Depomed's (DEPO) CEO James Schoeneck on Q2 2016 Results - Earnings Call Transcript

| About: Depomed Inc. (DEPO)

Depomed, Inc. (NASDAQ:DEPO)

Q2 2016 Earnings Conference Call

August 3, 2016 4:30 PM ET

Executives

Christopher Keenan - Vice President, Investor Relations and Corporate Communications

James Schoeneck - President and Chief Executive Officer

Matthew Gosling - Senior Vice President and General Counsel

August Moretti - Chief Financial Officer and Senior Vice President

Jack Anders - Vice President of Finance

Analysts

Randall Stanicky - RBC Capital Markets

Ami Fadia - UBS

Chiara Russo - Cantor Fitzgerald

Jason Gerberry - Leerink Partners

David Buck - Northland Capital Markets

David Amsellem - Piper Jaffray

Ken Trbovich - Janney Montgomery Scott LLC

Irina Koffler - Mizuho Securities USA Inc.

David Risinger - Morgan Stanley

Operator

Good afternoon and welcome to the Depomed’s Second Quarter Fiscal Year 2016 Financial Results Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Christopher Keenan, Vice President of Investor Relations. Please go ahead.

Christopher Keenan

Thank you, Jason. Good afternoon, and welcome to our investor call to discuss the company’s second quarter 2016 financial results announced earlier today. The press release covering our earnings for this period is now available on the Investors page of our website at depomed.com. With me today are Jim Schoeneck, President and Chief Executive Officer of Depomed; August Moretti, Senior Vice President and Chief Financial Officer; Matt Gosling, Senior Vice President and General Counsel; and Jack Anders, Vice President of Finance.

I would like to remind you that the matters discussed on this call contain forward-looking statements that involve risks and uncertainties, including those related to the commercialization of NUCYNTA, NUCYNTA ER, Gralise, Cambia, Lazanda and Zipsor, the company’s financial outlook and earnings guidance for 2016, development plans and expectations for cebranopadol and other statements of future expectations that are not historical facts.

Actual results may differ materially from the results predicted and recorded results should not be considered an indication of future performance. These and other risks are more fully described in the Risk Factors section and other sections of our Form 10-K for the year ended December 31, 2015 and our quarterly report on Form 10-Q that was filed today with the SEC.

Depomed disclaims any obligation to update or reuse any forward-looking statements made on this call, as a result of new information or future developments. Depomed’s policy is to only provide financial guidance and guidance on corporate goals for the current fiscal year and to provide, update or reconfirm its guidance only by issuing press release or filing updated guidance with the SEC in a publicly available accessible document.

References to current cash, cash equivalents and investments are based on the balances as of June 30, 2016. All guidance, including that relate to the company’s expected total product revenues, operating revenues, adjusted non-GAAP earnings and adjusted EBITDA is as of today, August 3, 2016.

Investors can find an explanation of the methodology for calculating non-GAAP earnings and adjusted EBITDA in today’s earnings release as well as reconciliation to the corresponding GAAP financial measures.

With that, I’ll turn the call over to Jim Schoeneck.

James Schoeneck

Thank you, Chris, and thank you all for joining us today. I will start today’s call with an overview of our second quarter top-line financial results. Then I’ll overview our first year of NUCYNTA re-launch with thoughts for the path forward. Next, I’ll offer a few comments on the rest of our portfolio and Matt will address the pending NUCYNTA litigation. Augie will then discuss our financials, before I provide closing comments and open the call to questions.

During the second quarter of 2016, Depomed established a new record for quarterly sales, posting revenue of $117 million, an increase of 23% compared to $95 million for the second quarter of last year. We had a GAAP quarterly net loss of $10.5 million or $0.17 a share.

Our second quarter non-GAAP adjusted earnings were $19.8 million or $0.27 a share and our non-GAAP adjusted EBITDA was $42.3 million. Augie will review our GAAP to non-GAAP methodology later in the call.

June marked the one-year anniversary of our NUCYNTA re-launch. In the second quarter the NUCYNTA franchise generated record quarterly net sales of $72 million and has produced $274 million of revenue during the first year of our re-launch, representing a 59% increase over the final year of sales under the previous owner.

In the June NUCYNTA ER prescriptions reached an all-time monthly high of over 29,000, surpassing our previous monthly record set in March. June marked a 26% year-over-year increase in prescription volume, the highest growth rate attained since our re-launch. We continue to see key messages resonating with our target prescribers, new prescriber numbers increasing and all-time high market share for NUCYNTA ER.

Last quarter, we reported NUCYNTA IR had stabilized. And now, during the second quarter 2016 we see encouraging trends producing the first year-over-year quarterly prescription volume increase since 2011. The 10% decrease that we inherited, when we re-launched NUCYNTA IR is now 2% year-over-year growth in back to back months.

We believe that this is just the beginning of an even more positive trend, as our pain-focused sales reps have more time allotted to NUCYNTA IR starting on June 1. I believe that the growth for both NUCYNTA ER and IR is particularly impressive, especially given the backdrop of the opioid market.

The overall market for opioid is down 4% with leading brands declining more rapidly. We fully support the appropriate prescribing of opioids and we believe that tapentadol, the molecule in NUCYNTA may be uniquely positioned to help pain patients and their physicians, while also addressing concerns raised by community leaders and the media.

As we have mentioned before, we have focused on the growth of NUCYNTA IR with four pillars: promotion, positioning, patient access and proper dosing. Let’s look at what we have accomplished in the past year, since our re-launch of NUCYNTA.

On the promotion front, we continue to perform well with pain specialists, plus the nurse practitioners and PAs that work with them. Our market share with pain specialists now exceeds 3% of the long-acting opioid market and is almost that high with NPs and PAs. These groups together write about 75% of the NUCYNTA ER prescriptions.

This is even more important when you consider that many primary care physicians are slowing their use of long-acting opioids, and referring more and more patients to pain specialists where we are much more likely to capture the scripts for NUCYNTA ER.

For product positioning, we believe that we have fundamentally changed the perception of NUCYNTA ER in the marketplace. Our work on repositioning NUCYNTA ER is paid off by defining a key patient population for the first time. Our market research study shows that the number one profile for physicians to prescribe NUCYNTA ER is the low-back pain patient with both nociceptive and neuropathic pain.

In addition, the market research reports that NUCYNTA ER is now seen as equally effective to other long-acting opioids in traditional pain and the number one choice for patients with neuropathic pain, a significant change from the pre-Depomed days.

Finally, the product is viewed as having low abuse potential and no evidence of a dose group seen with other opioids. We believe that these favorable characteristics reported by physicians will lead to further increases in prescribing and market share.

Turning to patient access, we’ve maintained strong formulary coverage and in some cases enhanced it. As I mentioned, 76% of commercial patients have unrestricted access to NUCYNTA ER, equal to that of oxycodone and more than OPANA ER. We are happy to report that Depomed products have retained favorable formulary positions at both Express Scripts and CVS Caremark.

At ESI, NUCYNTA, NUCYNTA ER and Gralise will all continue as Tier 2 Unrestricted in 2017. At CVS Caremark, NUCYNTA, NUCYNTA ER and Gralise will again be covered as Tier 2 Unrestricted on their national formulary. In addition, we have recently completed an analysis of our patient assistance and co-pay programs and we are making adjustments that we believe will improve our gross to net calculations in the back-half of 2016.

Regarding proper dosing, we’ve mentioned in the past that the dose of NUCYNTA ER used in the Phase III clinical studies was significantly higher than the amount used in the marketplace. Part of our 2016 forecast was predicated on seeing a slight increase in the milligrams per day of NUCYNTA ER prescribed.

There are two things that we’ve seen since our re-launch. First, physicians are now even more cautious about raising the dose level of any opioid. So we have actually seen a slight drop in the average milligrams per day rather than an increase. Second, our market research shows that physicians do not see the dose creep with NUCYNTA ER that they see with other opioids.

In other words, patients see continuing pain relief with NUCYNTA ER without the need to increase the dose due to tolerability and their doctors attribute this to NUCYNTA’s unique dual mechanism of action. As I mentioned earlier, we fully support the appropriate prescribing of opioids, including using the lowest effective dose for each patient.

Even with these market headwinds that have affected both the overall market prescriptions and the dosing levels, we saw NUCYNTA ER and NUCYNTA prescriptions and sales trends continuing to accelerate. We believe that the unique value proposition offered by NUCYNTA will continue to fuel growth for years to come.

The rest of our portfolio experienced a 19% year-over-year growth for the quarter with $45 million in revenue. The Gralise and Lazanda hit all-time record-high quarterly net sales. As I mentioned during our last quarterly conference call, we were not pleased with the performance of Gralise over the past year since our re-launch of NUCYNTA.

During that call, I also told you that we would be making changes to move Gralise back to growth mode.

In May, we initiated a net additional product training for our CNS sales reps that sell Gralise. As of June 1, we also adjusted the incentive compensation levels for this group. So that Gralise now accounts for 50% of this group’s bonus compensation.

In addition, we rolled out new medical education speaker content to further differentiate Gralise. We believe that these steps achieved the goal of increasing product knowledge as well as increasing focus, accountability and personal ownership for the brand.

Starting on June 1, Gralise is the number one priority for our CNS focused sales team, and we are expecting to start seeing results from this initiative sometime in the second-half of the year.

Cambia continues to grow nicely, achieving all-time high total prescriptions during the quarter, up 15% in prescription volume over second quarter 2015. Neurologists continue to be the key to Cambia sales and we expect growth to continue throughout 2016 and beyond.

With Lazanda, we posted record quarterly revenue of $6.4 million, up 65% over second quarter 2015. We achieved 18% year-over-year growth in units during the first-half of 2016, in contrast to the overall TIRF market, which saw an 11% drop in units during the first six months of the year.

This growth was impacted by compressions of market as a result of increased scrutiny by payors. We saw that payors were increasingly examining incoming prior authorization requests and continue to demand additional documentation supporting of patients diagnosis and prior pain management regimens before authorizing a TIRF script.

Recognizing this trend, we took two active steps during the quarter. First, we provided even more reimbursement support for physicians prescribing Lazanda, bringing prior authorates [ph] back up to around 80% approval from the 55% approval rate that was seen earlier in the year.

Second, we’ve expanded the sales force for Lazanda by 9 reps to total of 33. Designed further the reach and increase the frequency among our key prescribers, this group of primarily experienced oncology reps was hired and trained late in second quarter and started selling Lazanda in July. We believe that this group is a key to continued growth for Lazanda and we expect to see their impact during the fourth quarter.

Finally in June, we introduced a 300 microgram dose strengths of Lazanda, adding to existing 100 and 400 milligram strengths. This new dosage strength addresses the need for greater dosing flexibility that we heard from physicians shortly after we re-launched Lazanda. It’s particularly important for patients requiring higher doses as the two-straight dose of the 300 microgram, now provides an intermediate step between the 400 and 800 microgram doses.

Regarding the development of our Phase III ready asset cebranopadol, last week, we submitted our End-of-Phase II request to the FDA, which keeps us on track for starting Phase III trials in 2017. We will continue to update you on cebranopadol as the program moves forward. And looking ahead to September, we will again have a strong presence of PAINWeek 2016, the nation’s largest pain conference for frontline pain physicians.

And now, I’ll turn the call over to Matt, to give you an update on the NUCYNTA ANDA Litigation and the recent PTAB decision.

Matthew Gosling

Thank you, Jim. On the intellectual property front, we continue to expect the decision from the District Court in the NUCYNTA ANDA Litigation, no later than September 30. We remain confident in our prospects for securing exclusivity for the NUCYNTA franchise well beyond the expiry of the primary composition-of-matter patent.

As a remainder, with the six month pediatric patent term extension, we expect FDA to apply to all of the NUCYNTA patents. The patents on the tapentadol-molecule protect the franchise until February of 2023. The polymorph patent covering the marketed forms of NUCYNTA and NUCYNTA ER extends that protection to December 2025. And the neuropathic pain method-of-use patent covering NUCYNTA ER will expire on March 2029.

The defendants in the litigation have conceded infringement of both the 2023 and 2025 patents. So the District Court is only considering whether those patents are valid, and whether the polymorph patent is enforceable.

In that regard, as we disclosed on July 18, the Patent Trial and Appeal Board denied the IPR petition filed in January 2016, challenging the validity of the polymorph patent.

Though the IPR proceeding in the ANDA Litigation are unrelated procedurally, the invalidity arguments made in the IPR petition were duplicative of many of the invalidity arguments the defendants made to the District Court in the ANDA Litigation.

It’s important to point out that the legal standard applicable to invalidating a patent in an IPR proceeding is a lower preponderance of the evidence standard than the clear and convincing evidence standard that applies in District Court litigation. Thus we believe the fact that the PTAB declined to review the patent altogether indicates our confidence that our polymorph patent is well-placed.

As to the other arguments the defendants asserted in the ANDA Litigation, we are unaware of any court invalidating a polymorph patent on those grounds. As for the 2029 method-of-use patent covering NUCYNTA ER, we believe we presented a strong case demonstrating them the claims of the patent are invalid and infringed. So we feel we have a very good chance of securing nearly 13 more years of exclusivity from NUCYNTA ER.

We look forward to the court’s decision. In the meanwhile, we remain amenable to any settlement opportunities in line with the merits of the case. But we won’t be commenting further on the prospects for settlement on today’s call.

I’ll now turn it back over to Jim.

James Schoeneck

Thank you Matt. And now Augie will jump in to discuss our finances and updated guidance.

August Moretti

Thanks, Jim. Today, I’ll review two of the highlights of our second quarter results and discuss our guidance for the remainder of the year. I want to mention at the outset that with respect to our second quarter 2016 results and our guidance, I will be discussing certain GAAP measurements, as well as certain non-GAAP measurements, which we expect to continue to present in future periods.

Please refer to today’s press release, which is available on our website for an explanation of our non-GAAP financial measures and tables that reconcile the company’s non-GAAP adjusted earnings per share and non-GAAP adjusted EBITDA.

During the second quarter, total product sales were a record of $117 million, representing product sales growth of 23% year over year. As Jim mentioned, our NUCYNTA franchise achieved a record net sales of $72 million, which was up 27% over Q2 2015. Our other products delivered strong growth with aggregate revenues of approximately $45 million as outlined by Jim.

Days on hand at wholesalers at June 30 across our six products increased approximately one day from the levels at the end of the first quarter. Based on our experience over the last three years, we expected days on hand at wholesalers in the third quarter will maintain approximately the levels at June 30 and may increase somewhat in Q4 of this year.

Our balance sheet at June 30 was strong with cash, cash equivalents and marketable securities of $119 million after the early payment in April 2016 of $100 million of the principal amount of our secured debt, along with a $5 million prepayment fee. This prepayment deleverages the company, reducing our secured debt to $475 million, reduces annualized cash interest expense by approximately $11 million and provides us the financial flexibility to either refinance or payoff the remainder of the secured debt in April of 2017.

Adjusted EBITDA for the second quarter of 2016 was $42.3 million compared to $37.4 million in the prior year. Non-GAAP adjusted earnings for Q2 2016 were $19.8 million or $0.27 per share compared to $20.2 million or $0.28 per share in the prior year.

EBITDA and non-GAAP adjusted earnings for Q2 2015 included $10 million product sales benefit related to the NUCYNTA acquisition, which is set forth in our reconciliations for the second quarter last year. Without this adjustment, adjusted EBITDA increased 57% compared to second quarter 2015.

Moving to COGS, for the quarter COGS was approximately 18% of product sales and we expect COGS for the remainder of the year to be between 18% and 20% depending upon product mix.

Turning to expense levels, Non-GAAP SG&A expense was $47.1 million in Q2, 2016 compared to $55.4 million in the prior year. These amounts exclude stock-based compensation, purchase accounting contingent consideration adjustments and nonrecurring costs.

The decrease in non-GAAP SG&A expense from the prior year is the result of approximately $9.7 million of NUCYNTA transaction fees in the prior year period. Non-GAAP R&D expense for the second quarter 2016 was $7 million compared to $4.7 million for the same period in 2015.

The principal component of R&D expense for the quarter was expense related to pediatric trials for NUCYNTA, which we assume that’s part of the NUCYNTA acquisition. Completion of these pediatric trials will convey an additional six months of exclusivity for NUCYNTA IR and ER. We anticipate cebranopadol development expenses to increase throughout the remainder of 2016 leading to the start of the first of the Phase III trials in 2017.

Non-GAAP cash taxes were approximately $1.8 million and reflect the cash taxes that we estimate we will pay associated with the second quarter 2016. On a non-GAAP basis, we expect our effective tax rate to be in the high-single-digits for 2016, and this is a reduction from our prior estimate of low- to mid-teens.

With respect to guidance, we are revising our 2016 financial guidance in light of the factors that Jim mentioned earlier on the presentation: the decline in the market for opioids and the fact that we have not seen our expected slight increase in milligrams per day of NUCYNTA ER prescribed, but rather have seen a slight drop.

Guidance for the year is based on actual results for the first six months of the year and our current budget and expectations for the remainder of the year. Our budget is based on a large number of assumptions, and there are significant uncertainties in estimating future product revenues. This is particularly true for our largest revenue products NUCYNTA and NUCYNTA ER.

For a more complete discussion of the relevant risks related to our guidance. I’ll direct you to the Risk Factors section of our quarterly report on Form 10-Q that we filed today.

With that said, total revenues for our six products for 2016 are expected to be in the range of $480 million to $505 million. This is a reduction from our previous guidance of $490 million to $520 million. We are also reducing our non-GAAP SG&A expense guidance. Non-GAAP SG&A expenses; that is GAAP minus stock compensation, purchase account and contingent consideration adjustments and non-recurring costs; are expected to be in the range of $185 million to $190 million, a reduction from our previous guidance of $185 million to $195 million.

Non-GAAP adjusted earnings are expected to be in the range of $95 million to $105 million. Adjusted EBITDA is expected to be in the range of $175 million to $190 million. These are changes to the high-end of the ranges from our previous guidance that reflect the adjustment in revenues and expenses.

That concludes the financial discussion. And I’ll now turn the call back over to Jim.

James Schoeneck

Thanks, Augie. Over the past year that acquisition of NUCYNTA transformed Depomed. By adding this unique novel drug, we now have one of the most highly-differentiated pain and CNS focused portfolios in the industry. As I mentioned, we’ve grown NUCYNTA revenue significantly over the past year, up 59% from the level before our re-launch. And we believe that there is plenty of room to grow.

Our entire product portfolio is built upon lengthy product exclusivity. We have already won in Court or settled with ANDA filers, keeping exclusivity till 2022 with Zipsor, 2023 with Cambia, and 2024 with Gralise. The exclusivity on NUCYNTA and NUCYNTA ER will be determined soon and cebranopadol potentially takes the current portfolio into the mid-2030s.

As most of you are aware, during the quarter Starboard Value filed a 13D with the SEC indicating their position as a large holder of our common stock and disclosing their intent to gain control of the company.

We welcome open communication with Starboard as we do with all of our shareholders and we appreciate constructive input towards the goal of enhancing shareholder value.

Before going to your questions, as a reminder, the purpose of today’s call is to discuss Depomed’s second quarter results and our outlook. We will not be making further comments with respect to Starboard.

Thank you for your understanding of that. And we now open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Randall Stanicky.

Randall Stanicky

Great, thanks, guys. I just have a couple of specific ones and then a bigger picture question. Jim, just first, I know you guys touched on inventory, but can you just comment specifically on NUCYNTA inventory in the quarter? And then secondly, you talked about gross to net moving, improving in the back-half. Where is it now and where can it get to? And then I have a bigger picture question.

James Schoeneck

So I’m going to actually turn it over to Augie and Jack on the financial questions.

August Moretti

Yes. With respect to days on hand, on average the two with NUCYNTA and NUCYNTA IR were essentially flat. One was up a day and one was down a day.

Randall Stanicky

Okay, and on gross to net?

James Schoeneck

So we actually haven’t - we actually don’t disclose the overall gross to net Randall. And we got some things though that around our co-pay cards, around our e-vouchers and some other things that we’re looking at optimizing. That would potentially bring us back more revenue on each script and this would be revenue on those adjustments that would drop straight to bottom-line.

Randall Stanicky

Okay. And then, Jim, I mean, this one is probably for you. When we look at the changed guidance - or maybe, Augie - when we look at the updated guidance, is it fair to assume that NUCYNTA, lower assumed NUCYNTA revenue outlook for the year is the primary change to that new range?

And then, the second part of that would be as we look to the full-year it still implies, at the higher end at least, a pretty sharp ramp. Can you help us understand the swing factors, what needs to happen to get to the higher end of that revenue range for the year?

James Schoeneck

I’m going to let Augie take the first part and I’ll take the second.

August Moretti

I think, we - in our normal quarter-end process, Randall, we review all of the brands. And I don’t have the breakdown of any brand, the brand adjustment here. So I’m not prepared to answer specifically the causes of the delta.

James Schoeneck

So, Randall, with respect to that, I think as we look at it I would say, NUCYNTA just by the fact that it is our largest overall franchise and it’s about two-thirds of our sales really is the biggest factor in terms of that change. I mean, some of it is around the opioid market, which at the beginning of the year was basically flat to 1% up and is now down 4% to 5% year-over-year. That’s the first part.

The second is on the dosing level that I mentioned earlier, where we had estimated that we would have a slight increase in the dosage per day and now we’re actually seeing is it’s slightly down. And so, that really are the two biggest factors in terms of that change in the guidance range.

Well, I think, in terms of…

Randall Stanicky

Well…

James Schoeneck

Go ahead. Go ahead, Randall.

Randall Stanicky

No. No, go ahead, please.

James Schoeneck

I was going to say, in terms of the back-half of the year, I mean, we continue to see things accelerate. We’ve seen things move up. I would point out we have not yet taken a price increase this year on NUCYNTA, NUCYNTA ER or Gralise, so we will be looking at a number of avenues that we made due to enhance revenue in the back half of the year.

Randall Stanicky

One of the questions you’ve gotten lot is around the 2018 target for NUCYNTA. You guys have done a very good job re-launching in both the IR and ER, and the growth, both is inflected nicely. Obviously, there has been some macro-challenges to the broader opioid market. For the term investors looking at 2018 and anything beyond, is that $500 million target still something you guys aspire to, how much confidence do you have in your ability to continue to inflect growth higher, because that’s effectively what needs to happen to get to that number? Can you still do that given the macro backdrop?

James Schoeneck

Yes. I think a couple things, Randall. One is we actually have not mentioned the $500 million number since first quarter. It hasn’t been in our presentations since then. It hasn’t been on our calls or the oral presentation since then. So that should give you some indication. Some of it really is around some of the changes that we’ve seen in the opioid market.

And so, that’s in particular why we haven’t reiterated that number. I still think that we have a good opportunity to continue to increase the prescriptions. Again, we saw the 26% up in June. We continue to see the growth starting to occur now on IR. And so I think, there is a lot of upside on NUCYNTA as we continue to gain even more traction. And this concentration as I mentioned into the specialist office actually helps us. I mean, we have about three times the market share in the specialist office and the pain specialist office than we do in primary care.

So any patients that switch from one to the other have a much higher chance to get in our drug.

Randall Stanicky

Yes. That’s great. Thanks for the detail guys.

James Schoeneck

Thanks, Randall.

Operator

And your next question comes from Ami Fadia of UBS.

Ami Fadia

Question, firstly on NUCYNTA. Could you give us a little bit more color on what else might be slowing down besides the overall market and maybe the size of the prescription and maybe if you could sort of give us some sort of quantification around the average dosing levels currently versus where they were previously? And what types of patients are no longer getting NUCYNTA, which you thought could have been good candidates for NUCYNTA before? That’s my first question…

James Schoeneck

Yes, Ami, one, thanks for the question. I think a couple things in there, you mentioned about prescription, the number of pills per prescription down. They actually happened. That actually remained constant. It’s been the milligrams per day that’s come down. So immediately before our re-launch it was around 270 milligrams per day average dose of NUCYNTA ER.

It’s currently ranging depending on the month at 258 to 260. And so what we had thought it would go up slightly, it’s actually come down about 10 milligrams a day, so about 4%. So that’s a pretty large swing when you look at a market that the pricing is essentially linear and based around the milligrams per pill. So that really is the biggest around things.

Ami Fadia

Got it. And you previously talked about potentially looking into expanding the sales force in 2017 and you said that wanted to review that decision at some point. Is there any update you have around that?

James Schoeneck

When we do that every year, every year we take a look to see are we - is our alignment optimal, do we have the right resource in terms of our field personnel, so both in terms of who we’re calling and on the number of people. I mean, one of the interesting things about this market right now, it is constant. It’s becoming more concentrated. The pain physicians’ offices, some of them that we talk to say, that they’re actually overwhelmed with referrals coming in.

And so, I think that’s really an opportunity for us, because we have extremely good coverage of that audience. But to answer your question, we will look at that as we do every year. And then make the decision as we through our fall and late New Year budgeting cycle.

Ami Fadia

Got it. And then, just lastly on Gralise and Cambia, for Gralise was there any change in inventory stocking in the second quarter? And last quarter, you talked about an impact from deductibles that you had to sort of help patients with impacting the net realized price for Gralise and Cambia. What is the trend you’re seeing in second quarter and have you sort of recovered from that with respect to the net realized price? Thanks.

August Moretti

In terms of days on hand of these…

Jack Anders

Ami, this is Jack Anders here. In terms of days on hand, Gralise was probably a little bit about the one-day average. So probably close to the two-days, increase from a days-on-hand perspective. With regards to gross to net, we did see a little bit of an improvement from a gross to net perspective, specifically for Gralise relative to Q1, relative to the deductibles. So there’s a trend in Q2 and we hope we can continue that through the rest of the year.

James Schoeneck

Yes, what we continue to see, Ami, as I think a lot of companies see, as you see a drop off in the January and somewhat into February timeframe is some of the high deductible plans reset and you’ve got higher deductions around your co-pay cards or the equivalents of those. And those tend to be then washout by the end of February or so.

Ami Fadia

But just so I understand correctly, did you continue to see an impact from that in the second quarter? It sounds like…

James Schoeneck

It really minimizes after the first couple of months of the year, because that are on those, once they meet their deductibles, then things are covered. And so, once they are covered we’re no longer having quite the expense going out in the terms of the co-pay cards that had dollars going toward each of those scripts. So it seems to be a first quarter phenomenon.

Ami Fadia

Okay. Thanks.

Operator

And you next question comes from Chiara Russo of Cantor Fitzgerald.

Chiara Russo

Yes, hey, guys, thanks for taking my questions. I only have just I think two at this point. I’m kind of curious at the - that the milligrams per day piece, because I know that’s part of your marketing pitch NUCYNTA, it’s proper dosing, and that the original thought was that physicians were under-dosing patients, and are a little bit concerned that these dosages are kind of ticked off the way that they have. I’m just wondering if you could give me just a little bit more color on that.

James Schoeneck

Yes, there are really two effects going on here. I think one is as we get more new patients on to the drug they start on the 50 milligram dose and then move up to the 100. And a number of them are not needing to move past that physicians are telling us in the research that patients are seeing relief at that level. So that has some to do with it. That we’ve got new patients coming into the flow as we reaccelerated the brand. I think, the other part is that there is a kind of broad concern, I think by physicians on making sure that they are using indeed the lowest effective dose for opioid.

And that’s one that as I mentioned earlier, corporately we broadly support that. And so it’s one where, we’ve seen growth in the brand, we continue to see growth throughout the strengths of it, the growth is slightly higher in the lower strengths of the brand. And so that’s how we end up with that change in mix around it.

And the other one, I think, is important is when I mentioned, where literally they’re telling us that she is on other drugs, the patients tolerate and I have to then increase the dose. And what they are saying is on NUCYNTA, I really don’t see that, and that’s likely mechanistic, that’s likely a combination of the norepinephrine and the μ receptor antagonism. And those two together, rather than just hitting μ is really what’s allowing them to see that with NUCYNTA.

Chiara Russo

Okay, okay, great. And just sort of the last one here, I mean, I know you guys always get asked about minimizing your taxes. What are the latest thoughts on inversion in this - is that a priority for you guys? Thank you.

Jack Anders

We continue to look at ways to reduce our effective tax rate going forward, as I mentioned. Continues to be a priority for us, we do have the benefit of bit of time, in terms of what our effective tax rate is for this year and as we move out over the next several years. There has been a lot of attention to the inversion issue in the wake of the proposed Pfizer inversion. I think, that an inversion is still available to us, it’s something that we continue to look at, and along with other strategies to reduce our effective tax rate going forward.

James Schoeneck

I think overall, Chiara, we just look at it very comprehensively and how do we control for tax rate and there are different elements to it now simply the inversion around.

Chiara Russo

Sure. All right, great. Thank you, guys.

James Schoeneck

Thanks, Chiara.

Operator

And your next question comes from Jason Gerberry of Leerink Partners.

Jason Gerberry

I just have one question just on NUCYNTA pricing. So assuming, you guys don’t take another price increase this year that 10% tailwind from cumulative year-on-year pricing for the drug. How much of that would you expect to flow through into the number, especially in light of this growth to net improvement kind of curious if the full benefit of that 10% will flow through the number or even an excess of that 10%?

James Schoeneck

Well, so Jason, just to make sure we’re all start with - we have actually not taken a price increase this year. We did take on late last year, but we have not taken any price this year.

Jason Gerberry

Yes.

James Schoeneck

And with that, I mean, typically we would see - in all depending on what time of the year it happens and where the resets are compared to the timing of that price increase. Where you would see somewhat - my normal number would be around 50%, 60%, 70% depending on the brand and the exact timing is what you would see flow through. Products like Cambia, you tend to see more flow through, because it tends to be a primarily commercial focus drug with very little of it in the government programs.

And since the government programs are all tied to CPI increases, particularly if anything of the Medicaid program, that’s really the one where you end up rebidding much of it back. So anything that’s higher than Medicaid, you end up with a higher percent rebated back and with that less realized.

Jason Gerberry

Okay. And then, so NUCYNTA then something that’s above or below that - I’m sorry I’ve kind of lost track of what you said within that example?

James Schoeneck

Yes, NUCYNTA is a fairly low Medicaid. If there does, there is some in Medicare, but those are contracted. So really it’s more commercial followed by a slice of Medicare and a small slice of Medicaid. So I would put it towards the mid to higher of that range that I gave.

Jason Gerberry

Okay. And just my follow-up question, with the Teva deal closing you get this favorable IPR, I’m just kind of curious, were these in any way impediments to settlement discussions given that the ANDA was changing hands, just curious if you can comment on that?

Matthew Gosling

Not, not specifically, Jason. But certainly any time a lot of companies acquire there is this direction and there are consequences from this direction. So I mean, I really won’t say any more than that.

James Schoeneck

Yes. I mean, Jason, what we can say is that that the team was going pretty much intact from Allergan to Teva. And so, we didn’t really see a disturbance in the team, when it was switching over. So I don’t think there was any large issue on it.

Jason Gerberry

Okay, great. Well, thanks for taking my question.

James Schoeneck

Thanks, Jason.

Operator

And your next question comes from David Buck of Northland Capital.

David Buck

Yes. Thanks for taking the question. Just on NUCYNTA in the quarter, the sequential growth just for clarification, did you see any change in gross to net that may have impacted the reported revenues for that product?

And just in terms of the timing of the impact from changes to your co-pay program, is that really just a fourth quarter event? And what does that depend upon in terms of being able to realize that gross to net benefit? And how do you incorporate that in the new guidance? Thanks.

Matthew Gosling

David, so with regards to NUCYNTA growth, it was relatively flat from Q1. I would say maybe very, very modestly down, but nothing substantial with regards to sequentially Q1 to Q2.

David Buck

Down meaning an improvement?

Matthew Gosling

No, sorry, down meaning a reduction of revenues associated with gross to net, but very modestly down.

James Schoeneck

And in terms of the provisions on the co-pay program, that actually would affect the back-half of third quarter and fourth quarter.

David Buck

Is that improvement - is that dependent upon actions that you need to still take or is it an action that you’re taking already?

James Schoeneck

It’s some of both actually. We’ve made one change and we’re going to be making a couple of others over the next couple of weeks.

David Buck

Okay. And then one final quick one, the change in reps and compensation for Gralise, when would you expect to see the first impact in that?

James Schoeneck

Really during the second-half of the year we haven’t defined any more than that, but it generally takes reps. There was definitely a need for additional training and putting it in the first position for their sales calls, and also more importantly, as half their bonus compensation. There was really a need to ramp up our knowledge base there. And so, we’ve done that. They’re out now selling with that knowledge. We’re about two months into that and we expect that we start to see it as we get into the end of third quarter and into fourth.

David Buck

Okay. Thanks.

James Schoeneck

Hey, David, thanks.

Operator

And your next question comes from David Amsellem of Piper Jaffray.

David Amsellem

Thanks. So on the managed care landscape for NUCYNTA ER, can you just remind us what percentage of commercial libs have unrestricted access these days and how should we set our expectations for contracting in 2017. And then, secondly, you’ve said in the past that your longer-term aspirational target for NUCYNTA peek sales is around $1 billion. Is that still something that you’re thinking about as an aspirational goal? Thanks.

James Schoeneck

So both pieces of that; David, the first, we current have approximately 76% unrestricted commercial coverage for NUCYNTA ER. And there is another 15% or so that has some sort of a prior authorization or step added with it, and a very small percentage that’s actually not covered. So it’s actually very, very good and equivalent to the market leaders in the category.

We don’t see any substantial change there. We continue to look for our managed care wins. But when you got that higher percentage already, it’s tough to push it a whole lot higher. As I mentioned earlier, we know as of this week and we’ve been able to release that for both CVS Caremark and Express Script, so we retain Tier 2 preferred on their national formularies for both NUCYNTA and NUCYNTA ER. So a very good position there.

And in terms of the aspirational piece, we do. We still see NUCYNTA as really providing a solution in the marketplace that no other drug provides. And we see as the traction continues to grow that we can continue to grow. And we believe that before the end of exclusivity, we can get at that $1 billion dollar level.

David Amsellem

If I may follow-up, I mean, if you don’t get a favorable legal outcome, does that change your view on peak sales?

James Schoeneck

Certainly, the year that that would happen would matter. As you heard from Matt earlier, we’re bullish on both the patents and our case against the ANDA filers. And so, certainly that comes into our equation on it.

David Amsellem

Okay. Thank you.

James Schoeneck

Thanks, David.

Operator

Your next question comes from the Ken Trbovich of Janney.

Ken Trbovich

Thanks for taking the time for the questions. A couple of strategic ones, Jim, I was wondering if you could talk about turnover with your new sales force and whether you’ve seen anything associated with some of the efforts that you had to make with Horizon last year, whether or not you’re doing things like that now to try to retain the sales force, obviously knowing that they’ve been on a year and the benefit of the expanded sales force should really start to accrue through that experience that they’ve gained in the last 12-months?

James Schoeneck

Yes, if you think of the last year, I mean, with as you mentioned, Horizon just over a year ago and now the more recent activity. We cranked up the communication both internally at the office and at the sales force during that time. And I think pretty remarkable that we had hired 130 sales people shortly before the hostile was initiated last year. And by the end of the year, we had lost a handful of people that we didn’t want to lose in the sales force out of over 300. So we had extremely low turnover rate in that sales force.

We’ve continued to see that as well. I mean, you always lose a few people that you don’t want to lose, but it really is people that where we think we can get even better, and get better results out of those territories. I mentioned in the past that as you do a large expansion typically about a year later, you are able to sort some of that out to really see the people that are really making a difference and out there selling and people that maybe aren’t as effective, and right around a year, which is kind of what we just passed as we start to see there.

So we may see a little bit more turnover, but it may be some turnover that’s actually good for us rather than the other way.

Ken Trbovich

Sure. And then, just with regard to the opportunity on business development is the Starboard overhang creates a situation where the board and management would be reluctant to take advantage of M&A opportunities until that’s resolved or do you feel as though there is a clear mandate?

James Schoeneck

If we see an opportunity we would not be bashful on executing on it. And when you consider the situation over the last year or so, I mean it’s one where we’ve continued to look. Now, the great news on this is that we have just - as that all that activity started, had just re-launched NUCYNTA and NUCYNTA ER.

And so, I think both the opportunity to grow the current portfolio with the length of time that we have on it, along with delevering allows us to still provide a lot of value right now, while we continue to be very selective in what we look at the license end.

Ken Trbovich

Was the target still primarily to be focused to CNS? And could you give us a sense on size or scale? Would you limit yourself on size or would you be willing to look at a comparable size company and do a merger of equals?

James Schoeneck

We would look at a merger of equals. We would look at - if anything over the last year, perhaps the bottom-end of what we would look at has moved up some. To do another deal the size that we did with either Lazanda or Cambia, it probably wouldn’t make a lot of sense right now. Where one was doing $4 million before we bought it and - or excuse me, about $1 million before we bought it. And the other was doing about $13 million.

So those may not make quite as much sense anymore. But in terms of the upper end of it, we would see that as possible and would continue to look at those larger opportunities.

Ken Trbovich

Great, and then, last question, just with regard to debt repayment, I know last year you guys was very upfront about your plans and your intentions to repay that debt on the anniversary. Can you give us a sense as to what your comfort level is on similar plans either to restructure or repay for next April? And if you can’t do that now, how long do you think it will take before, you’d have the comfort to kind of talk about strategy around that aspect?

August Moretti

Ken, we are very intent on repaying and refinancing the debt in April of 2017. And so we mentioned on the call, we ended the quarter with $119 million of cash on the balance sheet. We expect to be strongly cash flow positive in the second-half of the year. Given the size of the business we have to retain some of that cash in April of next year for working capital purposes.

But we have - in my view we’d have the ability to use a portion of our cash-on-hand to repay a portion of the debt. And we think refinancing what would be left would be a very manageable proposition. Again, debt to - secured debt to EBITDA ratios would be very strong at that time and we think that we could refinance whatever balance was still there.

Ken Trbovich

So, Augie, is it too early to give us a sense for what you think the difference in terms might look like in terms of the marketplace on what the current level of debt is versus - or not the level of debt, but the actual cost of debt relative to what you think you might be able to attract, given the fact that you had NUCYNTA and are showing the strong growth there both in terms of revenue and cash flow?

James Schoeneck

Ken, I want to jump in on this. I think that our belief is that it will be a much better credit than we were 18 months ago, when we bought NUCYNTA. But predicting exactly where the credit markets are going to be six months from now or eight months from now. I’m not sure that I’m comfortable doing that. And if I could, I’d probably be doing some bond trading.

Ken Trbovich

Well, I don’t think any of us expect the rates right now. So the risk there doesn’t seem too high, but I understand you’re reluctant. So I appreciate you taking the time. Thank you.

James Schoeneck

Thanks, Ken.

Operator

And your next question comes from Irina Koffler.

Irina Koffler

Hi, thanks for taking the question. It sounds like you guys feel pretty good about your NUCYNTA Litigation and the brand’s durability. So I was just wondering if you do prevail, if you would consider other market expansion opportunities like conducting trials or creating more publications for specialists, especially given the fact that you have really good managed care coverage.

James Schoeneck

We always looked at that Irina. And look at what we can do to both give us data in the marketplace, and as importantly, modifications of the label on the product. So we certainly will continue to look at those things. And there are some things where there is data already there that we may be able to make some label modification. So those are things that we’ll continue to evaluate and the publication piece is always an ongoing piece.

We’ll have a number of abstracts coming up pain meetings over the next year or so.

Irina Koffler

Okay, great. And then on - the second question I had is about the Purdue litigation. Can you may be just give us an overview as to what’s going on timelines and, potentially, some of the scenarios that we could see, just help us understand that a bit more?

James Schoeneck

Yes. Let Matt take that and I’ll maybe make a comment when he finishes.

Matthew Gosling

Yes, Irina. We are back up in running in that litigation. We’re headed toward a trial. They haven’t been specified, but would expect about a year from now, maybe little bit more potentially. So we’re actually not too terribly far away from getting to a trial on that.

Obviously, the scenarios are either we go to trial and get a verdict or we settle in advance. Certainly here as elsewhere, we’re open to reasonable settlement possibilities.

Irina Koffler

And any color as to how big that settlement could be or any calculations around that?

James Schoeneck

Well, let me give you some broad parameters. If you look at by the time we would get to the date that Matt talked about in a decision, the total amount sold for that version of OxyContin would be approaching $15 billion in aggregate, since 2010. We at - on the same patterns, we had received a small royalty that we described as low-single-digit from J&J on NUCYNTA ER. And so each percentage of that type of numbers are 150 million bucks. And so you can decide what we meant is low-single-digit, but if it’s $200 million versus $300 million, if it’s 3%, it’s $450 million. So we’re talking about some very large numbers.

Irina Koffler

Great. Thank you very much.

Operator

And you next question comes from David Risinger of Morgan Stanley.

David Risinger

Thanks very much. Sorry about that. So I have a couple of financial questions. I guess, first, it would be helpful to just understand Augie, how we should think about the September quarter sequentially relative to the June quarter that you just reported, anything else that you like to call out for us.

And then, at a higher level, if you could just tell us, if there are price increases in the second-half of the year in current guidance. Thank you.

Jack Anders

So first, I would say that historically the third and fourth quarter should been a strongest quarters in the pain market and traditionally it’s the fourth quarter has been strongly than the third, we would anticipate that we would see that pattern in the second-half of the year that is that the fourth quarter would be stronger than the third. And that sequentially the third quarter would be stronger than the second quarter.

James Schoeneck

And then in terms of the price increase state, the fact that as I mentioned, we haven’t taken price increases here certainly gives us the opportunity to continue to asses that. And I would say that, that would be unusual for us not to take a price increase over the course of full year.

David Risinger

Okay. Thank you, Jim. And then, in terms of the portfolio, it seems like you should have the opportunity to take price up across the portfolio, but maybe that’s a wrong assumption. Any other color you can provide on that?

James Schoeneck

Yes, we did take a price increase on Cambia, Zipsor and Lazanda in June. But we have not yet taken a price this year increase on either the NUCYNTA products or on Gralise, which obviously has the great majority of our turnover. So I would say that we may not be as likely to do it on the products where we’ve taken it more recently, but the opportunity would exist on those that we haven’t yet taken this year.

David Risinger

Got it. Thanks very much. I appreciate it.

James Schoeneck

And Dave, thank you. And I want to thank all of you as we come to the - to the close of the hour. And as we head into the second-half of the year, all of us here at Depomed remain focused on advancing our portfolio, advancing the business and all with the goal of building value for everyone we serve, including our shareholders.

We thank you for the support at Depomed and we look forward to updating you on our progress over the course of the year.

Operator

And ladies and gentlemen, this concludes today’s conference call. You may now disconnect.

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