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Avanir Pharmaceuticals (NASDAQ:AVNR)

F2Q11 Earnings Call

May 09, 2011 04:30 p.m. ET

Executives

Ian Clement - Investor Relations

Keith Katkin - President and CEO

Christine Ocampo - VP of Finance

Randall Kaye - Chief Medical Officer

Analysts

Ritu Baral - Canaccord Genuity

Thomas Wei - Jeffries

Carol Werther - Summer Street Research

Greg Wade - Wedbush Securities

Operator

Good afternoon. My name is Piya and I will be the conference operator today. At this time I would like to welcome everyone to the Avanir Pharmaceuticals fiscal 2011 second quarter conference call. (Operator Instructions)

Thank you. At this time I would like to turn the conference over to Mr. Ian Clement. Sir, you may begin.

Ian Clement

Thank you and good afternoon everybody. Joining me on today’s conference call are Keith Katkin, President and Chief Executive Officer, Bill Sibold, Chief Commercial Officer; Christine Ocampo, Vice President of Finance and Dr. Randall Kaye, Chief Medical Officer.

Earlier this afternoon Avanir issued a news release announcing the company’s results for fiscal 2011, second quarter and first six months. If you have not received this news release or if you would like to be added to the company’s distribution lists please call the investor relations of the company or you can sign up through the IR section of the company’s website. www.avanir.com.

Copies of news releases and SEC filings can also be found in the IR section of our website. There is always a gap, I would like to remind you that the statements made on the call represent our judgment as of today, May 9, 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.

The company’s actual results may differ materially from the statements made during today’s call and the company undertakes no obligation to update any of these statements.

From an investor communications perspective we will be presenting an overview of the company at one meeting this month, tomorrow, Tuesday May 10th, we will present at the Bank of America/Merrill Lynch healthcare conference in Las Vegas, Nevada. A webcast of this presentation will be accessible through the investor relation section of our website.

With that said, I would now like to turn the call over to Keith.

Keith Katkin

Thank Ian, and thank you for joining us on the conference call today. During today’s call I would like to discuss recent achievements and provide an overview of our business. I will then hand the call over to Bill Sibold who will comment on the launch of NUEDEXTA, the commercial potential moving forward and why he found it a compelling opportunity to join Avanir.

Christine will then follow with an update on the quarter’s financial results that were released earlier today. Finally, Randall will then discuss our clinical plans for AVP-923, I will then conclude with an update on our key upcoming milestones and events.

Second quarter of 2011 marked another exciting busy and successful period for Avanir. Before adjusting the launch of NUEDEXTA I would like to take a moment to highlight a couple of other recent corporate highlights.

First, as we transition from a development stage company to an integrated commercial stage biopharmaceutical company ensuring we have the right talent in place is a key imperative for us. In the first few months of calendar 2011 we made a couple of important additions to the senior management team. This morning we announced Elona Kogan, has been appointed in the position of Vice President of Legal Affairs. Elona’s legal, regulatory and business expertise will be a valuable asset to our organization.

Promotion of Greg Flesher to the critical role of Chief Business Officer will help position Avanir to grow into a successful CNS company. Greg’s broad pharmaceutical background in business development, sales and marketing and research and development provide strong foundation to achieve this growth through an increased focus on business development and product lifecycle management.

In April, I was delighted that we were able to announce the appointment of Bill Sibold to the position Chief Commercial Officer. Previously, Bill was responsible for leading a $2.8 billion franchise and the management of over 800 people in the commercial organization of Biogen Idec. His proven ability to build and lead cross functional teams to drive growth, to develop and launch new products further enhances our already strong commercial leadership team.

Second, the filing of an IND application with the FDA for AVP-923 for the treatment of central neuropathic pain in patients with multiple sclerosis underscores our commitment to the continued development of AVP-923 for additional indications. Third, the recently announced PRISM registry, the largest ever observational study in PBA will allow us to further assess the prevalence of PBA across multiple underlying neurologic conditions and PBA’s impact on quality of life.

Moving on to the launch of NUEDEXTA, I believe we are off to a promising start as we build and develop a market for the first and only FDA approved treatment for patients living with PBA. We are measuring our success across a number of variables from a broad perspective including both quantitative and qualitative measures. We agree prescription data is trending in a positive direction and demonstrating overall continued growth. Awareness of PBA and NUEDEXTA are critical to the long term success of our business. Market research shows that awareness is growing through such activities as field sales force interactions, peer to peer speaker programs and advertising.

As expected our data demonstrates that call frequency makes a difference. Doctors called on more than once since the launch of NUEDEXTA are three times more likely to have prescribed NUEDEXTA than doctors called on just one time. From a qualitative perspective anecdotally we continue to hear success stories from physicians and patients. Many of these success stories from physicians have highlighted the life changing benefit NUEDEXTA has brought to their patients.

For example, a neurologist recently prescribed NUEDEXTA to a multiple sclerosis patient. The patient was complaining of excessive crying, both the patient and the caregiver had “reached the end of their road” and the patient was pretty much house bound. Two weeks after starting treatment the patient and caregiver are so happy with the results that they are able to leave the house again.

A physician was keen to share this story with the sales representative as he wanted to let us know that Avanir had “hit a home run” with NUEDEXTA. The patient a 20 something year old male had a TBI traumatic brain injury from a motorcycle accident. Whenever the physician would see the patient and simply ask him how he was doing the patient would immediately go into an episode of loud uncontrollable line, the doctor said the crying was so loud that his medical staff would actually come to the exam room to see if everything was okay. The doctor said he had tried everything but no treatments were working.

The patient’s mother recently called the doctor to say that they could no longer manage caring for the sun because his behavior was causing too much destruction in their household. Having just heard of NUEDEXTA the doctor told the mother there was something brand new he would like to try. He immediately placed the patient on NUEDEXTA and after approximately 10 days of therapy the mother reported that no episodes had occurred during the last four days.

Feedback like this not only serves as tremendous motivation for all of our employees but furthers our passion and belief that there is a tremendous need for NEUDEXTA which is the first and only FDA approved treatment of PBA and confirms our belief that there is a significant market opportunity for NUEDEXTA in PBA.

As there has been a high level of interest in prescription data we thought we would share IMS data for the past quarter as well. In January when we were loading the distribution channels and not yet actively promoting NUEDEXTA to physicians, a total of 50 prescriptions were written all of which were new prescriptions.

In February, when physician promotion commenced on February 7, a total 323 prescriptions were written of which 295 were new prescriptions, and for March, our first full month promoting NUEDEXTA a total 846 prescriptions were written of which 710 were new prescriptions. Thus for the quarter we had a total 1219 prescriptions, of which 1055 were new prescriptions which we believe represent new patients on NUEDEXTA therapy.

Looking to April, we do not have the monthly data at this time, however, the weekly data for the four weeks ending Friday, April 29th, showed almost 1,100 total prescriptions and nearly 800 new prescriptions. I am pleased that despite the fact, in April, many of our core neurologist-prescribing physicians were at the American Academy of Neurology Meeting in Honolulu, we continue to see positive trends in the prescription numbers for NEUDEXTA. In addition, over 10% of our field sales force were also at the AAN Meeting in Honolulu.

On the payer front, we continue to make progress. One of our imperatives for the launch is to ensure wide access to NEUDEXTA. We have a team of eight account managers who are focused on working with Medicare Part D, Medicaid and commercial plan providers. We have already negotiated contracts with a number of managed care organization including two of the three largest pharmacy benefit managers, Medco and Express Scripts. We believe we are on track to establish favorable formulary replacement with a wide number of plans by the end of this calendar year.

As of May 6, approximately 24% of insured lives were covered on tier 2. We remain focused on increasing the portion of patients with tier 2 access as the lower copays associated with tier 2 should allow more patients to afford their prescriptions.

To-date, approximately 60% of prescriptions have been filled under commercial plans and about 25% from Medicare Part D. What is encouraging about the split is that so many prescriptions are being filled under Medicare Part D, despite the fact that 70% of lives covered Medicare Part D require a letter of medical necessity for a patient to receive therapy, and the copay is relatively high compared to commercial plans. This has been the default status of NEUDEXTA on several large Med D plans prior to formulary reviews and contracting discussions.

Our managed care team is working diligently to improve reimbursement on Medicare Part D plans with a goal of securing preferred formulary placement by January 2012.

Turning to patient awareness, one of the main thrust of our efforts involves working closely with patient advocacy groups. In March, we held a very successful patient advocacy summit where seven advocacy groups were in attendance. These groups represented patients across the MS, ALS, brain injury, stroke, Parkinson’s and Alzheimer’s communities. The advocacy groups shared ideas for educating patients and family members about PBA and we expect many helpful, educational programs to be created over the coming year in support of our goal of increasing awareness and diagnosis.

As a couple of examples from the meeting, the National MS Society recently released a learn-online program called Uncontrollable Laughing and Crying, which is available on the website and on YouTube. The National Stroke Association has developed a patient brochure on PBA after stroke which will be available in the next few weeks.

Finally, we've been actively participating in scientific conferences where we continue to present data from our star clinical trial and findings from additional studies conducted by Avanir and third parties.

With that update on our operations, I will now ask Bill Sibold to say a few words. Bill?

William Sibold

Thanks Keith and hello everybody. I’m thrilled to be joining Avanir at such an exciting time. The launch of NUEDEXTA represents a significant opportunity for the company and most importantly patients and their caregivers and loved ones.

NUEDEXTA is a highly differentiated product. It work well, it works fast and does not have the additional burdens of black box warning or REMS programs. In addition to PBA which itself represent the large market opportunity, NUEDEXTA has many potential follow on indications to grow into so the future is very promising. I’m a strong believer in symptomatic therapy while focusing on the underlying neurological disease is critical, focusing on the patient’s overall wellbeing is an important treatment goal. I’ve spent many years in the MS field and have seen firsthand the number of issues these patients experience.

PBA is a prevalent yet often not discussed problem for MS patients. And looking ahead at our development pipeline, pain for MS suffers is a highly prevalent problem and has the potential to represent the next indication for NUEDEXTA. Between the existing large PBA population in ALS, MS, stroke, dementia and TBI, and potential future indications, I believe that Avanir and NUEDEXTA are extremely well-positioned for long term sustainable growth.

Of course success is predicated on having the right team and I believe AVANIR has one of the most talented and experienced team that I’ve had the pleasure of working with. It is the other major reason that I joined Avanir. I have been impressed with what has already been accomplished by this team and I am excited by what we will achieve together.

My observations of launch thus far are very favorable. We are building a market which takes time and we are making great progress. Until NUEDEXTA was launched in the middle of February, PBA was not on the radar of most physicians managing these at risk patients. Each day, PBA awareness is growing and more patients are benefiting from NUEDEXTA. I look forward to reporting this continued progress on future calls.

I will now hand the call over to Christine to address our financial results. Christine?

Christine Ocampo

Thanks Bill, and good afternoon everyone. My comments today will cover our financial results for the second quarter and first six months of fiscal 2011. In addition to the results summarized in the press release issued earlier this afternoon, you can find additional information in our upcoming 2011 quarterly report on Form 10-Q.

All figures discussed today are approximate. First I’ll address the financial results for the second quarter of fiscal 2011. We reported total net revenues for the three months ended March 31, 2011 of $1.4 million as compared to $1 million for the comparable period in fiscal 2010. The increase from prior year was primarily due to net product revenue from sales of NUEDEXTA.

Gross sales of NUEDEXTA were $505,000; net sales of NUEDEXTA were $462,000, total NUEDEXTA net shipments were $3.1 million and deferred NUEDEXTA revenue was $2.6 million. Gross margin on the sales of NUEDEXTA was 93% excluding an inventory reserve charge of $82,000.

Finished goods inventory consist of batches that were manufactured in 2010 to obtain FDA approval, this product is currently being sold to wholesalers and it’s scheduled to expire in 2012. Wholesalers generally will not purchase product within 12 months of expiration. As such, we recorded an inventory write down for the estimated amount of product that may not be shipped due to short dating.

NUEDEXTA revenue is recognized using a deferred revenue recognition model. NUEDEXTA cap full shipments to wholesalers are initially recorded as deferred revenue and later recognized as revenue when the product has left the distribution channel and is no longer subject to right of return. This effectively represent reported and user prescriptions and non retail shipments of NUEDEXTA capital.

Research and Development expenses were $2.5 million for the quarter ended March 31, 2011, compared with $3.8 million for the same period in the prior year. R&D expense decreased for the fiscal 2011 second year was primarily due to reduced expense with respective clinical trials.

Selling, General and Administrative expenses of $13.3 million for the fiscal second quarter of 2011 increased from $3.6 million for the corresponding period of the prior year. The increase was primarily due to an increase in expenses related to the commercialization activities surrounding NUEDEXTA.

Total operating expenses for the quarter were $15.8 million compared with $7.4 million for the comparable quarter in 2010. For the three months ended March 31, 2011 and 2010 the company reported $951,000 and $665,000 respectively of stock based compensation expense.

Our net loss for the second quarter of fiscal 2011 was $14.5 million or $0.12 per share compared with a net loss of $6.4 or $0.08 per share for the same quarter in 2010. These increases in our net loss during 2011 were primarily due to significant increase on our sales and marketing expenditures as a result of our preparation for the commercialization of NUEDEXTA.

Now, turning to the year-to-date results. Total revenue for the first six months of fiscal 2011 totaled $3.3 million compared to a $2.5 million, a 31% increase for the first six months of fiscal 2011. Cost of product sales for the first six months of 2011 was $114,000 compared with zero reported for the first six months of fiscal 2010.

Total operating expenses for the first six months of 2011 were $29.7 million versus $13.8 million for the comparable period in fiscal 2010. For the first six months ended March 31, 2011 and 2010 the company reported $1.8 million and $1.4 million respectively of stock based compensation expense. Net loss for the first six months of fiscal 2011 was $26.6 million or $0.23 per share compared with $11.3 million or $0.14 per share for the comparable period in fiscal 2010.

As of March 31, 2011, Avanir had total cash, cash equivalents and short term restricted investments in marketable securities of $105.1 million. We continue to expect total operating expenses in fiscal 2011 to be between $75 and $85 million. As previously indicated, we plan to provide more guidance on revenue once the company has more established run rate with respect to NUEDEXTA sale.

With that summary of our financial results I’d like to turn the call over to Randall. Randall?

Kaye Randall

Thanks Christine and good afternoon everyone. We continue to be active and productive in our clinical research and medical affairs departments. Recently we presented data on both PBA and NUEDEXTA at the American Academy of Neurology Meeting in Honolulu, both the poster presentation on PBA prevalence and the podium presentation highlighting data on onset of action of NUEDEXTA were well attended and generated terrific discussions, we were delighted that in April we filed and IND application with the FDA for AVP-923 for the treatment of central neuropathic pain in patients with multiple sclerosis.

The 30-day FDA commentary period has now passed and we are now progressing to next steps in this trial. We have selected our CRO and are moving forward with site selection activities. It is our intent to enroll the first patient before the end of this calendar year. The objectives of the study are to evaluate the safety, tolerability and efficacy of the three dose levels of AVP-923 capsules for the treatment of central neuropathic pain in the population of patients with MS.

As you know, AVP-932 is a six-dose combination of dextromethorphan and quinidine. This trial is a multicenter, randomized, double-blind, placebo-controlled four-arm parallel study. Eligible patients will be randomized to receive one of the three dose levels of AVP-923. And these will contain either 45 milligrams of dextromethorphan, or DM, and 10 milligrams of quinidine, or Q; 30 milligrams of DM and 10 of Q; 20 milligrams of DM and 10 of Q or placebo; is being administered daily for 12 weeks.

The primary efficacy endpoint is the pain rating scale that is obtained from daily patient diaries. Secondary endpoints include measures of the fatigue and disability, impact of MS on daily lives, sleep quality, cognition and depression. Safety will be assessed by monitoring adverse events, clinical lab tests, ECGs, physical examinations and vital signs.

The filing of this IND represents the next step in our plan to broadly develop AVP-923 for conditions of the central nervous system with high unmet medical need. We expect to enroll approximately 400 patients at 65 centers, both in the U.S. and internationally.

As we announced a few days ago, we have also initiated plans for a patient registry to further quantify the prevalence and quality of life impact of PBA. I am very excited about the PRISM registry because this will ultimately be the largest PBA clinical registry ever performed. Among other things, the registry will allow us to assess the prevalence of PBA across the at-risk populations and evaluate the relationship between pseudobulbar affect and its impact on quality of life. Additionally, collecting data across multiple sites in the United States will ultimately allow participating investigators to compare the incidence of PBA within their practice to both regional and national numbers.

The objectives of the PRISM registry are to define the prevalence of PBA in patients with associated underlying neurologic conditions, including ALS, MS, Parkinson’s, stroke, traumatic brain injury and Alzheimer’s disease. We anticipate recruiting 10,000 patients who have an underlying neurologic condition into the registry across approximately 500 sites in the United States. We expect to begin recruiting sites and enrolling patients later this month and overall enrolment is expected to take at least six months. The data collected should serve as the basis for medical meeting presentations, peer review publications and educational content.

Finally, it’s worth mentioning that we’ve had a higher number of interactions with physicians who are interested in our investigator initiated studies program. This interest is indicative of the unique mechanism of action of NUEDEXTA and its many potential therapeutic applications.

Our medical science liaison team is working with a number of these physicians to identify and facilitate the submission of some of the most promising of proposals.

With that update on clinical research and medical affairs activities I’d like to hand the call back over to Keith now.

Keith Katkin

Thanks Randall. A few comments in closing before we open the call to questions. With a strong balance sheet, a high performing commercial team, and a clinical development team with a track record of proven success, our priorities for the next 12 months are clear. First, the continued focus on a successful launch of NUEDEXTA in PBA. We are executing on key launch activities and have made significant progress in a short period of time. Performance metrics are moving in a positive direction, our team is excited, and most importantly we are hearing stories of how NUEDEXTA is positively impacting patient’s lives.

Second, the enrollment of the first patient into the new clinical study for AVP-923 for the treatment of central neuropathic pain, multiple sclerosis, third the initiation and completion of a PRISM registry, and finally advancing the European filing of NUEDEXTA in PBA. We believe, we're delivering on these imperatives will create substantial value for our shareholders.

With that summary of our business and financial update, I would now like to open the call up to questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) The first question will come from Ritu Baral with Canaccord.

Ritu Baral – Canaccord Genuity

Hi, guys. Thanks for taking the question. What is your confidence in the capture rate for the NUEDEXTA scripts right now? What holds could there be? I’m looking specifically at the discrepancy between the shipped the recognized revenues. And does this give you an idea of what’s actually in the channel right now?

Keith Katkin

It’s a good question, Ritu, and it’s one of the issues that we are constantly looking at. So it’s probably important first to explain what each of items on the balance sheet represents. So first is net NUEDEXTA revenue, so that’s according to Generally Accepting Accounting Principles or GAAP standards, and we use IMS data to book those net NUEDEXTA GAAP revenues. And, for everyone that’s moving at IMS that’s obviously an outward level prescription data service. Their capture rate, it’s hard to really be able to quantify their capture rate as there is no other standard to compare it to other than Wolters Kluwer who had the same issues in terms of their capture rate.

So, IMS is the best capture rate that is available, and that’s why using Generally Accepted Accounting Principles we need to book our revenue using IMS, both retail prescription combined with NUEDEXTA sold into the institutions.

The other two parts of NUEDEXTA revenues are the ex-factory shipments. Those are actually dollars that we – product that we have sent to wholesalers and then wholesalers ultimately sell that product to either institutions or to retail pharmacies. So, the deferred revenue really represents the difference between the GAAP-reported net revenues and the total ex-factory shipments. So, because there is no other data source other than IMS, we have to use that as our basis of recording revenue at the period of time.

Ritu Baral – Canaccord Genuity

So, essential that difference is what’s in the channel right now in inventory at the wholesalers?

Keith Katkin

Either at the wholesalers or at retail pharmacies or – it’s not out of the question, but it’s also sell-through but it’s not picked up IMS. If you look at IMS there, their weekly prescription data and their monthly prescription data, only accounts – is accounted for about by 77% of the pharmacies in the United States. So, anytime you're dealing with a new launch product, you have to make the assumption that your sales are being equally disbursed across all the pharmacies in the US, but it’s certainly possible that we could be selling through the 23% of pharmacies that are not represented, and therefore, IMS may not be perfect representation of sales. But it’s what we need to use in order to meet the requirements for revenue recognition under GAAP.

Ritu Baral - Canaccord Genuity

Got it. And the amount of product that represents that differential is all of it – does all of it have the potential to be retuned?

Keith Katkin

Yeah, under our returns good policy product can be returned goods policy, a product can be returned anytime from six months before the product expiry to 12 months after the product expiry. So, products in the channel does remain available to be returned. It’s booked in a different revenue.

Ritu Baral - Canaccord Genuity

Got it. And last question before I hop back in the queue. Can you give us an update on your differential marketing focus on the different specialists at this point, both on associated pathologies and I guess different physician specialties?

Keith Katkin

Yeah, I think it’s – I don’t know if I would call it a differential approach to the specialties. I think, we are approaching all of the major specialties that we're calling on. So that’s neurologists, psychiatrists, geriatricians and physical medicine rehabilitation specialists. We're certainly calling on them all in a very similar manner, I think what we're seeing though the representatives are tailoring the messages based upon each individual physician. And if you look at the physicians in broad groups – for example, neurologists are very interested in getting into conversations about PBA in particular and all of the underlying pathologies, where as psychiatrists they like to talk about the mechanism of action and how the product is believed to be working in the – putting forth its benefit in PBA patients. So, I wouldn’t say that there is a differential approach amongst the different physician audiences, but I would say obviously, receptivity has been good across all of the physician audiences and we're very pleased that we're seeing utilization really across all underlying neurologic condition. So, we're hearing many success stories in stroke, traumatic brain injury, Alzheimer’s, even in institutions as well. So, I think that it’s good to see that level of success coming in all of the underlying diseases this early in launch.

Ritu Baral - Canaccord Genuity

But your sales force is still focusing primarily on ALS and MS as the low-hanging fruit at this point?

Keith Katkin

No, I think – no. So our time about our field sales force is being spent about 60% with neurologists and then the remaining 40% split between psychiatrists, geriatricians and physical medicine rehabilitation specialists. And I think while we – our early prediction was that we would see the greatest uptake in ALS and MS patients early, anecdotally from what we're seeing we actually believe that uptake is occurring across all underlying diseases which I think is quite comforting in that it shows what we believed and that is the physicians believe that PBA is PBA irrespective of the underlying neurologic condition. So they don’t view PBA secondary to stroke to any different then PBA secondary ALS or MS.

Ritu Baral - Canaccord

Great thanks, I’ll go back in queue.

Keith Katkin

Thank you Ritu.

Operator

The next question will come from Thomas Wei with Jefferies.

Thomas Wei – Jeffries

Thanks. Just wanted to ask whether or not you send some – any difference in how physicians are selecting the patients to put on NUEDEXTA relative to the way that you had thought or defined the target population?

Keith Katkin

I think it's still too early to tell for certain there Thomas. I think a better way or the way that we think about it is really looking at physicians on a spectrum and where we want to move every physician to is where they are screening every patients that has an underlying neurologic condition in their office using the CNS-Lability Scale, they recognize the impact that PBA can have on the lives of these patients, their care givers and their spouses and that they know NUEDEXTA is the only FDA approved treatment, we can move the whole market to that outcome and then that’s how we define success.

So if you look at the Spectrum we’ve moved some doctors there and I’m happy to say that any doctor that we’ve gotten to start screening, universally the feedback we get is, wow, PBA is more prevalent than I thought all that data and research that you guys have is correct.

Now it’s really impetus for us, help us to the PRISM registry and that is really to validate our previous findings on a much broader scale looking at 10,000 patients across the US at 500 different sites, and then being able to show physicians their data from their site relatively to their part of the country or the entire US. So that’s how we’re defining success right now and we are pleased with how things are moving along.

Thomas Wei – Jeffries

And then just a question on their prescription data and the interpretation of it. Can you just help us understand that the refill rates for each of the months that data that you read you were talked about in the prepared comments doesn’t quite match the TRx from the previous month and should we assume that some of the new prescriptions there are actually like a refills or for the second month and that’s why the refill rate is somewhat less than the TRx from the month before.

Keith Katkin

I think that’s a good question Thomas and the one that we are looking into. As we talked to our market research department who has researched a number of these launches, what we hear is that it’s really hard to get a good sense of the true refill rates early in a launch. In the first couple of months there are some of what you said which is patients that are – have essentially two in our access that are represented. I think the first seven weeks of this quarter though representing from February 7th through the end of March, our sense is that most, if not all of those, NRxs were likely new patients. But looking at the new Rx the total Rx refill rate is something that we are certainly going to keep a close eye on in the coming months, but we really feel that until we get a fewer months of data we really can't draw any conclusions from NRx-TRx ratio.

Thomas Wei – Jeffries

And it looks like the size of an average prescription is close to 30 days. So, but you don’t seem to think that it’s a discontinuation problem or that patients are using it more episodically. We should - what you are hearing from the field would suggest that the patients who are going on are experiencing benefit in taking the drug chronically as prescribed.

Keith Katkin

The success stories that we’re hearing are exactly that. That people are taking it as prescribed and continuing on therapy. I will say that we’ve heard in the long term care community in particular which has been elder population, the model there is start low and go slow. And in that community they are probably titrating for a longer amount of time using q.d. dosing for a longer amount of time. But long term care does not represent that. A majority of our business actually were excited that we’re already seeing, the uptake that we’re in long time care given that was in our long term plan until much later this year.

Thomas Wei – Jeffries

All right, thank you.

Keith Katkin

Thanks Thomas.

Operator

The next question will come from Carol Werther with Summer Street.

Carol Werther – Summer Street Research

Thanks for taking my question. Are you still sampling? And it seems like the prescriptions aren’t going up as quickly as I might have thought, do you have any comments on that?

Keith Katkin

Sure. First in regards to samples, yeah, samples are and will continue to be an important part of our promotional mix. Given NUEDEXTA works so quickly, as you know Carol in many patients you can see just significant relief in the first seven to ten days. We believe that making samples available to doctors, so the patients can experience that benefit and therefore are very likely to go and refill the prescription is something of very important to us from a corporate objective standpoint.

In regards to your question about the prescription data, I think you’re referring from the last three weeks. I think it’s hard to really discern anything from the past three weeks. When you look at AAN, the AAN meeting which took place in Hawaii, you had most neurologists or a good number of neurologists at that meeting and when they went, they went for on an average a minimum of five days and many of them put additional vacation time on top of that because they're flying all the way to Hawaii, they might as well bring their family and make a vacation of it.

You combine that with the fact that over 10% of our field sales force were in Hawaii promoting to the doctors at our booth and not in their normal sales rotation, calling on doctors in their territory, we think it's hard to really draw any conclusions from these past three weeks and we really look to May and June to really get a true sense of what the run rate looks life.

Carol Werther – Summer Street Research

Okay, on some of the doctors I've talked to have many – the ones that I've talked to that are using the product most have already either used the compounded product or were involved in clinical trials. Do you think a lot of the compounded use is getting switched soon?

Keith Katkin

I think certainly we're looking at that, we don't think that there's a significant amount of compounding going on out there. And we do know that for the people that who are doing it, which is a violation of our intellectual property, that sometimes patients had three months or longer of compounded supply. So it could take a little bit of time for them to move over to branded product. I would say though I think we're getting a tremendous number of prescribers, first time prescribers, people that have no experience using the product previously and some of our prescribers that we have to-date are ones who just started using NUEDEXTA once it was approved. And we're really excited about the uptake we're seeing there and with some of our big writers.

Carol Werther – Summer Street Research

Okay, I'll ask one more before I get in the queue. So, just about the dosing and the MS trial for pain. You've only got the one dose approved this first time around. Do you think that would be sufficient to get the 30-10 dose approved if it were effective and safe?

Keith Katkin

I think our going in assumption is that we would need two well-controlled phase three studies in a pain secondary to multiple sclerosis, this first study because it is essentially the first large study in pain secondary to multiple sclerosis is by FDA definitions considered a phase two. That said, we're powering it large enough with 400 patients such that if we get a positive result, it's our hope that we can use that as the first of two phase three studies. But the PBA data from the Star trial looking at pain secondary to multiple sclerosis, we believe will be obviously submitted with the application but it certainly would not be sufficient for which to get approval.

Carol Werther – Summer Street Research

Thank you.

Operator

The next question will come from Greg Wade with Wedbush.

Greg Wade – Wedbush Securities

Good afternoon, thanks for taking my questions. I was just wondering if you might clear just with a little more granularity from physician level script information that you might have. Are you seeing a testing behavior and then more accelerating script writing by physician? And then also with respect to prescribing behavior, I don't know if you have this data, but is the drug being prescribed on the front line setting to folks coming in with a new PBA complaint or subsequent to failure on another unapproved approach. How's that playing out?

Keith Katkin

Sure, so let me pick the first part in terms of physicians prescribing patterns. I think that there's not one way to describe physician adoption. Looking across the universe, I can give you some personal examples, I've been out in the field a few times over the last month. You know, there's some doctors who – they have the classic PBA patient that they've seen have an episode in their office and that's who they want their first treated patient to – with NUEDEXTA to be. So they're waiting for that patient to come back in the office because that's the ideal candidate.

We've had other doctors who have given it to patients, heard the positive feedback from patients and have then rapidly continued to look for and more actively screen for PBA. And what we're finding is that the success that doctors are having in their minds with what we classic PBA which is a patients having episodes in front of them, that's really providing an impetus for them to do more screening in order to start looking for these patients more actively.

So we do believe having that first patient experience being very successful is important because that's really what moves the doctor to look into PBA and to writing more NUEDEXTA. As it relates to front line or second line therapy, we – I have not heard nor have I heard from field sales force many instances at all where doctors are saying that they're reserving NUEDEXTA for reserve therapy. In fact, if anything, we're hearing many doctors say that nothing works for PBA and that NUEDEXTA really is the only thing that's out there up to and including many of those anecdotal stories a few of which I shared on the call today, a lot of them start with tried to treat the PBA unsuccessfully with A, B and C products off label, for the first time found something NUEDEXTA, that actually worked for these patients. So the longer that we're out there, the more stories we hear, the more convinced we are that we have the only effective treatment for PBA.

Greg Wade – Wedbush Securities

I just want to ask a follow-up with respect to inventory in the channel. Can you just give us an estimate of number of weeks of inventory you believe is in the channel? And then, do you have a view into where that might reside, either at the retail level or within wholesalers? And thanks for taking my questions.

Keith Katkin

Sure. Thanks Greg. We haven’t done an analysis of weeks in channel as of yet. We’re still early in the launch that you need to really believe that you have a steady state and a run rate in order to be able to calculate weeks of inventory on hand. So that’s not something that we have available because we would essentially just be speculating on future sales which would be similar to giving guidance, which as you know we don’t give any guidance. So, stayed tuned for that probably which would get more comfortable and were able to give guidance in the future then we can also provide updates on what we believe to be in the channel.

In terms of the split out there for what’s in the channel, my sense is that most of it's out there is probably at the inventory level. We did not push inventory out to the pharmacy level. So, it’s our belief that the pharmacies that are ordering and ordering because they have a prescription in hand, given the cost of NUEDEXTA is not something that we believe they’d want on their shelves unless they actually had a prescription that they were filling.

Greg Wade – Wedbush Securities

Thanks

Keith Katkin

Thank Greg.

Operator

The next question is a follow-up question from Ritu Baral with Canaccord.

Ritu Baral – Canaccord Genuity

Hi, guys. Thanks for taking the follow-up. Can you characterize the discounts that you’re offering and sort of the nature of the discounts that you put forward to gain tier two status with Medco and Express Script?

Keith Katkin

Yeah, I think I’d me most comfortable Ritu just talking in the generalities that we talked about that in our previous calls rather than going into any specifics on an account-by-account basis. And I should say that the gross-to-net calculation for this quarter, we obviously did not have a lot of contracts in place. So the gross-to-net discount we expect it to increase over time. And at steady state we expect that gross-to-net will probably be somewhere between 15% to 20% discount from gross to net, if we go with let’s say a moderate contracting strategy; and as we discussed before, probably between 20% and 25%, if go in February aggressive contracting strategy.

Ritu Baral – Canaccord Genuity

Got it. And can you give us an update on how sampling is going and how those are being deployed by sales?

Keith Katkin

Yeah. I think as we talked about previously, sampling is an important part of our mix. I think that we have an experienced sales force. We're really interesting the representatives to figure out how best to use samples in order to maximize if with their particular clinicians. The direction that we're giving in the field sales team is any time we have – what they should be doing is trying to get doctors every time they want to write a description to give that sample, because that sample will allow the pharmacy to order the product but more importantly will allow the patient experience that initial benefit which we believe drives them to openly pickup their prescription at the pharmacy.

Ritu Baral – Canaccord Genuity

And are the samples included in cost of goods sold that you reported?

Keith Katkin

No, samples are included in our selling and general and administrative expenses.

Ritu Baral – Canaccord Genuity

Got it. And can you give us an update on how you're targeting the nurse practitioners associated with the various neurology and geriatric medicine and psychiatrists practices that you're targeting?

Keith Katkin

Yeah. It’s an important question Ritu. Because we’d never mention or imply that we're more calling on a neurologist. But that’s – we are walking into the office having that conversation with a neurologist and then leaving the office, really our approach is that what you'd call a little over use now, but we’ll say a total office call where our representatives really develop relationships with everyone throughout the office. So, it’s equally as important to talk to the PA or even the scheduler that is to have a conversation with the neurologist .I’ll just give you one example from my experience out in the fields last week talking to director of large neuroscience clinic who said he is really not a specialist for any of the underlying condition. So, he doesn’t really see much PBA. And I said, well, but you have some stroke and PBA patients. He said I’ve got some but you really best sort of talking to a neurologist in the clinic because they are ones who are really seeing a bulk of these general neurology patients.

So, yeah, de-parted and then his scheduler came in. Yes, the woman is spending a lot of time on the phone with his patients putting them on the calendar. She sat down and started having a dialogue with her about what PBA is and the fact that the doctor said that he doesn’t see very many of these patients. And she just shook her head and she said, “I can think of half a dozen or more patients off the top of my head that have PBA because I’m the one talking to them, I am the one experiencing – on the receiving end of the episodes. So that just gives you a little bit of a sense of the disconnect in what we're doing to trying to change behaviors, but here is a doctor who really didn’t think it was too prevalent within his practice, but you talk to the scheduler and she knows that it’s there, and that there is a plenty of patients. So needless to say we’re getting her to start to try and screen the patients so that she can present them to the doctor but that’s what it means to create a class, that’s what it means to change behavior and that’s really what our team is focusing on here.

Ritu Baral – Canaccord Genuity

Got it, so, are you enabling sort of pro talk within the office in situations like that?

Keith Katkin

Absolutely, and even if we walk into “high target neurology office,” certainly the represented take that time in the office to talk to some of the other neurologists, the PAs and everyone else in the office because we’ve got a lot of opportunity in that office setting and then I should say few that are our peer to peer programs and our speaker programs they all –they include nurse practitioners as well as obviously who recognize importance of the nurse practitioners in the potential prescribing decision.

Ritu Baral – Canaccord Genuity

Great, thanks for taking the question guys?

Operator

The next question is a follow-up question from Carol Werther with Summer Street.

Carol Werther – Summer Street Research

I just had a couple of follow-ups guys. The first is, do you have any plans to publish any additional data of NUEDEXTA this year?

Randall Kaye

Carol, it's Randall. We do have a very active publication program and after I close the presentations as you know we had a couple presented at the most recent meeting in Honolulu. We continue to be quite active, stay tuned, I think you will see a series of publications coming out over the course of this year and into a little bit of early next year, absolutely.

Carol Werther – Summer Street Research

Okay, great. And then also – Randall, some of the data that you have generated with STAR and all, what kind of a discontinue rate should we be thinking about? I know that just because you didn’t hit the primary end point doesn’t mean that patient wasn’t responding and wouldn’t discontinue. But could you just give me an idea of where you’re thinking it might be?

Randall Kaye

Well, Carol, pivotal trials are not necessarily predictive of what’s going to occur in the real world as it relates to discontinuation rates because it combines a variety of different factors. However, what we did see in the STAR trials relative to my own experience of being involved in countless trials as that the discontinuation rate was actually quite low, I mean it was around the 10% range, a very high percentage of patients completed the double lined portion of the STAR trial and then what was actually rather interesting is in terms of completion where patients the high percentage of patients that then moved into the open label extension and that touches upon tolerability and then also a desire for these patients to be treated. We also found that making a change in the dose formulation in particular, setting up a dose titration, a q.d. dosing for the first day and then going to q.12-hour dosing after, that’s made a dramatic difference in the overall tolerability of NUEDEXTA. So while our earlier trials and alternative formulation had discontinuation rates that weren’t favorable, we’d expect that discontinuation is not going to be a big factor as we get out there and present this compound to healthcare professionals.

Carol Werther - Summer Street Research

Well, thanks. It sounds like you kick off to a good start. Congratulations.

Keith Katkin

Thanks Carol.

Operator

There are no further questions. At this time, I would like to turn the conference over to Mr. Clements for any closing remarks.

Ian Clements

Thanks very much. In closing, I’d like to thank you for joining us today and your continued interest in Avanir, and we look forward to continue to update you in the progress we are making here at upcoming conferences and on future calls.

If you have further questions or you’d like to discussion any portions of results we discussed today, you can call the Investor Relations department.

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