Supernus Pharmaceuticals' (SUPN) CEO Jack Khattar on Q2 2016 Results - Earnings Call Transcript

Supernus Pharmaceuticals, Inc. (NASDAQ:SUPN)

Q2 2016 Earnings Conference Call

August 3, 2016 09:00 ET

Executives

Peter Vozzo - IR

Jack Khattar - CEO

Gregory Patrick - CFO

Stefan Schwabe - Chief Medical Officer

Analysts

Ken Cacciatore - Cowen & Company

David Amsellem - Piper Jaffray

Annabel Samimy - Stifel

John Boris - SunTrust

David Steinberg - Jefferies

Bill Tanner - Guggenheim Securities

David Buck - Northland Capital Markets

Operator

Good morning, ladies and gentlemen and welcome to the Supernus Pharmaceuticals Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will follow at that time.

As a reminder, this conference call is being recorded. I would now like to turn the conference over to Peter Vozzo of Westwicke Partners, Investor Relations for Supernus Pharmaceuticals. You may begin.

Peter Vozzo

Thank you, Shanelle. Good morning everyone and thank you for joining us today for Supernus Pharmaceuticals' second quarter 2016 financial results conference call. Results discussed today are for the quarter ended June 30, 2016. Yesterday, after the close of the market, the company issued a press release announcing these results.

On the call with me today are Supernus' Chief Executive Officer, Jack Khattar; Chief Financial Officer, Greg Patrick; and Dr. Stefan Schwabe, Chief Medical Officer. Today's call is being made available via the Investor Relations section of the company's website at ir.supernus.com. Following remarks by management, we will open the call to questions. We expect the duration of the call to be approximately 45 minutes.

During the course of this call, management may make certain forward-looking statements regarding future events in the company's future performance. These forward-looking statements reflects Supernus' current perspective on existing trends and information and can be identified by such words as expect, plan, will, may, anticipate, believe, should, intend and other words of similar meaning. Any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those noted in the Risk Factor section of our Annual Report on Form 10-K and most recent of which we will file on March 9, 2016. Actual results may differ materially from those projected in these forward-looking statements.

For the benefit of those of you who may be listening to the replay, this call is being held and recorded on August 3, 2016, at approximately 9:00 a.m. Eastern Time. Since then, the company may have made additional announcements related to the topics discussed. Please reference the company's most recent press release and current filings with the SEC. Supernus declines any obligation to update these forward-looking statements except as required by applicable securities laws.

And now, I will turn the call over to Jack.

Jack Khattar

Thank you, Peter. Good morning everyone and thanks for taking the time to join us as we discuss our 2016 second quarter results.

Supernus had a strong second quarter reaching for the first time a record quarterly net sales of $50 million. This represented a robust sales growth of 47% compared to the second quarter of 2015. Such performance underscores the solid fundamentals of our epilepsy products and continued growth in product prescriptions.

Total prescriptions for Trokendi XR and Oxtellar XR combined in the second quarter as reported by IMS were 123,758, representing an increase of 39% over the second quarter 2015. Trokendi XR prescriptions for the second quarter 2016 totaled 93,094 prescriptions, which is a 42% increase over the same quarter last year. And Oxtellar XR prescriptions for the second quarter of 2016 totaled 30,664 prescriptions, representing an increase of 30% over the same quarter last year.

In addition, total net product sales for the first half of 2016 were $93.4 million, representing again a solid growth of 50% over the same period last year. Regarding our supplemental new drug application for Trokendi XR we resubmitted in June, the revised label, requesting approval to expand the label to include treatment of migraine in adults. This resubmission was requested by the FDA to review the proposed label in a different format. The FDA has set a target date in the third quarter of 2016 to complete this review. We continue to prepare and will be ready to launch the migraine indications soon as after receiving full and final FDA approval.

Regarding our pipeline and starting with SPN-810. Enrollment continues for both Phase 3 trials which is currently in development for impulsive aggression in patients' age six to 12 years old who have ADHD. The pace of enrollment is slower than expected due to challenges such as those experienced by caregivers in recording patient information on the new electronic diary and lack of compliance during the screening period regarding washing out of current medications. The screening period prior to entry into the trial requires that patients forego currently use active treatments for the regression while staying under ADHD treatment prior to randomization to establish the patient's baseline data.

Some patients experience difficulties abiding by this requirement resulting in higher than expected dropouts during the screening period. As a consequence we have instituted a number of measures to improve patient enrollment and retention. These include potentially extending the screening period and providing increased education for site coordinators and caregivers on the electronic diary to make it easier for caregivers and patients to comply with the trial protocol.

While we are encouraged by the recent progress in improving recruitment and retention for both Phase 3 trials, it is likely that enrollment will continue until 2017. We are also encouraged by the fact that to-date, enrollment into the open label extension by those who completed the trial has been very hard.

Finally, despite the slower than expected enrollment, we continue to expect to launch SPN-810 in 2019 according to the original timeline that we communicated last year. As we have built into such a timeline, contingencies for potential delay is on the way. Regarding SPN-812 which is currently in development for the treatment of ADHD in patients six to 12 years old, we have reached another important clinical milestone by completing enrollment in the Phase 2B trial. The final patient visit was completed during the third quarter of 2016, and 84% of patients who completed this trial have enrolled on the open label extension portion of the study.

The company continues to expect data from the Phase 2B trial by early 2017. Regarding Trokendi XR IP litigation on July 27, a settlement conference was held in New Jersey where all parties have settlement discussions facilitated by the Magistrate Judge. At this point, there is nothing definitive that we can disclose regarding the status of such discussions. We remain confident in the strength of our intellectual property and continue to vigorously defend a patent protection that our innovative products deserve. Oxtellar XR has seven patents and Trokendi XR has six patents that are listed in the Orange Book.

Finally, we continue to look for partnership and corporate development opportunities that strategically fit with our vision in building Supernus to become a leading pharma company. We continue to look for commercial assets first, followed by assets that reached commercial stage with a reasonable timeframe of one to two years. After that, our priority would be to look for assets which are already in or about to enter Phase 3.

With that, I will now turn it over to Greg to walk you through the details on the financial results.

Gregory Patrick

Thanks, Jack, and good morning everyone.

As I review our financial results, I would like to remind our listeners to refer to the second quarter 2016 earnings press release issued yesterday after the market closed. We expect to file a report on Form 10-Q for the three months ended June 30, 2016 by next week. Net product sales of Trokendi XR for the second quarter of 2016 was $37.6 million, which is 43.3% higher than $26.3 million reported in the second quarter of 2015.

Net product sales for Oxtellar XR in the second quarter of 2016 were $12.7 million, a 58.7% increase over $8 million reported in the second quarter of 2015. Gross to net deductions for the second quarter for Trokendi XR and Oxtellar XR were in line with the gross to net deductions for the first quarter. Specifically, the gross to net deduction for Trokendi XR expressed as a percentage is modestly over 30%. The gross to net deduction for Oxtellar XR expressed as a percentage is modestly over 40%.

Research and development expenses in the second quarter of 2016 were $11.1 million as compared to $6.9 million in the same quarter last year. This increase is primarily due to our ongoing Phase 3 trials for SPN-810 and Phase 2B trial for SPN-812, as well as the open label extensions for these associated with both SPN-810 and SPN-812. We continue to expect research and development expenses to increase in the second half of 2016 as clinical advancement of both SPN-810 and SPN-812 progresses.

Selling, general and administrative expenses were $26.1 million for the second quarter of 2016, as compared to $33.3 million in the same period of 2015. The higher expenses in 2016 reflects our efforts in preparing the launch of the migraine indication for Trokendi XR.

For the second quarter, operating income totaled $10.4 million compared to $3.1 million in the same period last year. The improvement in operating income of the second quarter of 2016 compared to the year earlier period is primarily due to the 47% in net product sales.

Net income for the second quarter that ended June 30, 2016 was $10 million or $0.18 per diluted share, as compared to net income of $2 million or $0.03 in the second quarter of 2015. Approximately $51.7 million weighted average diluted common shares were outstanding in the second quarter of 2016, as compared to $52.3 million diluted shares in the same period last year.

As of June 30, 2016 we had $128 million in cash, cash equivalence, marketable securities as compared to $117.3 million at December 31, 2015. As of June 30, 2016 approximately $6.6 million of our six-year $90 million convertible note offering remain outstanding.

Now turning to 2016 guidance; we are reiterating our previously issued full year 2016 guidance for net product sales and updated guidance for research and development expenses and operating income. Full year 2016 guidance for net product sales remain in the range of $200 million to $210 million. We expect R&D expenses to be in the range of $50 million to $55 million compared to the previous range of $55 million to $65 million. This reduction in R&D expense guidance is due primarily due to the slower than expected enrollment of the Phase 3 trials for SPN-810 that Jack previously mentioned. And we expect operating income to range between $32 million and $37 million compared to prior guidance of $28 million to $35 million.

I will now turn the call back to the operator for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Ken Cacciatore of Cowen and Company. Your line is now open.

Ken Cacciatore

Thank you, guys. Congratulations on the results. Just wondering, Jack, were you referring to the 810 study when you said that the retention of those that have completed is still high in the open label. I don't know if you're referring to 810 or 812. Just want a clarification, and then maybe a little bit more nuance on what the issue is with the diary and how you corrected it and wondering if it had any impact you think on the kind of the ongoing program and do you need to maybe increase the patient size just to make sure your powering stays good. Then lastly on the settlement discussions, is that prompted by the judge or is that something that parties agree to sit down to? Can you just give a little nuance on what's going on there with that settlement discussion that you indicated? Thank you.

Jack Khattar

Yes, sure. Regarding the first question which is on the open label enrollment. Actually it's very high in both programs. As we mentioned on SPN-812 it's around 84% which we think is very, very encouraging, and on 810 it's actually higher than that. But it's still early in the trial so that could also change overtime, but we're very encouraged with both of them. As far as the settlements, and then I'll let Stefan talk a little bit about the diary issue. As far as the settlements, I mean we'd been in discussion with different parties over time, and this is public information as mostly people know. As far as the court, we have different dates that were setup just to facilitate these kind of discussions. We have one in April that got pushed to July.

Finally, we were able to meet on July 27, and as I mentioned all the parties met and discussed settlements and so forth. I don't have anything specific right now or definitive to share. But these discussions will continue for now and we'll see what happens. So we'll certainly try to work hard to take this soonest off the table, but it has to be, as I mentioned many time earlier, has to be reasonable terms. And also at the end of the day we feel very, very strongly about IP anyway. So but nevertheless we're willing to engage in these settlement discussions and if it is a reasonable arrangement we're willing to enter into those kind of arrangements.

So Stefan if you want to take on the - question.

Stefan Schwabe

Sure, this is Stefan. The diary issue is of course embedded that in the larger issues of the trial, one of the reasons this is so exciting that's all frontiers of science stuff. The diary is a new tool that we had to develop, it is not very easy to use for some of the caregivers and we have to do it this way because it's very detailed and very accurate and strictly validated, working very closely with the FDA so we cannot make quick changes and the pace of the trial, or the way we use the diary, and for this reason we're learning how to use it and we're trying to make it as easy as possible for the patient and the caregivers.

Ken Cacciatore

Okay, thank you.

Operator

Thank you and our next question comes for the line of David Amsellem of Piper Jaffray. Your line is now open.

David Amsellem

Thanks so wanted to ask about business development so in the past you have talked about potentially acquiring a psychiatry focus that over assets, that are either market ready or already on the market, that you can build a sales force around the head of the of the launcher 810 and 812. So maybe talk about your latest thoughts there and how you're thinking about that and then also to be said that you're looking at other neuroscience opportunities give us a flavor for what therapeutic areas are of interest to you are like. Thanks.

Jack Khattar

Yes, regarding a corporate development our strategy is still the same as far is our objectives and the priorities that we have set for ourselves. As you mentioned it's really a two - strategy where we continue to be focused in CNS in psychiatry as well as in neurology, so when it comes to psychiatry we have been looking and continue to look for assets that potentially could come to the marketplace before our 819 or 812 program. I believe it doesn't make any sense for us to bring and programs that are at the same time line as 810 or 812, because we have our own high quality programs so why acquired other programs that in the end don't allow us to accelerate launching potentially a third products. So that's our focus on the psychiatry spaces, if we can accelerate introducing it in new third product forced upon us ahead of 810 and 812 we're very interested in that, it does allow us to get into the psychiatry office establish our presence and pave the way for SPN-810 and SPN-812.

And similarly on the neurology side since we have are very strong footprint, very strong sales force that have executed that amazingly well in that specific space. There are a lot of it adjacent therapeutic areas that present themselves with a lot of overlap when it comes to the physician universe that we call on. You know example would be things like Parkinson's, migraine, MS you know all of these areas. Than to normally have a lot of overlap when it comes to the universe of the physicians that you need to call on and therefore we're all was open with these kind of assets that could be in the marketplace, and again similarly or about to get to the marketplace in a year or two, we look at that as well.

So we are heavily looking in both areas neuro and psych at the same time.

David Amsellem

Yes and Jack, if you may get a follow up on the head count for the neurology focus sales force right now do you do you feel that you're where you need to be, are there any significant expansions planned, you have any headcount expansion want to get migrating in this level.

Jack Khattar

Yes, I mean there are some I think we mentioned that there are a couple times before or you're right on when it comes to the migraine now we did mention that we were forced to launch it with existing sales force, existing headcount that we have. Monitored very, very closely and if we see that there is a significant upside clearly we would be looking at adding and expanding our sales force behind the migraine. So that that remains the case that has not changed.

David Amsellem

Alright thanks.

Jack Khattar

Sure.

Operator

Thank you and our next question comes line of Annabel Samimy of Stifel. Your line is now open.

Annabel Samimy

Hi, thanks for taking my question. I kind of want to follow on from David's question. you mention that you're looking for assets that are close to market and that could potentially get market before your programs, it seems right now that 812 is moving quite rapidly, do you have I guess the - what are the next steps for 812 what do you think the timing might be for 812, could it move ahead of 810 and how many assets out there are there that potentially sell that on market closed market type of characteristic that you're looking for. and then on 810 if I could just follow up with that, the extension of the screening period if patients are having a hard time complying with washing out their drive, how is extending that the screening period help was that I would think that it would hurt so maybe it and talk about that a little bit.

Jack Khattar

Sure, regarding 810 and 812 I will draw a very similar comparison which is interesting we went through that in a few years back when we have to Trokendi XR and Oxtellar XR. Which is the case that we've always have multiple shots on goal, we have several programs running in parallel. And you never know which one 's going to get ahead of the other one, and actually that's exactly what happened some of you may remember with Oxtellar XR getting in the and head of Trokendi XR which Trokendi XR was the lead program. So we always anticipated you know these things will always be in flux until you get final approval obviously, because that's how drug development goes you always have issues that pop up or issues that go away and things speed up.

and you're right on Annabel I mean it looks like 812 could end up being sped up as far as the development will see, once we get the data will be able to read through it and see what's the impact of that clearly of the data as positive, it is full speed ahead as far as we're concerned, and we are looking and have been looking at ways that potentially speeding up that program. And there is - there a chance that it could leapfrog 810 that is a possibility but we will certainly update folks on the timelines, as we get closer to getting the data and so for.

As well as a number of assets you know we're looking at getting something ahead of 810 or 812 and there are few assets out there. There's not too many it's not like you know there are a lot of them and if there were too many a lot of times differentiation between the different assets becomes very little differentiation, so we try to be very selective in what we're trying to bring in, so we're looking for quality assets that can really be meaningful in the marketplace, especially in this environment with the reimbursement and so forth. We want to make sure the clinical benefits is obviously very sound and strong before we just bring in something into the full year.

So look Stefan talk about the screening period on how we're handling that.

Stefan Schwabe

Sure, so just to be clear of the screening period was not lengthened in the sense that it is now mandatory to be in for a longer period of time, what happened is that originally we had 14 to 28 days in which time the patient had to show that they were on a stable dose of their anti ADHD medication. That they could handle the diary in a reliable fashion, and that all other medication that could interfere with the impulsive aggressive and point were tapered off.

Now in that time period would happen this number that these are some of the most complex difficult to handle patients around they are people who have their children who have ADHD and impulsive aggressively which is possibly the single most important factor for ADHD when you talk about lifetime prognoses. So in that time period what sometimes happened is that the patients would have some trouble, they needed adjustment for the ADHD meds, and then the clock ran out they had gone past 14 or 28 day period so we have not simply said that we're giving them a little longer time to comply fully with all the requirements to go into the main part of the trial. Does that explained it?

Annabel Samimy

Yes, that does thanks. If I could just ask one more question on Trokendi seems like the prescriptions where - were generally pretty solid your, gross net seems to be pretty stable of there been any other inventory fluctuation in - in Trokendi inventories are the pre stable.

Gregory Patrick

Hi Annabel, this is Greg, no the inventory levels first quarter second quarter pipeline which includes of the inventory the pharmacist as well as whole set of distributors has been very stable actually for both products.

Annabel Samimy

Okay has there been any change in that the proportion of high dose verses low dose at all that would change the course price.

Gregory Patrick

Not that I'm aware of it.

Annabel Samimy

Thanks.

Gregory Patrick

Welcome.

Operator

Thank you and our next question comes from the line of John Boris of SunTrust. Your line is now open.

John Boris

Thanks for taking the questions then congratulations on the results. First question just has to do with the chronic migraine review by the FDA, did you that at all have an opportunity to have a conversation with the FDA regarding securing a - for the adults in the in chronic migraine. And then if you did or if he didn't how does that shape your thoughts around securing approval in late August you know assuming this is a class 1 review by the FDA, or should we be assuming tentative approval which would mean along sometime in March 2017. And I have a follow up question after that.

Jack Khattar

Yes I mean as far as the indication that still the same that we're going after which is the above indication on migraine. We don't have any specific feedback from the FDA that leads us to believe it's going to be tentative or final. So from our perspective I mean that to us it's doesn't matter as much at this point as we mentioned previously. If it is tentative then we will launch it in April next year after the exclusivity expires and if it is finally we're ready to launch it as well. So from our perspective it's really we don't view that as material really at this point. So what we'll know soon hopefully we'll get a final but we're not really confident obviously or completely positive or certain that it would be final approved.

John Boris

Okay thanks, on the Trokendi IP. settlement discussions I completely understand the sensitivity around what discussions transpired on July 27, but how should we be thinking about since there was a change in control of the Octaves [ph] business meeting, I think as of yesterday it's now Zydus [ph] business not Elegance business with their changing legal counsel that occurred as a result of that.

Jack Khattar

Actually it was on that day when we were there that they have announced that they will close in a week's time frame, so on the closing of the deal after the settlement discussions on July 27 so on July 27 it was the same party that we had been interacting with, as well as the council the team and so for that it Octavos has the same folks so. having said that now that there was transaction disclose we don't know whether that will change, I mean obviously it will now move to - So we will see or you know whatever the council team will change or not than whether some of the internal folks will be the same or not, that we don't know yet.

John Boris

Wouldn't they have had to have notified the judge of that and the judge also scheduled another conference on September 28. It is that with the same legal counsel from both parties or not.

Jack Khattar

At that time you have to realize from a legal point of view that asset is still Actavis's asset. So you wouldn't have any people showing up because it's not their asset you know, they can't really enter to discuss on something they don't have yet clearly, so that's why I am saying as of July 27 when we were there, the teams were the initial original teams, we have been talking and working with and nothing has changed.

Now since then the transaction closed so we will see now whether there will be a transition and what is that transition involves and whether the same folks would remain on the case or not, so that we will look forward and hopefully to learn that sooner than later. As far as the September 28 the conference that is really tight to the fact that September 23 if I am not mistaken is the end of the export discovery process, also the status conference that normally get set up after we go through the export discovery process at the end of that, so that is more like a general status conference that has been set up.

John Boris

And timing that if you do go and litigate, is that been pushed into half of next year or - any update there?

Jack Khattar

We still think it will be probably around the end of the year, so is there a possibility it might shift a little bit to like a January timeframe? That is a possibility, yes. But we think, if it is - if this thing does go to trial, the judge will definitely want to do it before the 30-month expiration and the 30-month expiration for Actavis is in February and for Zydus is in April. I forgot the exact day, but maybe - I think it's like February 9 for Actavis and April for Zydus. So the judge would want to definitely try to resolve that matter before these dates. So even if there is a slippage, I don't think it will be beyond, maybe, January. But again, this is pure guessing on my part at this point. We'll definitely know, I think, for sure with a lot of certainty on September 28, when we have the status conference after finalizing the export discovery and the export reports and all that.

John Boris

Okay, is there any color or adjective you can describe to how the negotiations went during the settlement discussions?

Jack Khattar

I'll just say the discussions are better than no discussions. I'll leave it that way.

John Boris

Very good. Thanks for taking my questions.

Jack Khattar

Sure.

Operator

Thank you. And our next question comes from the line of David Steinberg of Jefferies. Your line is now open.

David Steinberg

Thanks, and good morning. Jack, I know that you've been talking for a while now about - for your business development strategy, looking for assets. And today you've talked about adjacent categories. It's a fairly narrow universe and I'm just curious, within that universe where you're looking, where do the potential acquirees stand in evaluation? It's been a while since the sector reset, valuation wise. Are you still seeing forwards thinking that the all-time high of last year as a starting point? Or are you seeing a lot more rational behavior in terms of potential price for public companies and for private companies as well, if you're looking at those?

Jack Khattar

Yes. I mean, you're absolutely right. At the beginning of the year, everybody felt, including myself, at some point the valuations would reset to a little bit more rational, reasonable range. I don't think that happened and I think, if anything, it's probably reversed trend, and we're back to where we were before, meaning the [indiscernible] and so forth, specifically on the public side. As far as privately owned companies, clearly the IPO market is not as robust as it was before, so those folks could be under a little bit more pressure than the publicly traded companies, because the IPO is not as robust. So there might be there a slight reset of valuations, but I don't think it's that remarkable. I don't think - we haven't seen really a major movement, let me put it that way.

David Steinberg

Okay. And then just on your pricing reimbursement strategy; so you've clearly had some pricing flexibility in the past, the company's taken regular price increases, although more modest ones. What sort of headroom do you still have? Do you still have some flexibility to take regular price increases or are you kind of hitting - getting close to the ceiling?

Jack Khattar

Discussing pricing strategy is a difficult one on a call like this because we don't publicly discuss that, but basically, if you look at the prices of our products versus other branded epilepsy products, as you rightfully said, we are in a very reasonable place, we have taken very reasonable and sensible price increases, and that will continue to be our strategy. So we want to be competitive in the marketplace, and be very reasonable in our pricing - price increases, and that's how we will, for now, that's how we see it.

David Steinberg

Okay, thank you.

Jack Khattar

Sure.

Operator

Thank you and our next call comes from the line of Bill Tanner of Guggenheim Securities. Your line is now open.

Bill Tanner

Thanks for taking my question. I guess this is mainly for Stefan. On the 8/10 study on the screening, your discussion - your explanation on the extending the screening period was helpful, but I guess it sounded to me like, with Jack's comments, perhaps with some of these patients that are being screened if they're going off the meds that are meant to control aggression, they're having some problems. I don't know if that's a fair characterization. So my - so the point is that I'm wondering if you're going to ultimately end up enrolling patients that might not fit the profile that you'd like, that those -

Stefan Schwabe

No.

Bill Tanner

Okay.

Stefan Schwabe

No. We're - one of the reasons we've extended the screening period, or allowed extensions in cases where that's needed, and one of the reasons we are speeding up our recruitment, but still not going as fast as we'd originally planned, is because we are not going to compromise on quality. The patients will have to fulfill all the requirements: a, because that's the right thing to do and it doesn't matter how many patients you recruited, you recruit the wrong ones, you're not going to get the right result, and we want the right result; and the other thing is that we're very closely working with the FDA. And for that reason, we cannot make major changes without getting their agreement first.

Bill Tanner

But I mean, is there some middle ground in terms of severity of the aggression that you're looking for? Or that if someone is too severe, as an example perhaps they're untreatable and if they're not severe enough, the aggression, maybe you don't see that much of a treatment effect? I guess that's my point, just wondering if you're - you said you're not going to compromise but if there is not going to be some compromise, it's going to be - it's going to be had to accommodate meeting the enrollment, and then accommodate to the fact that people can't, maybe, control their aggression if they're off the meds.

Stefan Schwabe

No. I think, just to allay the fear that I think I hear underneath your statement is we'll finish this trial and we'll finish it in a reasonable time period. And we're going to get the patients we need, we just have to find the best way to do it. Again, remember, we're using a new scale with a new drug, at new doses, and an entirely new indication area. This is - nobody's ever been where we're going right now. So we're learning as we go along and we're having to do that. The point you raise about the difficulty in making sure that you have patients who have enough severity that treatment can affect the course of the disease but not so much that their behavior is disruptive, that is the thing that we have always struggled with but here - and you do that in every CNS trial, but here we have had no issues along those lines because we think that our drug will be able to help even the very severe cases. So far that has not been a reason to not include patients.

Bill Tanner

Okay. All right, that's helpful, thank you.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of David Buck of Northland Capital Markets. Your line is now open.

David Buck

Thanks for taking the questions, two quick ones. The easy one, I guess, for Jack or Greg is, can you talk about whether there have been any meaningful changes that you're expecting for 2017 formularies or potential growth in net changes as we get into a new reimbursement year? And just a follow-up with Dr. Schwabe on the SPN 8/10 issues; the risks to not getting the proper screening, I guess one of them is higher dropouts; I was curious on what caused the dropouts? Was it the investigators themselves who basically excluded some of those patients who were not properly screened or was it the caregivers themselves or patients? What led to the higher dropout and the delay in the enrollment, I guess, and at this point, do you think that the issues are fully addressed with the extension or are there some other plan b, plan c that you need to address the issues?

Gregory Patrick

Hi, Dave. This is Greg. I'll take the first question as regards changes in managed care. We continue to look at our managed care programs continually. We continually are challenged by our managed care partners or vendors, if you will, in terms of what they're trying to do with their program. So I would say there's a fairly robust ongoing dialogue between the two groups. We continually look at the pluses and minuses of moving from a Tier III, which is overwhelmingly where our drugs are, or seated in the formula for Tier II. That's often a mixed bag because there are higher fees associated with that and the like, but there's also common deductions to the copay program.

So the answer is, we continue to look at it and there are changes which are progressing through this year. That being said, I wouldn't expect this to be a huge source of change to our gross-to-net calculation. As we progress over the next couple of quarters, I may be proven wrong but based on our experience over the last year, I would say that the aggregate impact has been relatively modest. So I'll turn the next question over, which is a harder one, so I'm going to give it to Stefan.

Stefan Schwabe

Just to start off with, now this is not absolute, but generally, you use the term dropouts for patients who are already in the main administrative part of the trial. The patients that we're having the bigger issue with are the ones in the screening phase and we refer to those generally as screening failures. And the difference is huge because the reason we have had some issues in the screening phase is that we are, and continue to be, very strict about who we allow into the trial. So the dropouts in the trial have actually been very, very few. That, we think, actually confirms that we're doing the right thing. We're very, very strict about who we include in the randomized portion of the trial, and in those, we don't have a lot of dropouts. So we're actually getting exactly the patients that we want, and we're making sure that we get the patients, largely, who can complete the entire trial. So we're screening them at the beginning.

So the biggest issue is the compliance with the diary because, again, it's a new tool and it's a complex tool. The parents or caregivers actually have to basically monitor the child's activity during the entire day, plus there's an activity in the evening when they have to go back over the day and make sure: a, they haven't missed anything, and if they have logged nothing, that that was because, really, nothing happened and they just didn't miss it.

So that's the sort of thing we're dealing with. That's not always easy for folks because you also have to remember the simple truth: parents of people with ADHD sometimes have ADHD themselves. So we're dealing with caregivers who have difficult patients and often have their own issues. So we're dealing with this whole complex issue of problems and that makes it a tough trial. But it's a tough area but, again, let me just go on an optimistic note: it is because of the desperate need that we're so upbeat about this whole thing.

David Buck

Okay. So if I could just follow up. It sounds like the diary itself, as opposed to getting the patients on the right dose, is actually the reason for the screening failure, as you're calling it.

Stefan Schwabe

It's one of the reasons. The other reasons are compliance with the medication and the way in which we use the diary. The diary is actually an electronic handheld device, so teaching folks how to use that, making sure that the staff at the site knows how to educate properly, that they are instructed in its use, that the patients themselves, the children, understand what's going on as far as they're able to do that…all of these things play into that. Does that answer the question, or am I missing something?

David Buck

Well, I guess it does, but I mean, you're indicating the diary is difficult to learn and the other question's going to be how are these caregivers actually going to be able to manage the diary during the course of the study. But obviously -

Stefan Schwabe

Well, no, in the course of the study, those that we do include have done very well, because we make sure that they fulfill all those criteria before the patient is dosed or randomized.

David Buck

Okay, fair enough. Thanks.

Operator

Thank you. And I'm showing no further questions at this time. I would now like to turn the call over to Mr. Jack Khattar for closing remarks.

Jack Khattar

Thank you. We are very excited about the growth in our business and remain focused on continuing to grow Trokendi XR and Oxtellar XR, advance our pipeline products with clinical development, and vigorously defend our intellectual property. In addition, we continue to be active in business development, looking for potential assets to strategically complement our portfolio. We look forward to updating you through the year on our progress.

So thank you very much for joining us today, and we look forward to speaking with you next quarter.

Operator

Thank you. That concludes our program. You may now disconnect your line, and have a wonderful day.

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