also recently conducted a survey of over 5,000 of their members and will be releasing the result of this survey within the next few weeks.

In addition, last week we trained our first wave of physicians to conduct peer-to-peer educational programs. The feedback from the physicians was very positive. They were very eager to not only educate their colleagues but also treat their PBA patients with NUEDEXTA as soon as it was available for prescription.

Even though our official promotion starts on February 07th, we have already started to see physicians around the country prescribing NUEDEXTA for their patients. All of these initiatives collectively support our strategy of increasing awareness, recognition, diagnosis and treatment of PBA with NUEDEXTA.

In the past quarter, we also initiated our brand of NUEDEXTA promotional campaign with print and digital advertising and a product website with separate content for healthcare providers and patients. We encourage everyone to visit our website at www.NUEDEXTA.com.

While we are educating physicians treating a variety of underlying neurologic conditions associated with PBA, we continue to believe early uptake will occur primarily in patients with PBA secondary to ALS or MS as there the populations are most similar with PBA and NUEDEXTA.

We expect a second wave of adoption will occur amongst stroke and traumatic brain injury populations and the slowest adopting patients will likely the patients with Parkinson's disease and other underlying neurologic conditions due to lower levels of disease awareness. We expect the staged approach to building the market will provide the opportunity for continued long-term growth of NUEDEXTA.

With the sales organization in place and marketing [Indiscernible]actively] initiated we have also build out our managed markets team who are now calling on key Medicare Part D plans, commercial plans, pharmacy benefit managers and drug wholesalers. We expect that NUEDEXTA will be covered on a majority of health plans, with either a tier 3 copay without restrictions or a tier 2 copay with or without restrictions.

As we expect it will take approximately nine to 12 months for formulary reviews to take place and reimbursement policies to be enacted. We have created several patient programs to optimize patient access to NUEDEXTA during this interim period.

Specifically we are offering support services such as reimbursement hotline to assist with coverage determination and any required insurance paperwork, a copay assistance program for qualified patients to ensure that out of pocket expenses will not be cost-prohibitive. And lastly, we plan on establishing a patient assistance program for qualified patients within the first year of launch.

It is important to note that we expect most health plans to place NUEDEXTA on tier 3 as a default coverage position until such time the formulary reviews have been conducted and enacted.

In other words, we believe that most plans will reimburse NUEDEXTA from day one of launch at that level with limited or no utilization restrictions.

With a strong balance sheet, a high performing commercial team in place, and a clinical development team with a track record of proven success, our goals for fiscal year 2011 continue to be clear. In the coming year, we will focus on creating substantial value for our shareholders by completing the successful launch of NUEDEXTA, initiating a new clinical study for NUEDEXTA outside of PBA and advancing the European filing of NUEDEXTA and PBA. Dr. Randal Kaye will go into greater detail on our clinical development plans later in the call.

With that, I will now turn the call over to Christine Ocampo, who will review our financial results. Christine?

Christine Ocampo

Thanks Keith and good morning everyone. My comments today will cover financial results for the first quarter of fiscal 2011 as well as expected cash burn for fiscal 2011. In addition to the results summarized in the press release issued earlier this morning, you can find additional information in our 2010 annual report on Form 10-K, as well as our upcoming quarterly reports on Form 10-Q.

All figures discussed today are approximate. I will begin with the discussion of our results for the first quarter of fiscal 2011. In the first fiscal quarter of 2011, revenues totaled $1.8 million as compared to $1.5 million in the same period in the prior year. First quarter fiscal 2011 revenue of $1.8 million consisted of the recognition of deferred revenue of $417,000 and royalty revenue of $1.4 million.

Cash used in operations for the first quarter of fiscal 2011 was $14.1 million. Total operating expenses for the first quarter of fiscal 2011 were $13.9 million compared to $6.3 million in the same period of the prior year.

First quarter fiscal 2011 operating expenses consisted of research and development expenses of $3.8 million, compared to $3.4 million in the same quarter in the prior year, and selling general and administrative expenses of $10.1 million, compared to $2.9 million in the same quarter in the prior year.

The increase in research and development expenses is primarily attributed to an increase in regulatory and medical affairs costs related to NUEDEXTA, offset by a reduction in costs incurred in support of the complete response to the approvable letter and other regulatory activities.

The increase in selling, general and administrative expenses is primarily attributed to expenses incurred in preparation for the February 2011 commercial launch of NUEDEXTA.

The net loss from operations for the first quarter of fiscal 2011 was $12.1 million or $0.11 loss per share, compared to a net loss of $4.8 million or a $0.06 loss per share for the same period a year ago. The increase in net loss is primarily attributed to expenses incurred in preparation for the February 2011 commercial launch of NUEDEXTA.

We ended the first quarter of 2011 with total cash and restricted investments of $119 million and cash used in operations at $14.1 million for the first fiscal quarter of 2011. We expect that our cash on hand will be sufficient to fund operations till at least the end of fiscal 2012, including the commercial launch and further clinical development of NUEDEXTA.

In November 2010, we strengthened our balance sheet by raising $83 million in net proceeds in a public offering of common stock with a strong investor base, including several large long-only institutional investors.

We continue to see a high level of interest and excitement about AVANIR in the financial community.

Looking forward to fiscal 2011, we continue to anticipate that our operating expenses, excluding share-based compensation expenses will be between $75 million and $85 million with the majority of expenses related to the commercial launch of NUEDEXTA.

We expect gross margin to be approximately 90%. As we discussed in our last call, we will not be providing guidance on revenues until we generate several quarters of revenue and are better able to estimate future revenue. Starting with the second fiscal quarter earnings, we plan to report shipments to wholesalers as deferred revenue and product revenue will be based on prescriptions billed at retail pharmacies and non-retail demand.

Now, I'll turn the call over to Dr. Kaye. He will provide an update on the progress of our NUEDEXTA research and development program, as well as an update on our Medical Affairs Organization.

Randal Kaye

Thanks, Christine, and good morning everyone. The approval of NUEDEXTA was a significant achievement for the AVANIR clinical team as well as the investigators and patients involved in the development program. We are excited to have the opportunity to make NUEDEXTA a first-in-class treatment available to many patients living with debilitating episodes of PBA.

My comments today will provide an update on the next steps for the NUEDEXTA clinical program, our thoughts on European regulatory strategy and summarize our accomplishments over the past quarter including the medical affairs launch readiness activities.

First, I will touch on the NUEDEXTA clinical development program with a unique mechanism of action, intriguing proof of concept data outside of PBA and a high degree of investigator interest; we will further develop NUEDEXTA for other clinical uses.

We believe NUEDEXTA for PBA may just be the beginning of potential therapeutic uses for our proprietary combination of dextromethorphan and quinidine. MS-related pain, diabetic peripheral neuropathic pain and behavioral disorders associated with dementia are some of the development areas that are currently under investigation.

At this time, we anticipate that we will focus our efforts on filing an investigational new drug or IND application for the next clinical program in initiating our first study under that program during calendar year 2011.

From our NUEDEXTA clinical trials we obtained a significant amount of insight into other CNS symptoms that NUEDEXTA maybe able to ameliorate. For example, in the Star Trial we reduction in pain in patients with MS. In addition, we have observation data related to the improvement in both fatigue, headache, and muscles spasms. These are common symptoms in debilitating neurologic conditions.

We anticipate looking further at the symptoms associated with MS disability. This would provide an opportunity to study a variety of clinical endpoints, which contribute to MS disability. Some of the steps we will need to take will include initiations of a clinical study steering committee, protocol development, IND filing, and the selection of contract research organization to assist with study conduct. We plan to update you on the progress during our next quarterly conference call.

An important objective for fiscal 2011 will be the development of a filing plan for Europe. As a preliminary step, we met with key European physician consultants in December, neurology experts in the field of PBA from a variety of European countries. The consultants were very clear with regards to the status of PBA in Europe. PBA is well characterized and it is seen often in their clinical experience.

Current treatment options are of limited value due to the lack of data and marginal efficacy. The consultants were excited to hear about the potential new treatment option as PBA has a significant impact on their patient’s quality of life and they recommended that we move forward with developing a European filing plan. We have already selected an outside consulting organization to facilitate the steps necessary to seeking approval in Europe, a group with extensive experience working with the European Medicines Agency or EMA.

Some of the preliminary steps will include GAAP analysis to identify if there are any deficiencies within the U.S. new drug application relative to EMA requirements, a pre-submission meeting and reaching agreement on a pediatric plan with the EMA. We anticipate that 2011 will be significant in terms of meaningful and positive progress towards the European filing.

Lastly, the FDA approval of NUEDEXTA in the first quarter of fiscal year 2011 set a stage for a series of activities that are necessary in order to have a successful launch immediately after approval. The results of the pivotal Star Trial were published in the Annals of Neurology, which is one of the most prestigious of neurology journals. This is the testament to the importance and the significance of NUEDEXTA’s pivotal data and we look forward to additional data presentations at upcoming medical conferences throughout the year.

With FDA approval in hand, systems needed to be put in to place to inform and educate healthcare professionals as quickly as possible about benefits and risks of a new treatment option. We're very pleased that our medical information call center was operational the very first business day after FDA approval. In addition, our drug safety center went live in early December. This is the necessary and critical step to capture report product adverse events in order to ensure the safe administration of NUEDEXTA going forward.

As we enter into the launch phase, the medical affairs organization will play an important role in supporting a successful commercial launch of NUEDEXTA. We are in the process of expanding our medical science or MSL team. This includes the recent appointment of the Director of the MSL as well as expansion to better cover all of our identified regional and national opinion leaders.

In addition, we have added a specialized MSL that covers pharmacy decision makers and managed care organizations. Going forward, medical affairs will play an important role in interacting with our most important physician opinion leaders, supporting speaking training programs and responding to unsolicited medical information request. Indeed, this is an exciting time as we prepare and support the launch of NUEDEXTA.

There are many patients in the U.S. currently untreated and suffering from the sudden and disrupted episodes of PBA, and we are thrilled to be in a position to provide these patients with the safe and effective treatment option to reduce or even eliminate their debilitating episodes of PBA. We are dedicated to improving the lives of these patients and their caregivers and we will continue to build our organizational capabilities to ensure the prescribing physician have access to important information about NUEDEXTA.

Thanks for your time and attention. I'd like to turn the call back to Keith now.

Keith Katkin

Thanks Randall. In closing, we are delighted that we can finally offer the many patients in the U.S. suffering from debilitating episodes of PBA, their first and only FDA approved treatment option in NUEDEXTA.

I would once again like to thank all of the investigators, patients, investors and employees that have believed in and supported AVANIR over the past several years. While we sit here at the NUEDEXTA launch meeting and it’s still very early in the launch process, we are pleased that all the early indicators are suggesting a successful commercial launch.

These include initial physician feedback, market research findings, payer interactions and most importantly sales team excitement and enthusiasm based on many success stories from the field.

Operator, I would now like to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Ritu Baral with Cannacord.

Ritu Baral - Cannacord Genuity

Good morning guys, thanks for taking the question. I wanted to ask about call frequency for the physicians that you’re targeting as you rollout the launch. Are you concentrating on certain specialists out of the gate and how often do you think the rest will see them?

Keith Katkin

Great, great question, Ritu. The way they were thinking about the launch right now is really a stage launch. So the primary targets at the initial launch will be neurologists and geriatric psychiatrists. So each represented and probably has about 50 or 60 key geriatric psychiatrists and neurologists and those were the doctors who are seeing a lot of the patients with MS and ALS.

So we’re going to them frequently in the first couple of months because we want to establish that base of physicians that are using NUEDEXTA, that are seeing the success with NUEDEXTA and then they can share their success stories overtime and then shortly thereafter we’re going to start to expand as I think you recall each of our representative have a target of about 200 physicians and that includes neurologists, psychiatrists, physical medicine and rehabilitation specialist as well as medical directors for long-term care facilities and [brain injury physicians].

So, after we get that initial adoption by those core targets then we’re going to expand out to include the entire list.

Ritu Baral - Canaccord Genuity

Got it. And of the typical call right now, typical sales rep call, what's the breakout of emphasis or time between sort of continued PBA awareness and actual time spend on detailing NUEDEXTA?

Keith Katkin

Well, the way that we have set the launch is we’ve really tried to have people just focus on PBA up until now. So we gave them anywhere between a month and half and two months in the field and that was by design. We want to make sure that the first time the representative walks into a doctor’s office; they are not talking about diagnosis of PBA, identifying those patients and then also talking about the NUEDEXTA.

We want them in just talking about PBA raising disease awareness, profiling the office, understanding the doctor’s attitude towards PBA and that way when they have they are now, in some cases second and third interactions with those doctors, with NUEDEXTA on the market, they can say doctors we talked about last time, I know you have some PBA patients in your practice .We just launched NUEDEXTA, its commercially available, lets talk about those patients that are the right patients for NUEDEXTA in your practice and get them on therapy.

Ritu Baral - Canaccord Genuity

Okay. So, will PBA awareness continue as a portion of the call going forward?

Keith Katkin

Absolutely, absolutely. It takes, as we have stressed it takes a long time to change behavior and as you pointed out to us Ritu here, you are well aware that it will take a long time to change physician behavior. So if you look at research studies in terms of raising the index of suspicion, having doctors really start asking about PBA proactively. It’s probably going to take anywhere between five and seven visits before doctors really start getting this first to mind and in some cases even longer for other physicians.

Keith Katkin

And are there any, excuse me inventory or stocking trend that we should keep in mind given this unique diseases stay as awareness increases. I think we just try to be what I’ll call appropriate with our initial stocking. So we did not push out tons of product into the channel we put out what we saw would be necessary to support the initial launch and that what we think that we’ll see some reorders as we get the field sales force out there; and as prescriptions are generated. So we’re looking forward to our next conference call where for the first time, we’ll be able to report the NUEDEXTA revenues.

Ritu Baral - Canaccord Genuity

Great, last question then I’ll hop back into the queue. As far as rest compensation what’s the structure there? What percentage or approximate percentage do you anticipate as performance driven versus base?

Keith Katkin

We’ve given guidance for the average representative cost fully burdened is around $200,000 per sales representative, I don’t want to go into tremendous detail on the specifics of the compensation obviously for proprietary reasons. But what we’ve done is we really trying to build out a performance culture here and that’s our theme at our launch meeting here.

And as part of performance culture; it’s certainly accountability and rewarding representatives that can really contribute to the business. So we’ve set up an uncapped compensation program for our field sales representative it is based on prescriptions generated, and if our representatives do what then a good portion of their compensation package by their bonus opportunity.

Ritu Baral - Canaccord Genuity

Thanks. I will hope back in the queue.

Keith Katkin

Thanks, Ritu.

Operator

Your next question comes from the line of [Matt Duffy] with PGR Research.

Matt Duffy - PGR Research

Good morning and thanks for taking my questions. Couple of things, as your reps have got now and now that you are getting little closer to the market, which area, which indications do you think are the best opportunity. Do you think MS or ALS is going to probably lead the way initially?

Keith Katkin

Its interesting Matt. We're seeing success all around, not just in ALS and MS, but some of the greatest reception that our team has gotten as being in stroke and traumatic brain injury physicians. So, I think, less about the underlying conditions and more about the physicians practice in their approach.

And we are finding that those physicians that or we call highly empathetic with the patients, are the ones that are more likely to recognize PBA and that’s irrespective of whether is stroke, TBI, ALS or MS. We do think, as I said in my initial remarks, that the majority of adoptions are going to happen in ALS and MS and I think, out of those two, to specifically answer your question, you will see greater penetration with ALS clinics and that’s because they are far more concentrated. There is just a couple of dozen clinics that are out in the U.S. that are treating a large number of the patients with ALS throughout the nation.

So, that easy concentrated access to patients were we can have those conversations with doctors and ALS doctors; I give them a lot of credit. They are highly emphatic with their patients. They are doing everything they can to enhance quality of life in the years that are remaining for those ALS patients.

Matt Duffy - PGR Research

Okay, great. And couple of sort of accounting type questions. How should we be thinking about the gross to net adjustment from WAC and also you'll be able to book sales as product to ship or you're going to have deferred those until you see a movement?

Keith Katkin

Yeah, I'll take the second part first, so we do anticipate that when we announce our revenues in future quarters there'll be a two, actually three parts of revenues. There will be gross revenues -- gross deferred revenues. There will be net deferred revenues and then there will be actual gap recognized revenues which I think many people aren’t familiar with based on revenue recognition principals by GAAP.

So what we’re planning on doing in and we're currently in the process of finalizing our revenue recognition process. What you'll likely see is something very similar to other companies in our stage of commercialization and that is we’ll be looking to end user demand to recognize our actual revenue and then until we can recognize that end user demand, do things like prescriptions or through DBD Outlook level data then we'll be keeping it on the balance as deferred revenue.

In regards to your question about the gross to net adjustment, I think it’s a little bit too early to be exactly specific on that. There is something's that we know for sure. For example, we know that wholesalers charge every new company a 7% wholesaler service fees. So you can just these days take 7% right of the top until your revenues are in excess of $100 million.

For Medicaid which we believe we’ve got 10% to 15% of our business that you got about 23.1% discount that you have give within that business. And then, as we're thinking about the Medicare Part D plans and the commercial plans we have a big emphasis on payer coverage and we have got an experienced account team out there. We’re willing to give some discounts but we’re only willing to give those discounts in exchange for things like tier two unrestricted access.

So we’ve got those discussions ongoing and it has to be seen where we will fallout within those negotiations. I’d say that if we didn’t, if we don’t offer rebated to Medicare Part D and to commercial payers either I will probably looking somewhere on 12% to 15% gross to adjustment. If we do offer discounts there, we’re probably somewhere around 20% to 25% gross to net adjustment.

Matt Duffy - PGR Research

Okay, great. Thanks very much.

Keith Katkin

Thanks Matt.

Operator

Your next question comes from the line of Carol Werther with Summer Street.

Carol Werther - Summer Street Research

First question. Do you know the length of the prescriptions, the initial prescriptions yet?

Keith Katkin

We do not have that level of detail but the prescription data that we have been getting right now is just from wholesalers. So we haven’t actually seen the RXs.

If you look at IMS dailies or weeklies, you’ll start to see some of the prescriptions coming through but the dailies are highly extrapolated and you don’t get a lot of information there, even though weeklies have a fair bit of extrapolations. So once the monthly start coming in and we can get a data like and DTI data from IMS, that’s only we’ll be able to understand exactly what the prescriptions are looking like.

Carol Werther – Summer Street Research

Okay. And can you give us a breakdown of how, what percentage are tier two and what percentage are tier three with your reimbursement?

Keith Katkin

Yeah, the sales right now, a majority, high majority are tier three and that’s because as I mentioned in the call, as many of these payers are going through their formula review processes, which can take upward of six to nine months, maybe essentially just putting us on tier 3 as a default, most of those are putting us on tier 3 unrestricted.

Some plans out there are putting us on tier 3 with restrictions and some very small number are requiring letters of medical necessity, which is exactly what we expected, what we are prepared for, and that’s why we really built out our reimbursement capabilities of the company.

Carol Werther - Summer Street Research

Okay. And then for Doctor K, I'm just trying to understand where the next studies might be and if you’d comment at all about the rejection of Acorda’s drug for MS in DU and if that has any impact on your plans going forward?

Randall Kaye

Hi, Carol its Randall. I can’t comment on the quarter experience. I don’t think it’s relevant to where we are as an organization with the compound that we have available. With regards to next steps with NUEDEXTA there were three base areas that we are with most of our emphasis on and that is in MS related pain diabetics peripheral neuropathic pain in the study is behavioral symptoms associated with dementia.

In our preliminary analysis, it looks that an MS related pain as one of the symptoms of MS disability would be a good first place to go. Other symptoms that are associated with MS disability can include fatigue and muscle spasticity. So I’ll go through this in a lot more detail on our next conference call or I can be little more precise in terms of what our next steps will be. But that at least is to share with you our early thinking.

Keith Katkin

And then Carol I’ll just add a few comments regarding the Ampyra experience. As Randall said it’s really hard to draw direct correlations. The only comment that I would say is that for NUEDEXTA in our opinion the treatment benefit was unambiguous.

And if you look at some of he EMA documents on Ampyra what you see is they were looking at the benefit risk profile and are essentially the y struggled little bit with the benefits of the patients we’re receiving and as you’ve seen in our clinical data with the unambiguous benefits in the significant episode reductions and the over 90 % patients that had clinical benefits find is that greater than 30% reduction episodes we think that will certain – that’s something certainly that we will highlight in our filings with the EMA.

Carol Werther - Summer Street Research

Okay great. Thank you very much

Keith Katkin

Thanks Karol.

Operator

(Operators Instruction) Your next question comes from the line of Ritu Baral with Canaccord.

Ritu Baral - Canaccord Genuity

Thanks for taking the follow up guys. What is your plan are as far as sampling the drug?

Keith Katkin

Sampling is a very important part of our launch rollouts. We actually shipped to our field representatives last week that are initial samples. We have plenty of the supplier samples and we want to make sure that samples are in the cabinet of every physician office that is a target of ours. We because NUEDEXTA works so quickly with about a 50% reduction there, within the first week.

We want to make sure that doctors have that sample they can give it to the patient; they can start the patient on therapy. Our hope is the patient will start to experience that benefit in the first week and then immediately go have take that prescription to the pharmacy to insure that they can continue with the benefits of NUEDEXTA.

Ritu Baral

And as far as the decision to expand I guess the target doctor population, what’s your thinking about when that sort of expansion will be made. Do you expect that continued 60 doctor per rep focus to be sustained in the past one quarter?

Keith Katkin

I think it is really going to be an individual-by-individual territory basis. We hired experienced sales representatives. They are almost two-thirds of which have CNS experience, either in neurology or in psychiatry. So those representatives have relationships with many, many doctors. And I think it will be easy for them to expand their universe much more quickly and really, expand the use of NUEDEXTA.

For some representatives that are new to CNS that might take them a little bit longer. They may be able to stay a little bit with their core. But we hired just a phenomenal, phenomenal team. We are hearing from the team that this is most fun that they had in the years and they are working incredibly hard. But it's incredibly rewarding to them because they feel like they are making a difference in the lives of these patients and it really feels like its something special to be part of.

Ritu Baral - Canaccord Genuity

Got it. And the distribution of marketing cost, I guess, over the year, you mentioned that $10.1 million this quarter was SG&A. What percentage of that was essentially one-time launch cost versus sort of recurring marketing cost and how do you see it sort of rolling out with the various medical meetings and which ones are the most important for you guys medical meeting ways?

Keith Katkin

Yeah. We've really taken a very fiscally conservative approach, as you know Ritu, over the years. I think our approach to sales and marketing is a little bit different because there is not a benefit in being fiscally conservative on a launch because you really want to make sure that you are doing the right things, that you're funding the right areas.

So for example our launch meeting is not a big pharma launch meeting. We are not spending the million of dollars that a lot of big pharma companies spend on a launch. We're really focusing our resource on what's important in that things like peer-to-peer programs where doctors are talking to doctors about PBA and about NUEDEXTA. We are focused on incentive compensation for our field sales representatives because ultimately it’s those sales representatives who were going to drive the adoption of NUEDEXTA.

So as you think about spreading out the cost throughout, you will really see them equally distributed because we're not putting a lot into that ra-ra launch and really what I consider would be wasting money. We're really focused on doing what's going to accomplish our overall strategic objectives, which is increase with diagnosis of PBA and then the rapid trial and adoption of NUEDEXTA and that's where the dollar is going to right now.

Ritu Baral - Canaccord Genuity

Following up on that peer-to-peer campaign that you mentioned, what types of doctors does that encompass right now and how do you see that expanding?

Keith Katkin

It's really – it spans the gamut in terms of the doctors that are interested right now. We have got neurologists, we have got geriatric psychiatrists, regular psychiatrists, physical medicine rehabilitation specialists, geriatricians.

Really its quite rewarding just to see all of these doctors really, really appreciate what the first and only approved medication for PBA can do and those doctors that understand that told PBA takes on these patients lives they are eager to get out there and they are eager to share their message, and we'll be training many more doctors throughout the upcoming year.

And the last week was just a way one because we do think that the peer-to-peer education is very important especially when you are trying to increase the awareness and diagnosis of the conditions such as PBA.

Ritu Baral - Canaccord Genuity

And a question for Randall Kaye. The GAAP analysis that you mentioned, Randall, what’s the timing on that and as well as estimated timing on the pre-submission meeting with Europe and pediatric studies?

Randall Kaye

Ritu, I think we can provide some better specificity at our next conference call. All the activities have to take place and there’s a lot of interdependencies. So to give you that kind of precision today wouldn’t be possible.

Ritu Baral - Canaccord Genuity

Okay. And any update on corporate strategies as far as business development Keith?

Keith Katkin

Yeah, certainly our longer term objective on the business development front is to continue to look forward complementary assets and now that we have a commercial infrastructure, we certainly want to leverage that. That said, we need to be laser-focused on this launch.

Everyone of the company right now is focused on it and we think the best way that we can drive shareholder value in the very immediate future is to make sure that we launch NUEDEXTA well but we are certainly our eye out for potential products that’s complementary but I wouldn’t expect to see anything on that for a while.

Ritu Baral - Canaccord Genuity

Great. Thanks guys, thanks for taking my questions and good luck.

Keith Katkin

Thanks Ritu.

Operator

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

Thomas Wei - Jefferies

Hi, thanks. Just wanted to follow-up on the reimbursement comment that you’ve made. How have you actually seen payers at the time to restrict access to the drug, what sort of restrictions they’re placing and can you quantify for us at all how many are unrestricted versus some form of restrictions right now?

Keith Katkin

Yes, so majority is unrestricted right now at tier 3. Overall, what we have heard for those when they do have restrictions its essentially just a physician picking up the phone, calling and saying that this patient has PBA, they are asking for diagnosis.

What we have heard for our peer advisory board previously is that one of their larger concerns was the potential use in pain given the literature that is out there for dextromethorphan and quinidine in pain. So the early reports and these are very early reports physicians are just calling and asking to confirm a diagnosis of PBA.

Thomas Wei - Jefferies

You are saying payers are restricting it by the underlying [physician] and after ALS?

Keith Katkin

We haven’t heard that out there yet, it’s possible because PBA has to occur secondary to neurologic disease or injury that could be a second question that they ask. But to-date we haven’t heard that as of yet.

Thomas Wei - Jefferies

And how large is the sample that you’re giving out?

Keith Katkin

The sample that we are giving out is a 10-day sample. So as a reminder NUEDEXTA should be dosed as once a day for the first seven days, and then move to twice a day on day eight and there forward. So we’ve got a 13 capsules sample bottle which allows for 10 days of therapy. We wanted to make sure that we cross patients over to BID before they go ahead and refill their prescription.

Thomas Wei - Jefferies

And do you know how frequently these patients end up seeing their physicians on average?

Keith Katkin

I think there is a wide range and that is in some cases dependent upon the underlying condition. So ALS and MS patients see the doctors fairly regularly. What we found is stroke and traumatic brain injury patients, they see their doctors more regularly early on after the stroke or after the traumatic brain injury and over time it gets less and less frequent overall.

Thomas Wei - Jefferies

And lastly do you have an estimate for what proportion is PBA patients suffered from predominantly laughing?

Keith Katkin

I know that we have that data in our clinical database, but it’s not something that we’ve looked specifically, but what we have found from talking to patients is that both laughing and crying can be equally disturbing. In fact we had a patient here at our launch meeting yesterday who spoke to the team just a quite of moving muscles sclerosis patient and his wife who is also his caregiver.

He suffered at times from episodes of laughing and they talked to us about those episodes of laughing happened in very serious situations or happened when it's—in his sense when his grandchildren were doing things that he didn’t like, but the grandchild that interpreted the laughing as something that he liked after the family had intervened and just created an incredible level of discomfort for the entire family. So we’re equally focused on those patients that have laughing or crying.

Thomas Wei - Jefferies

Thanks very much

Keith Katkin

Thanks Thomas.

Operator

Your next question comes from the line of Carol Werther with Summer Street Research.

Carol Werther - Summer Street Research

Thank you. How large is your payroll programmed now and are you planning on expanding that?

Randall Kaye

So we have one director of MSLs, we have seven regions that correspond with our commercial organization and their spread out observation sufficiently cover national key opinion leaders and regional key opinion leaders and regional key opinion leaders. We will likely to stay with that group and focus on disease state awareness and also give opportunities for generating interest in our investigator initiative studies program and that we’ll maintain itself through this fiscal year.

Carol Werther - Summer Street Research

Okay. And do you have any plans for partnering for the rest of the world?

Keith Katkin

As we discussed previously, Carol, that something -- that certainly we are having discussions about. But as we have also talked about, it's not anything that we are in a huge rush to do. We think, with our balance sheet where we are at with revenues for NUEDEXTA, now coming in, we are happy to entertain the discussion. But we do believe that there is certain intrinsic value in owning the worldwide rights to the asset.

So, we will have the discussion and if somebody puts something on the table that we think is worth pursuing than opportunistically we would absolutely do it. But in the meantime, our clinical team has demonstrated their ability to deliver with the FDA approval of NUEDEXTA.

So, we have equal confidence that they can shepherd NUEDEXTA through the EMA process. We've also got a CRO that's got a high expertise in Europe as well to help move that process along. So, we are happy to take it as far along as we need to. And quite frankly, the further that we take it, the greater the economic value that we can potentially extract from a European deal. So, stay tuned. But we are not in any rush to sign an exercise-U.S. deal.

Carol Werther - Summer Street Research

Okay, thank you.

Keith Katkin

Thanks Carol.

Operator

At this time, there are no further questions. Presenters, do you have any closing remarks?

Keith Katkin

Just like to thank everyone for joining us on our fiscal 2011 first quarter conference call and we look forward to keeping everyone updated on our progress. Thanks.

Operator

This concludes today's conference call. You may now disconnect.

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