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AVANIR Pharmaceuticals, Inc. (NASDAQ:AVNR)

F1Q12 Earnings Call

February 7, 2012 4:30 PM ET

Executives

Ian Clements – IR

Keith Katkin – President and CEO

Christine Ocampo – VP, Finance

Joao Siffert – SVP, Research and Development

Randall Kaye – SVP, Clinical Research and Medical Affairs and Chief Medical Officer

Analysts

Charles Duncan – JMP Securities

Ritu Baral – Canaccord

Thomas Wei – Jefferies

Christopher James – MLV & Company

Carol Werther – Summer Street

Gregory Wade – Wedbush

Operator

Good afternoon. My name is Nathalie and I will be your conference operator today. At this time, I would like to welcome everyone to the AVANIR Fiscal 2012 First Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session.

(Operator Instructions)

Thank you. Mr. Ian Clements, you may begin your conference.

Ian Clements

Thank you, operator and good afternoon, everybody. I’d like to welcome you to our conference call to discuss our financial and operating results for fiscal 2012 first quarter. Today is the one-year anniversary of the commercial launch of NUEDEXTA. Hence this is an opportune time to discuss the success of our initial launch phase and the strong momentum heading into 2012.

We have recently undertaken several initiatives to help accelerate revenue growth and deliver meaningful returns to our shareholders. To discuss our results and these initiatives, I’m joined by Keith Katkin, President and Chief Executive Officer, who will provide a strategic overview of our performance, Christine Ocampo, Vice President of Finance, who will provide additional details on our financial performance during the quarter and Dr. Joao Siffert, Senior Vice President, Research and Development who will provide an R&D update. For the Q&A portion of today’s call, we will also be joined by Dr. Randall Kaye, Chief Medical Officer.

During the course of this conference, we will be making certain forward-looking statements. These statements are subject to numerous risks and uncertainties and reflect our current expectations and judgments. Examples of these forward-looking statements include statements relating to our expectations for NUEDEXTA sales and revenue growth, future expense levels, the timing and success of future development of AVP-923 for other indications and the potential approval of NUEDEXTA in new markets.

Actual results could vary materially from the results anticipated by these statements. Investors should read the risk factors set forth in the AVANIR’s Form 10-K for the year ended September 20, 2011 and periodic reports filed with Securities and Exchange Commission.

With that said, I’d now like to turn the call over to Keith Katkin. Keith?

Keith Katkin

Thank you, Ian and my thanks to each of you for joining us today. I’ll start today by highlighting the achievement of a number of important milestones on the commercial, clinical and regulatory fronts.

First, on the commercial side of the business, I’m delighted to report that we continue to significantly grow NUEDEXTA prescriptions. The number of PBA patients being treated and benefiting from NUEDEXTA has steadily grown each month and I’m very pleased with the continued growth in prescriptions that we are observing.

Taking a look at monthly prescription numbers, in October, a total of 4,100 prescriptions were written, of which 2,043 were new prescriptions. In our number, a total of 4,896 prescriptions were written, of which 2,562 were new prescriptions. And for December, a total of 5,630 prescriptions were written, of which 2,894 were new prescriptions.

Thus, for the first fiscal quarter of 2012, we had a total of 14,626 prescriptions, of which 7,499 were new prescriptions. This represents a 43% increase in total prescriptions versus the prior quarter. The average prescription size during the quarter was 51 capsules.

I’m pleased with the option and growth we are seeing for NUEDEXTA. Additionally, new patient and physician market research undertaken during the last quarter reaffirms our long-term belief in the growth opportunity for NUEDEXTA. For example, the physician market research suggests that physicians in our target that are already prescribing NUEDEXTA expect a substantially increase in the number of patients treated with NUEDEXTA over the next 12 months. And those physicians who have not yet prescribed NUEDEXTA for the first time, expect to write their first prescriptions in the near future.

Additionally, in the creation market research, although a small sample size, 75% of patients on NUEDEXTA report being very or extremely satisfied with the achievement of their PBA episodes, compared to only 35% satisfaction with other treatment options. These market research findings bode well for the future of NUEDEXTA.

Next, I’d like to provide an update on some of the important short to mid-term growth initiatives that were discussed on our last quarterly conference call. First, the institutional salesforce. The signs of the impact that our new institutional salesforce is having on sales in that segment continue to be encouraging. Since initiating the pilot in early November, our institutional salesforce has made 3,500 calls on nursing facilities and executed nearly 700 speaker programs. As of December, approximately 50% of all NUEDEXTA prescriptions are now coming from the institutional segment. We expect to be better able to assess the success of the institutional sales team over the current quarter and I look forward to giving you more details on our next conference call.

Second, with respect to patient access, we have made good progress on the payer front over the past quarter and just in the last couple of weeks, another large payer had NUEDEXTA to its formulary in a tier 3 unrestricted physician. This payer covers over 4.5 million Medicare Part D lines and approximately 3.5 million commercial lines. With this addition, nearly 35% of patients have tier 2 access to NUEDEXTA and approximately 65% of patients, representing about 200 million lives in the U. S. have unrestricted access to NUEDEXTA.

In other words no requirements for administrative steps such as prior authorization, prior to filling the prescription. This represents a significant improvement in patient access over the course of our launch here. Our goal continues to maximize coverage for NUEDEXTA with few or no restrictions as we continue to work with the remaining commercial and Medicare Part D plans to improve coverage.

Third, our NUEDEXTA branded consumer advertising campaign was recently launched. We have inserted NUEDEXTA advertisements in broad reach consumer publications such as AARP, The Magazine, Better Homes and Gardens and People Magazine. We have also inserted digital banner advertisements in high traffic health related websites such as WebMD. We are now in the process of rolling out live patient educational events in select markets across the country. All of our consumer initiatives are designed to raise awareness of PBA and motivate patients or their care givers to ask their physician if NUEDEXTA is right for them.

To conclude, I’m delighted in the excellent progress we have made on all fronts over the past quarter and the achievements the organization continues to make.

I’ll now turn the call over to Christine Ocampo to address our financial results. Christine?

Christine Ocampo

Thanks, Keith and good afternoon, everyone. My comments today will cover our financial results for the first quarter of fiscal 2012. In addition to the financial results summarized in the press release issued earlier this afternoon, you can find additional information in our upcoming Form 10-Q. All figures discussed today are approximates.

We reported total net revenues for the three months ended December 31, 2011 of $7.2 million as compared to $1.8 million for the comparable period in fiscal 2011. The increase from the prior year was primarily due to net product revenue from sales of NUEDEXTA. Gross sales of NUEDEXTA were $6.3 million. Net sales of NUEDEXTA were 5.5 million. Total NUEDEXTA net shipments for the first fiscal quarter of 2012 was 6 million and net deferred NUEDEXTA revenue was 1.9 million.

First-quarter wholesale inventories were maintained at two to three weeks. Those margins on the sales of NUEDEXTA for the first fiscal quarter of 2012 was 94%. In late December we enacted a price increase for NUEDEXTA of 7.9% bringing the wholesale acquisition cost to approximately $527 per month. NUEDEXTA revenue is recognized using a deferred revenue recognition model.

NUEDEXTA capital 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. Recognized product revenue effectively represents reported end user prescription and non-retail shipments of NUEDEXTA capsules.

Research and development expenses, was 3.7 million for the quarter ended December 31, 2011 compared with 3.8 million for the same period in the prior year. In the first fiscal quarter of 2012, R&D spend was primarily attributed to non-clinical post marketing requirements, medical affairs, EMA regulatory expenses and the cost associated with the start-up of the PRIME study.

Selling, general and administrative expenses of 19.1 million for the first fiscal quarter of 2012 increased from 10.1 million for the corresponding period of the prior year. The increase was primarily due to an increase in expenses related to the commercialization activities for NUEDEXTA. Specifically in the first fiscal quarter of the prior year we did not have the effect of a full quarter of commercial expense since the salesforce was hired in November 2010 following FDA approval. In the first fiscal quarter of 2012 we have a full quarter of commercial expense for the complete salesforce including the additions of our institutional sales force.

Total operating expenses for the quarter were 22.8 million compared with 13.9 million for the comparable quarter in 2011. For the three months ended December 31, 2011 and 2010 the company recorded 1.2 million and 834,000 respectively of stock-based compensation expense.

Cash used in operations for the quarter ended December 31, 2011 was 17.6 million. Net loss for the first quarter of fiscal 2012 was 15.9 million or $0.12 per share, compared with a net loss of 12.1 million or $0.11 per share for the same quarter in 2011. 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 continuing promotion efforts for NUEDEXTA.

As of December 31, 2011, we had total cash, cash equivalents and restricted investments in marketable securities of 75.4 million, which includes proceeds of 7.8 million from warrants exercised in December 2011.

With respect to guidance, we continue to anticipate that total operating expenses, excluding share-based compensation, will be in the range of 85 million to 92 million. Breaking total operating expenses down, we expect R&D expenses to be in the range of 21 million to 24 million, including our Medical Affairs organization and SG&A expense to be in the range of 64 million to 68 million.

In regard to NUEDEXTA revenue, we continue to evaluate the appropriate time to provide guidance. Over the coming months, we will evaluate the impact on revenue from our institutional sales pilots and the progress of our ongoing discussions with third-party payers before making any decisions about providing guidance. And with respect to cash needs for the coming fiscal year, it is our goal to minimize any significantly dilutive financings as we focus on growing our revenues and managing our expenses.

Should we have the need for additional capital, we have a number of non-dilutive options that we may be able to take advantage of, including lines of credit, term loans, royalty debt and ex-U. S. partnerships.

And with that summary of our financial results, I’d like to turn the call over to Joao. Joao?

Joao Siffert

Thanks, Christine and good afternoon. So during the last call – during this call, I’ll focus on NUEDEXTA clinical development and I will also comment on the ongoing PRISM patient registry. In our previous earnings call, I reported that NUEDEXTA or AVP-923 was wet in clinical development. As a reminder, the ongoing PRIME study will test the safety and efficacy of three dose levels of AVP-923 for the treatment of central neuropathic pain in patients with multiple sclerosis.

We expect to enroll about 400 patients into the PRIME study at sites in the U. S. and overseas. We currently have approximately half of the sites in the U. S. activated and we are on track or start activation of European and international sites in the coming months. Our current estimate on timeline is that we should announce preliminary data for PRIME in the second half of 2013.

In addition to the PRIME study, we’re also working alongside key dimensional experts to develop a study in patients with Alzheimer’s disease. We’re planning to begin this study by late summer of 2012. This will be a proof of concept study aimed at further assessing the safety of AVP-923 in this mostly elderly population and exploring the effect of AVP-923 on behavioral disturbances including agitation, which are commonly associated with Alzheimer’s disease. In addition, to our own R&D plans, we continue to actively receive investigator initiated study proposals to test AVP-923 in a variety of CNS conditions. Proposals have ranged from understanding the mechanics of action of dextromethorphan to the effects on cognition, as well as speech and swallowing in patients with ALS.

Community and academic physicians have continued to explore other potential users of AVP-923 and have started to report on potential new uses in the literature, such as a recent report by Dr. William Ondo, with a recent letter to the editor in the Journal of Clinical Neuropharmacology, where he described the use of NUEDEXTA in 10 patients with Chorea of mixed at etiologies.

Regarding the PRISM registry, we continue to activate sites in enrolled patients. We have reached our goal of 500 registered investigators have been actively enrolling patients. As mentioned in our last earnings call, we intend to supplement ongoing analysis of PRISM data to upcoming medical meetings in 2012.

Finally, as a reminder, we filed the NUEDEXTA MAA for PBA in October 2011. The review is progressing well and will continue to have dialogue with EMA.

With that update in clinical research and medical affairs activity, I’ll hand it back over to Keith. Keith?

Keith Katkin

Thank you, Al. Before – the start of our new fiscal year has been exciting and we’ve made some significant progress on both the commercial and clinical fronts.

During 2012, our focus will continue to be: first, build the NUEDEXTA market in PBA and growing sales; second, further advancing NUEDEXTA or AVP-923 into new clinical opportunities; third, advancing the European regulatory process for NUEDEXTA in PBA; and finally, actively managing our cash position and expenses.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Charles Duncan with JMP Securities.

Keith Katkin

Charles?

Operator

Mr. Duncan your line is open.

Charles Duncan – JMP Securities

Hi guys, thanks for taking my question and congratulations on a good quarter of progress. My first question is regarding the guidance that Christine mentioned with regard to revenues. I know that you are evaluating the proper time to give revenue guidance but what I assumed that triggers in terms of long-term care that you’re looking at, it seems like scripts being above 50% now would be perhaps inappropriate time to give that revenue guidance?

Keith Katkin

Hi Charles, its Keith, thanks very much for the question. I think there is a couple of different things that we want to get just a little bit more color and clarity on before moving to guidance. Long term care certainly, it is now representing about 50% of all of our prescriptions and who we think are the bad reinforces the real opportunity within that setting. That said we’re still very early into the initial sales initiative where this pilot having just launched in November that data that we got that we put it today’s call it’s really only November, December, so just about two months.

So we would like to see another couple of months so we can get a better handle on the growth rates adoptions we’re looking at a number of different metrics internally and once we feel that we can accurately project those metrics and put out a number that’s one component that we really want to see on the revenue side.

The second certainly on the payor front, again we make good progress on the last quarter there and we’re pleased where we’re at from a fair perspective but we still have some additional work to do in Medicare Part D got some additional plans that we’re they’re hoping that we can move, that we really like to see more of a steady state, so we do exactly where we stand with the remaining plans that we do not have an agreement with as of yet.

Charles Duncan – JMP Securities

That’s helpful Keith. In terms of that long term care effort, it seems like you’re getting good traction early on, if you anticipate that if that continues that you might shift a sales focus to that and would that involve hiring additional folks or shifting within your current commercial infrastructure?

Keith Katkin

Good question, Charles. I think it’s too early to say. I will say that all options are on the table as we assess where we’re at with the pilot and the range of options are what you suggested there from fully resourcing the institutional sales effort, which would be about an additional 20 or 25 head count if we decided to do that. And obviously over the long-term, our goal would be if this pilot is successful to fully resource that opportunity. That said, we’ve got to balance that with our expenses and we’re going to continue to very actively manage our expenses.

And then also, we can’t take our eye off of retail. Retail portion of the business and specialty still very important and still significant opportunity within that part of the business. And ultimately we think over the long-term, while it’s more difficult to get momentum within the retail setting and the specialty setting, that’s where the real long-term growth opportunity lies. So we’re going to continue to focus on both aspects of the business, we will adjust our mix such that we believe that we’re getting the highest return, while actively managing our expenses.

Charles Duncan – JMP Securities

Makes sense to me. Last question and then I’ll hop back in the queue. With regard to the gross to net, last quarter I believe that it was around 85%, the calculate it to be around 87% this quarter. Do you think that that’s about where it’s going to stabilize or could it move slightly more as you more aggressively target Tier 2?

Keith Katkin

Yeah. I think as we continue to have discussions and negotiations with payers, we will likely see that that gross to net go down. And as we had – I think the guidance we have given earlier still stands, I guess down, depending on your perspective down or up, until we put the exact numbers out there. If we do a moderately aggressive discounting strategy and then we’ll be looking at somewhere between 15% and 20% reduction. If we go very aggressive, then we’ll be looking at 20% to 25% reduction.

Charles Duncan – JMP Securities

Okay. Thanks for the added color. Congrats on a good quarter.

Keith Katkin

Yeah. Thanks, Charles.

Operator

Your next question comes from Ritu Baral with Canaccord.

Ritu Baral – Canaccord

Hi, guys. Thanks for taking the question. Could you review for us the number of covered lives? Again, you had mentioned that about 200 million were at Tier 3, but could you sort of – could you go over the metrics that you guys have on hand? What large plans are covered right now? And can you name or sort of characterize the outstanding plans that you guys have in your cross hairs going forward in the near-term?

Keith Katkin

Yeah. So let me review the numbers first. But in regards to giving specific plan dates, I think we are going to stay away from giving any specific plan date like we have in the past obviously because it’s a sensitive issue with some of the plans. So we don’t want to go into that level of detail. But to recap the numbers, as it stands right now, so the first time that we said was about 35% of lives with a tier 2 coverage. So that would include tier 2 unrestricted access or tier 2 with restrictions, which we have opted in some cases for tier 2 physician with restrictions because I think the restrictions are very easily met by the PBA population.

If you look at the unrestricted access to NUEDEXTA and it was approximately 65% of patients or 200 million lives, that represents tier 2 unrestricted lives and tier 3 unrestricted lives. So, essentially the number of lives, if anyone can go to a pharmacy in the U.S., drop off of a prescription and the prescription won’t be filled that whatever the copay is for that particular plan. And I should say that that’s particularly important within the long-term care setting because Medicare Part D patients in the long-term care that are do eligible are known as LIS patients. If they are at tier 2 within restrictions, they have an extremely low co-pay. So in some instances, all we need to obtain is a tier 3 unrestricted physicians in order to get how the patients have access to NUEDEXTA with a very low co-pay.

Ritu Baral – Canaccord

And can you go over what some of those tier 2 restrictions are and are you seeing any trends as far as whether some of those are going away or whether they’re sort of changing or the bar is being lowered even if there are still restrictions.

Keith Katkin

Yeah. Almost exclusively, it’s the documentation of the existence of PBA. So essentially, the doctor, the plan is just want to make sure that these are patients that have PBA and the way they did plans, execute that are differently, some want to see just underlying neurologic condition associated other plans have considered as putting in smart, they want to see that patients are on meds for underlying neurologic initiative, they see one of those meds and then it’s automatically approved. So a wide range, but nothing, no step edits that we’re aware of, just very easy and simple prior authorizations.

Ritu Baral – Canaccord

Got it. And your targeted patient events that you are moving forward with, what are the strategies you are using and what sort of underlying disease populations are you targeting with the patient events?

Keith Katkin

Really across the board. During the fourth quarter, we did a number of pilot programs and we did pilot programs in specific disease states for example multiple sclerosis pilot program or stroke pilot program and then we also did Alzheimer’s pilot programs where that we invited people with all types of neurological condition and we saw good attendance at these programs, a lot of interest in PBA and a potential therapeutic intervention for PBA.

So based on that we’ are excited to roll out more on a national level these patient initiatives and this initiative is going to hopefully driven by our field sales team. So they’ve got the latitude to cite how they want to enroll it out within their particular of the country whether they want to focus on a particular disease state or they would prefer to and essentially an Alzheimer’s program that covers all of the disease states associated with PBA.

Ritu Baral – Canaccord

Got it. And the status of your European application, have you guys received your 120 day questions yet?

Keith Katkin

Given that we’re not at the 120 days quite yet, that will begin sometime in March, no we haven’t received any formal questions.

Ritu Baral – Canaccord

Got it. Last question, I’ll hop back in the queue. What data or activities have you planned for AN up?

Keith Katkin

Randall, do you want to comment on AN?

Randall Kaye

Any of the – hi, Ritu, it’s Randall. We’ll make probably announcements prior to the meeting of any of the data and that would potentially be presented that we would wait to hear back from them with regards to any of the approvals.

Ritu Baral – Canaccord

Great. Thanks, guys.

Keith Katkin

Thanks, Ritu.

Operator

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

Thomas Wei – Jefferies

Thanks. I had a couple of questions. Just on the overall prescription curve and when you split that out between retail and institutional, can you help us understand what the dynamic looks like between those two growth curves, has it been 50-50 for many months now or is one appearing to gain over the other i.e. the institutional part may be gaining as a percentage of the overall prescriptions?

Keith Katkin

Yeah, so first I’d like to clarify the 50% number to make sure that there is some misinterpretation of that for the 50% was that of all the prescriptions written in December roughly 50% of them were derived from long term care setting that wasn’t a growth related percentage.

But if you look at the two separate books of business the retailer specialty side of the business and long term care, we definitely see growth in both, but we’re seeing a larger growth within the long term care setting, which is consistent with our hypothesis going in long-term care setting patients are easier to identify when you move, you typically move a facility, which includes multiple patients, compare and contrast that to retail where if essentially a patient by patient identification and you have to also raise the awareness and change behaviors of physicians in order to have them identify patients.

So as we look forward, it’s hard to project, but looking back over the past couple of months, the growth rate in the long-term care setting has been faster than the growth in retail. But growth in both, which is why we’re going to continue to support both parts of the business.

Thomas Wei – Jefferies

And have you actually – for the – can you just remind this with this pilot salesforce? How many salespeople is that and four 3,500 calls that have been made, what proportion of long-term care facilities have they actually caught on?

Keith Katkin

There is about – there is roughly 32 sales representatives that are dedicated to the institutional selling effort. And then we’ve got our 75 specialty or retail sales representatives, of which they can spend up to 20% of their time focused within long-term care. So we’ve made over 3,500 calls us we mentioned. I don’t have the exact number of facilities.

The way that the team has been asked to roll this out, they focus on a small number of facilities, essentially get mine within those facilities, get patients on therapy, and then make sure that reimbursement is flowing through within those facilities. And then once that is established, then move on to additional facilities. And so we’re keeping our – even though we plan at having a larger target universe, we’re starting off with a small number of very focused number of facilities demonstrating success and then going from there.

Thomas Wei – Jefferies

And when you describe the institutional versus the retail growth curve, is the retail growth curve actually seeing kind of a steady growth or is it actually decelerating in terms of growth at the expense of accelerating institutional growth?

Keith Katkin

I’m not sure I understand the question exactly. So let me try and answer as I think I understand it, which is we’re seeing growth in both, there’s a growth in retail for the best of my recollection has been pretty consistent over the last couple of months, where we’ve seen somewhat of a change in trajectory for lack of a better term is within the long-term care, with the addition of the institutional pilot, we’ve seen the trajectory change in some larger growth in the long-term care of that segment.

Thomas Wei – Jefferies

And I did have a question as well on interpreting some of the script numbers here, just I think I have asked this before, just the ratio of the NRX and TRX. Now that the product is a little bit more mature, I’m trying to understand the ratio of those two numbers and why there aren’t more refill at this stage?

Keith Katkin

Yeah. We spend a lot of time really trying to understand refill rates. And as we look into it in greater detail, I think we find there is a number of different ways to look at refill rates. And part of the issue that we’re dealing with here is even within long-term care, you can have multiple doctors that are responsible for prescriptions within a facility. So you could have, for example, a consulting psychiatrist, such as the one that starts prescription, which is sometimes just it might be a seven-day prescription depending on one of the months it’s written.

And then that’s considered at NRX. I mean, at the start of the month, you may have the attending, pick it up and start write a new prescription, which then ultimately very often has picked up in another NRX. So given the – just given the way things that work within the institutional setting of the number of doctors that could be writing prescriptions for each individual patients.

I think it’s hard really to make a full assessment of what’s going on with refill rates, as we’ve tried to work with – look at it was in the retail side of the business, there we’ve looked at a number of different metrics and we think the metrics that are the best estimate of what the refill rates are, we’re looking at between 60% and 70%, which is consistent with all the products that we’ve looked at within the CNS space.

Thomas Wei – Jefferies

Just to be clear, it sounds like you are not concerned about any persistence issues here, you think it’s really just a function of the disproportionate long-term care contribution to the prescriptions and the way that scripts are dispensed in that spending?

Keith Katkin

I think that’s the general hypothesis. That’s our general hypothesis. And certainly what we expect in one of the attraction that we had to the institutional settings is that we expect the compliance will likely be better than what we’re seeing within the retail setting, once these patients are started, once the benefit is observed, by the staff or by the patient, then the refills become much easier and they just become a matter of course of the business. So within that setting, our hypothesis that we will see, a very high compliance, but again our ability to validate that is based on the data that’s available is likely not going to be high.

Thomas Wei – Jefferies

But you’re not seeing or you’re not, you don’t believe that there is persistent issues in the retail setting, just I’m sorry to beat a dead horse here, but I just want to make sure it’s clear.

Keith Katkin

We don’t believe that our persistent issues are any more or less than those that are driven by typical CNS products.

Thomas Wei – Jefferies

Okay. Thank you.

Operator

Your next question comes from the line of Christopher James with MLV & Company.

Christopher James – MLV & Company

Hi, thanks for taking my questions and congrats on the progress made during the quarter. Just hitting back to your pilot program, you said 32 salespeople and you mentioned I think 3500 calls, do you have a preliminary sense on the average number of calls that takes to get a script written and I think you gave some data earlier I think you might have said it, it takes 12 calls to get a script written in the retail setting, how does that compare to the institutional setting?

Keith Katkin

Yeah. Thanks, Chris and a good question. The long term care is a lot different than retail. So the 12 calls that I referencing or from the announcements of the retail business. Within the institutional side of the business, because you’ve got very different dynamics in different homes, we’ve really seen outcomes that spanned again that we’ve seen representatives walk in and as early as the first or second call we find an advocate and that advocate wants to make something happen within the facility. They own it, they deal with consulting pharmacy, they deal with the staff there and patients lined up getting put on very quickly.

In other facilities, because there are many stakeholders that are involved within the institutional setting, you could find an advocate the medical of director could be a big advocate for NUEDEXTA but you still need to find a consultant physician, you still need to find a consulting pharmacist, you still need to educate the directors of nursing and the other nursing practitioners that are within the facility and its some instance that’s taken ten twelve weeks.

So as we looked at our expectations from this initial selling effort within the institutions, we thought that we would be getting a very good sense of where we’re at around the twelve week mark, so that’s very close essentially to where we’re at right now in terms of timing given that we’ll kick this off maybe getting a member, so we’re also going to be watching very closely and hopefully at some additional data to share in our next call around that particular question.

Christopher James – MLV & Company

Great. Thanks. It’s very detailed and helpful. Next question, you’re making good progress on your TRx and NRx. But it looks like your average capsule size is staying the same at 51. Is that something that we should expect to remain stable or do you have some leverage there to go up?

Keith Katkin

That’s what – we talked about earlier in the call one of the things we have to understand better before potentially giving guidance up another one of those factors, so what we are seeing is that the average prescription size within the institutional setting is lower than the retail part of the business. And that’s primarily driven by a monitor that happens within the institutional setting, which is start low, go slow. So what we find is that many patients are started on CID that a benefit is absorbed and the physician is more comfortable staying at – I’m sorry it starts at QD and the patient is more comfortable staying at QD or once daily dousing versus titrating up and getting the maximum benefit.

So for – in order to address that, one of our key messages going out to clinics right now is to make sure that patients are getting the maximum benefit from NUEDEXTA and then the QD patients, power switched over to BID, but I would expect that as if long-term payer continues to be a larger and larger portion of the business, then we’ll likely see that capsule count come down a little bit.

Christopher James – MLV & Company

Okay. And then you’re making good progress again on reimbursement. What sort of push back again are you getting from physicians and institutions that have not written prescriptions for NUEDEXTA. Is this an issue of misdiagnosis or are they using other agents first prior to NUEDEXTA, what sort of push back, just given the good progress you’re making on the reimbursement side?

Keith Katkin

Yeah. It’s interesting because as we look at that, the number one reason that we see is that we’d have greater presence within the offices. So we haven’t really gotten a significant amount of which back when doctors are educated on PBA educated on NUEDEXTA, they are very interested. Certain types of clinicians are known for being more conservative in taking a longer amount of time on the adoption curve, for example the neurologist into my left here.

On this call, we’ll say that neurologist are generally conservative, they’d like to see a lot of use many very often before jumping in and writing prescriptions and they’ve gotten a little bit apprehensive due to some other products in the past. That has seen – they have seen – untoward safety issues arrive after sometime on the market.

We actually don’t expect that that won’t be an issue with NUEDEXTA. So to the extent they need to say time, they need to see their colleagues using and getting more comfortable that’s fine with us. I will (inaudible) my comments on the research that we have completed here recently, which I think bodes well for continued growth. And that is current to next users expect to use a fair bit more and the non-users expect to start writing within the upcoming months.

So I think what we’ll take on our part to make that a reality is just to make sure we have continued contact. Again that’s why the retail part of the business is very important to us. If we’re there, that means we’re talking about PBA, we’re getting them to screen, we’re changing behavior. And long-term that’s how we are successful as we can’t be with NUEDEXTA by changing behavior and making PBA part of every offices.

Christopher James – MLV & Company

And just a couple more quick ones. On the EMA front, you were qualified for standard review timeline versus expedited review, which makes sense. It’s not an oncology drug, but does that say anything for your pricing leverage or are there any pricing or are there any implications for significantly less pricing in Europe than the U. S. ?

Keith Katkin

That’s still ongoing research on our part. I don’t think that whether or not we qualify for a standard review or an expedited review would have an impact on pricing. I think ultimately, what it’s going to boil down to is, the value proposition. And that’s why we’re looking right now and doing on reimbursement to make sure we can put forward the best possible story around pricing.

And what we’ve learned in the early stages of our reimbursement work that bodes well for us is, CNS products of a class tend to be – going to be a reimbursed at a level closest or closer to U. S. pricing than many other products classes. And also what we’re seeing from an European pricing perspective is that the benefit or the percent of patients that benefit from the therapy is also becoming more and more of a component. And given, if you look at our Phase III data, over 80% of patients experienced at least the 30% reduction, which is defined as the clinically meaningful reduction and episodes. We think that that efficacy will bode well for us as we put together our arguments for reimbursement within Europe.

Christopher James – MLV & Company

Great. And then one final one, I’ll jump back in the queue. On the meeting front, have you identified anything interesting in the neurological space or – and then would you consider expanding outside of that space if you found an interesting asset?

Keith Katkin

Certainly, priorities one, two and three are growing NUEDEXTA sales and then maximizing the long-term potential of NUEDEXTA with studies within MS pain and within agitation secondary to dementia. That said, we do have a very small team here that in the part of their job side looking for ex-U. S. partners forward. (Inaudible) to assess opportunities that might be good fits for us. There is, always things coming across the wiring opportunities to be looked at. So we’re not necessarily versed to doing anything, but it is certainly not the high priority for the organization. But if it be absolute or right opportunity came by, that was too good to pass up. We would consider it, it would have to be within CNS and it have to align very well with our call points for NUEDEXTA but again not a significant priority for the organization right now.

Christopher James – MLV & Company

Makes sense. Thanks so much and congrats.

Keith Katkin

Thanks, Chris.

Operator

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

Carol Werther – Summer Street

Thank you. Can you hear me?

Keith Katkin

We can Carol, how are you?

Carol Werther – Summer Street

Great. I am good. Congratulations on a really good quarter. So I just wanted to ask you about any kind of updates you might get from the PRISM registry this year?

Keith Katkin

Sure. Let me turn that one over to Randall.

Randall Kaye

Hi, Carol, its Randall. I think you heard earlier that Joao had indicated that we have reached our target our 500 investigator sites there registered. These sites are continuing to actively enroll control patients. So we would look forward to submitting some of the data that we’re seeing to some upcoming 2012 congresses.

Preliminarily, what I can tell you is that we’re encouraged by the prevalence estimates of PBA that we’re seeing and they seem consistent with some of the recent survey data that’s out there, so preliminary looks good.

Carol Werther – Summer Street

And then if I missed this, I’m sorry. Where are we with the enrollment for the MS neurological pain study?

Keith Katkin

I will turn that over to Joao with the intro that we haven’t provided any specific numbers in relative to patients. But certainly on the sides front and our expectation for (inaudible) as well

Joao Siffert

Yeah. So we are – just over half of the U. S. sites have been now activated. So then, once they activated, they can begin to enroll patients. So we’re seeing a pick up there. And the overseas sites in Europe and Argentina are about to be activated in the coming months. There is a long lead time there for regulatory review and so forth. But that’s coming to an end then we would look to having activated sites in Europe and Argentina in the coming months. So that also contribute to enrollments. The expectations of data, preliminary data will be available in the second half of 2013.

Carol Werther – Summer Street

Okay. Thank you. And if you just help me a little bit about where you are in thinking of funding any partnerships overseas?

Keith Katkin

Yeah. Certainly, as we stated before, we have had and continued to have dialog with a number of potential partners as we look at the opportunity certainly it is a priority for the organization, but we also believe that the potential for NUEDEXTA is similar outside of the U. S. as it is within the U.S.

So we carefully – we think long and hard before signing any potential deals and I think as I’ve said in the past, we think it’s good business practice to always look across the range of options, which range from an out license and someone that could potentially co-share with our several other clinical programs to local distribution agreements to potentially setting up the infrastructure ourselves. So we continue to have evaluate all those options because we don’t want to be in a situation where we would be forced to accept a suboptimal offer from a potential partner. So stay tuned on that, we’re still very early in the review process and we’ll continue to provide updates as appropriate in the future.

Carol Werther – Summer Street

Thank you for that. My feeling is that I think the drug is extremely valuable and I’m just trying to understand has the dialog with other companies in the last twelve months, has that been recognized?

Keith Katkin

I think certainly there is a lot of interest out there and we know that a lot of companies are watching our U.S. performance and we continue to gain scheme and demonstrate success in the U.S. and obviously that just causes their interest to typically that more broadly. I do think what’s going against this is most many companies are trying to fill gaps with in the U.S. and we’re not interested in having discussions around any potential U.S. partnerships, we’re focused exclusively on ex-U.S. potential deal.

So I think uniformly as people hear the patient stories, as people understand the data, they certainly appreciate the value and as we continue to grow sales there in the U.S. and just raising the overall value proposition of NUEDEXTA globally and so certainly there is that enthusiasm but within the business dealings, it is the business deal and we got to go through and let these deal take much time that they need.

Carol Werther – Summer Street

Thank you.

Keith Katkin

Thanks, Carol.

Operator

You have a follow-up question from the line of Ritu Baral with Canaccord.

Ritu Baral – Canaccord

Hi, guys. Thanks for taking the follow-up. One of the I guess consequences – points is if you guys booking revenues the way that you do as far as not – not booking them until their out from the shadow of returns, is that we don’t get any sort of color on inventories and how ordering in the retail channel is going, can you give us any sort of trends or characterize what you’ve seen this past year as far as inventories and sort of ordering patterns?

Christine Ocampo

Sure, and I think Christine alluded to it a little bit in her comments. So with the initial launch that everyone does, we have stocking within the channel and then we quickly saw as we more throughout the year that inventory being drawn down. As of last report, we’re seeing about two to three weeks worth of inventory at the wholesaler level and actually as of late, managing a lot closer to the two-week level.

So certainly as we continue to increase the business, then you’d expect to see incremental or higher inventory level at the wholesaler level. And that is one reason that we continue to evaluate our revenue recognition, we’re at the one year anniversary of the launch today. So we’ve got about a year’s worth of return data behind us. So we’ll be assessing over the next quarter if potentially a good time to make a change from our revenue recognition to reporting as most people report which is xfactories that sails straight from our warehouse in to wholesalers and other users?

Ritu Baral – Canaccord

Where do you expect ultimate inventory to stabilize at, is that sort of the two-week mark to three week, what sort of healthy for what you’re seeing?

Keith Katkin

Two to three weeks is typically what you expect. I think when we’ve got the benefit that we have is as our base grows, then the value of two to three weeks continues to grow and as pharmacies have more and more patience, it’s a likelihood that they would lead products at the pharmacies so that could immediately perception also increases. So over time, I think you’ve got two areas within the channel, where you could see additional stocking both at the wholesaler level and also at the pharmacy level.

Ritu Baral – Canaccord

And as far as the dementia trial, have you guys given more thought to potential end points. Have you nailed some down for sure or what are the other ones that you’re still sort of considering as more important or less important to end points for Dementia?

Keith Katkin

Sure. I will turn that over to Joao with the caveat that still early thinking and certainly subject to change.

Joao Siffert

Yeah. So – hi, the conceptual stages of this point is there are a variety of validated endpoints to look at these patient population before focusing on Alzheimer’s patient – most of the outpatients who have primarily agitation as their main symptom. But as you can imagine, a variety of other behavioral disturbances are co-existent with agitation. So we’ll look at all of them, although we’re selecting patients who have agitation primarily. And there are a variety of validated scales that we’re looking at and we have our peek, but that’s not agitation. All of which are validated, well-known use to measure agitation and then behavioral disturbances in these patients.

Ritu Baral – Canaccord

Great. Thanks and congratulations on the ramp, guys.

Keith Katkin

Thanks.

Operator

Your next question comes from the line of Greg Wade with Wedbush.

Gregory Wade – Wedbush

Hi. Good afternoon. Thanks for taking my question as well. Keith, I just wonder if you may help us to understand your expectations for the growth of NUEDEXTA in 2012. When you look at sales at the salesperson level and you look at prescription behavior, to get an understanding of what’s driving behavior at physician level, and with more matured data in those institutions with those docs that are – have been using the product longer, what’s your expectation for this year? Should we be thinking that we’re going to see and increased growth rate or is the growth rate you’re on are you comfortable with that? Thanks.

Keith Katkin

I think that’s around our way of asking for guidance, Greg. In fact, let me share just some thoughts as we look forward into 2012. One, as it relates to – I heard an inflection point question in there. And I think what’s important to recognize is, if you look at our growth over the past many months, we’ve been really on a very nice linear trend. And if you forecast that trend down just on a linear basis, whether you think our continued growth is going to be 1.5% week-over-week or 2% or 3% week-over-week, all of them paying down very good pictures in terms of our total potential revenue achievement for 2012 and 2013. So we obviously aren’t giving any guidance.

But I do want people to be clear that there’s not a need for an inflection point in order for us to perform very well in 2012 and within 2013. At the representative level, I’ve been fortunate that over the last two years, we’ve been able to spend some time with our sales representatives and our some point of action meetings or POA meetings. And I can tell you that the sentiment of the field salesforce and/or the morale is very high, which is always the parameters that I look at to really try and sense where we’re at from a business perspective. And that where we’re going to go.

And there are so many stories about accounts or physicians that are on the cost border just finally started to ride and they’re seeing a great benefit of NUEDEXTA and this is something that we’ve seen just going back over the launch of the typically patients or even institutional facilities, they like to identify just a few patients on the retail and specialty side, doctor will typically try NUEDEXTA out just in one or two patients to get a sense of how it’s working same with the institutional side, they’ll try one or two patients just to get a sense and once they get that feedback from the patient that there is a great benefit the patient is experiencing, that’s when they start looking for more patients and that’s when they put more patients within the institutional facilities onto therapies. So I think all of those factors really bode well for our long-term success in 2012 and beyond.

Gregory Wade – Wedbush

Well considering the number of new prescriptions are being written, I mean that data point would suggest that there should be an accelerating rate of growth, and that’s kind of what I was pointing out is when you look at the data, what’s your feeling, is it this is a great growth rate, which I agree it is. And we’re very comfortable with the growth rate you have, but when you look at the prescriber level or sales person level if you see them maturing in each of the accounts leading to an increase in demand I would suggest that there would be an increase in growth rate. Thanks.

Keith Katkin

Thanks. I appreciate the question.

Operator

You have a follow-up question from the line of Charles Duncan with JMP securities. Mr. Duncan, your line is open.

Charles Duncan – JMP Securities

Hi, guys thanks for taking the follow-up. This is not a question intended to ask you for guides again, but you did mention Keith that your market research indicate current NUEDEXTA prescriber is intend to prescribe quite a bit more number of patients in the next 12 months and perhaps you just kind of address this question, but I’m trying to understand your definition of quite a bit more of what would fit that if you just kind of give a sub bracket of categories there?

Keith Katkin

Yeah, and I will I think one thing I look at market research, both on a directional level, then specific numbers I think I shared the actual number with you, you wouldn’t believe it as we discount the actual expected growth as the physicians are stating themselves. So what we’re looking at and the metrics that as I see that is whether that with the sentiment about the product now about the benefit that they’ve seen on the patients they have used and whether or not they’re going to be looking for other opportunities to prescribe the product.

So all of that is coming back very positively from the market research. I can’t tell you exactly what that increase would be or how soon the non-riders will start to ride, but I can tell you we know that NUEDEXTA is promotionally sensitive. So the more people that we can put out there, the more interactions we can have either on the retail side or as in institutional side, the more business that we believe we will be able to generate.

So that’s our number one priority is getting out there making sure that PBA NUEDEXTA are top of mind and we do think that as we start to run these pilots within the consumer settings and go after some of the broader reach consumer advertising, they will be watching very closely to see how that contributes to the overall business mix and see if that’s another area that we may want to increase our investment in the future as it obtains big dividends.

Charles Duncan – JMP Securities

Thanks for the added color. Congrats on the traction.

Joao Siffert

Thanks, I appreciate it.

Operator

There are no further questions. Do you have any closing remarks?

Keith Katkin

Thanks very much. In closing, I’d like to thank you for joining us today and for your continued interest in AVANIR, and we look forward to providing updates to you on the progress we continue to make at upcoming conferences and on the future earnings calls. If you have any further questions or you would like to discuss any portion of the results today, you can call my direct line in the Investor Relations Department at 949-389-6737. Thanks very much.

Operator

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

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