Medivation (MDVN) David T. Hung on Q2 2016 Results - Earnings Call Transcript

| About: Medivation, Inc. (MDVN)

Medivation, Inc. (NASDAQ:MDVN)

Q2 2016 Earnings Call

August 09, 2016 4:30 pm ET

Executives

Anne Bowdidge - Senior Director-Investor Relations

David T. Hung - Founder, President, Chief Executive Officer & Director

Marion McCourt - Chief Operating Officer

Jennifer Jarrett - Chief Financial Officer

Mohammad Hirmand - Interim Chief Medical Officer

Analysts

Yigal Dov Nochomovitz - Citigroup Global Markets, Inc. (Broker)

Geoffrey C. Porges - Leerink Partners LLC

Geoff Meacham - Barclays Capital, Inc.

Tazeen Ahmad - Merrill Lynch, Pierce, Fenner & Smith, Inc.

Katherine Xu - William Blair & Co. LLC

Kennen MacKay - Credit Suisse Securities (NYSE:USA) LLC (Broker)

Simos Simeonidis - RBC Capital Markets LLC

Peter Lawson - SunTrust Robinson Humphrey, Inc.

Salveen Richter - Goldman Sachs & Co.

Mike G. King - JMP Securities LLC

Eric Schmidt - Cowen & Co. LLC

John Newman - Canaccord Genuity, Inc.

Biren Amin - Jefferies LLC

Operator

Good afternoon, everyone, and welcome to Medivation's Second Quarter 2016 Financial Results Conference Call. This call is being recorded. At the end of the company's prepared remarks, we'll open the call for questions, and we'll provide specific instructions at that point.

I would now like to turn the call over to Anne Bowdidge, Senior Director of Investor Relations. Please go ahead.

Anne Bowdidge - Senior Director-Investor Relations

Thank you for joining us. Just after market close today, a press release was issued with the earnings results for the second quarter 2016. The press release and the slide presentation that will accompany this call are available in the Investor Relations section of our website.

On the call today with me from Medivation are Dr. David Hung, Founder, President and CEO; Jennifer Jarrett, Chief Financial Officer; Dr. Mohammad Hirmand, Interim Chief Medical Officer; and Marion McCourt, Chief Operating Officer.

Before we begin, I'd like to remind you that various remarks that we make on this call contain forward-looking statements that are made under the Safe Harbor provisions of the securities laws. Forward-looking statements include our clinical development outlook and financial guidance and can generally be identified by words such as may, could, believe, intend, expect, project, anticipate, and similar expressions. These forward-looking statements involve risks and uncertainties that could cause Medivation's actual results to differ significantly from those discussed today. Such risks and uncertainties are discussed in Medivation's filings with the SEC, including our Form 10-Q for the quarter ended June 30, 2016, which is being filed with the SEC today.

Medivation cautions listeners not to place undue reliance on any forward-looking statement. All forward-looking statements made during this call are based on information available to us as of today, and we assume no obligation to update these statements as a result of future events or otherwise. This call is the property of Medivation and any replay of this conference call cannot be made without Medivation's express written permission. We'll also be using non-GAAP financial measures to help you understand underlying business performance. The non-GAAP to GAAP reconciliations are provided on our press release and will be posted on our website.

With that, I'll turn the call over to Dr. David Hung, Founder, President and CEO of Medivation. David?

David T. Hung - Founder, President, Chief Executive Officer & Director

Thanks, Anne, and thank you all for joining us today. On this call, we'll update you on the continued commercial progress we are making with our blockbuster prostate cancer drug, XTANDI, for metastatic CRPC, which is advancing nicely upstream in the urology setting and is being further developed in earlier stages of prostate cancer as well as breast cancer, liver cancer and other potential indications. We'll also discuss important near-term developments we expect to see this year and the exciting opportunities that lie ahead with our late-stage pipeline. First, I'll start with XTANDI.

We saw another strong quarter for XTANDI in which underlying demand in the U.S. grew 18% in Q2 on a year-over-year basis for a total of $595 million in worldwide sales for the quarter. This demand was driven both by new patient starts, which Marion will discuss later on the call, as well as by a continued increase in duration. For the quarter, we estimate that the mean duration of treatment for XTANDI based on patient discontinuation, which is a retrospective analysis, is now nine months, an all-time high for us. A prospective analysis would likely show an even longer duration of therapy.

As we noted in our last conference call, Q1 was the first quarter that XTANDI surpassed abiraterone in market share. Because of cross-resistance between these two androgen-signaling inhibitors, whoever is sequenced first has a longer duration of therapy than whoever gets used second. Since overtaking abiraterone in market share, as you can see by the vertical blue dotted line on slide five, we have seen an acceleration in the slope of duration growth, as you can see in the dotted up-sloping red line, especially over the course of May where the acceleration appears to be the greatest. Furthermore, we anticipate continued increases in duration of treatment as we move farther upstream in the metastatic CRPC treatment paradigm, which is primarily the territory of urologists, and we believe that this will be a major contributor to revenue growth over the coming years.

Another potential driver of XTANDI revenue growth, even just within the currently labeled M1 CRPC indication, is what appears to be an increasing rate of diagnosis of metastatic disease based on improvement in scanning technologies. Let's turn to slide six. A recent published study by Evan Yu in the Journal of Urology demonstrated that when asymptomatic patients presumed to have non-metastatic or M0 CRPC are evaluated just by commonly used imaging technologies like planar bone scan, approximately 32% of them are found to be metastatic or M1. Secondly, in a paper published in the Journal of Nuclear Medicine, bone imaging techniques are dramatically improving in their sensitivity or ability to find metastatic prostate cancer.

If you look at the scan on the left, you'll see a patient image with a standard planar bone scan. Notice that he has a left shoulder bony metastasis, but you cannot identify any bony mass in his left thigh bone. However, if you look at the sodium fluoride PET scan image on the right, you can clearly see a left thigh metastasis in addition to multiple other metastases that are not detectable on a standard bone scan. Indeed, in this paper, the sensitivity of planar bone scan was only 57% compared to 100% for sodium fluoride PETs.

These studies demonstrate two points. Number one, that patients believed to be non-metastatic because they are asymptomatic are actually metastatic when evaluated by standard imaging techniques like planar bone scan. And number two, patients believed to be non-metastatic when evaluated by standard bone scan are actually metastatic when evaluated by more sensitive imaging techniques. The bottom line is that metastatic prostate cancer is a highly under-diagnosed and likely to grow population.

Several other dynamics are also increasing the incidence of metastatic prostate cancer worldwide. One is the generally increasing aging population and another is the recommendation of the U.S. Preventative Services Task Force in 2012 to stop PSA screening. The elimination of PSA screening will likely lead to later detection and more metastatic prostate cancer as the first disease presentation, much like in the 1980s, prior to the advent of PSA testing when men with prostate cancer were primarily diagnosed by clinical symptoms of locally advanced or metastatic disease.

A paper published three weeks ago in the journal, Prostate Cancer and Prostatic Diseases, reported a 72% increase in metastatic prostate cancer between 2004 and 2013. Given that the recommendation against all PSA screening was only made in 2012, a 72% increase in metastatic disease incidence in this study may reflect the consequences of an aging population as well as improvements in imaging technologies, as mentioned above, and likely does not yet reflect the increase in metastatic disease expected from stopped PSA screening.

However, if you look at the most recent four-year period in the SEER database, there has been a nearly 15% increase in Stage 4 prostate cancer, and we believe that unfortunately for patients this will accelerate in the years ahead. For these reasons, we believe that expanding growth will be robust well into the future driven by, one, an increased duration of use as we move farther upstream in urology; two, an increase in the diagnosis of metastatic disease due to improved scanning technologies; as well as three, an increase in the incidence of metastatic disease due to the growing aging population and decreased PSA screening, resulting in more advanced disease at first diagnosis.

As a reminder, XTANDI is the only treatment for CRPC which has shown both overall survival and progression-free survival benefits in two randomized Phase 3 trials and a significant improvement in PFS over an active comparator, bicalutamide, in the M1 patient population.

On top of all of this, yet another factor will drive XTANDI revenue growth, and that is XTANDI taking even greater market share from our primary competitor, abiraterone. XTANDI sales continued to exceed abiraterone's in the U.S. this quarter and posted the largest gap in net sales since XTANDI first surpassed abiraterone sales in 2015. We expect that gap to continue to widen as XTANDI's efficacy, safety and convenience profile is increasingly preferred over abiraterone by both prescribers and patients, particularly given a very recent development in abiraterone's label.

Just over two months ago, the abiraterone label was updated to reflect new, hepatotoxicity issues based upon abiraterone's post-marketing experience. Abiraterone's label had always included warnings and precautions for hepatotoxicity since its approval. However, given new findings from real-world use, the updated abiraterone label, under Warnings and Precautions, it now states: "in post-marketing experience, there have been Zytiga-associated severe hepatic toxicities, including fulminant hepatitis, acute liver failure and death." Under the Highlights of Prescribing Information, in the Warnings and Precautions statements, it states that "hepatotoxicity can be severe and fatal."

And the Dose Modification Guidelines now state that abiraterone must be permanently discontinued in patients with an ALT greater than three times the upper limit of normal and total bilirubin greater than two times the upper limit of normal. Furthermore, all patients starting abiraterone treatment must undergo liver function monitoring prior to starting abiraterone, and then will require monitoring every two weeks for three months and every month thereafter while on treatment. Patients with baseline moderate hepatic impairment require a reduced dose and even more intensive monitoring, and abiraterone cannot be used in patients with baseline severe hepatic impairment.

We believe that the warnings and precautions for abiraterone regarding liver failure and death will further differentiate and grow XTANDI in the novel hormone therapy, or NHT, market, particularly among urologists who are already concerned about abiraterone safety and convenience issues and will likely find burdensome the need to consider even more serious safety issues and institute such aggressive monitoring. We also believe that these new warnings and precautions for abiraterone are severe enough to have an impact on oncology use, as well as potentially mitigate the impact of generic abiraterone in the future.

We also expect that our label will be further differentiated from abiraterone when we receive word from the FDA on or before October 22 regarding the XTANDI label amendment to include data comparing XTANDI head-to-head against bicalutamide, a urology standard of care. As you can see on slide seven, our goal is to establish XTANDI as the backbone of therapy across all lines of prostate cancer, and to that end, we are conducting the broadest clinical program in prostate cancer today, including trials like EMBARK and ARCHES that are studying enzalutamide in indications as far upstream as hormone-sensitive prostate cancer. We believe that XTANDI is a pipeline within a product, and we are excited to have a number of enzalutamide data readouts in the coming months.

In prostate cancer, we expect to receive data from our Phase 4 PLATO trial which will inform us whether continuing enzalutamide upon disease progression leads to better outcomes and results in a potential increase in the duration of therapy. In PROSPER, our Phase 3 M0 CRPC trial, we expect later this year to exceed enrollment of 1,200 patients, the targeted enrollment number of our competitor's SPARTAN trial. Depending on the results of SPARTAN, we may choose to read out PROSPER early.

In breast cancer, we expect our Phase 2 trial in women who are ER/PR positive and HER2 normal to read out in the fourth quarter. The ER/PR positive patient population represents a sizable commercial opportunity given that these patients constitute nearly half of the entire breast cancer market. In the fourth quarter, we also expect to initiate our registrational Phase 3 ENDEAR trial in triple-negative breast cancer. ENDEAR will enroll approximately 780 women with diagnostic-positive TNBC who have received either no or one prior line of systemic therapy for advanced disease. In this randomized blinded study, patients will be treated with enzalutamide plus Paclitaxel, enzalutamide alone or Paclitaxel plus placebo. The primary endpoint is PFS.

We'll now turn to slide eight. I also want to share some exciting clinical data that were published a month ago in the July issue of the journal, Oncotarget, confirming enzalutamide's immune stimulating properties. As you know, I've spoken in the past about the potential immune enhancing effects of enzalutamide, which are well documented in preclinical studies. One of the issues for immunotherapy and prostate cancer, however, is that prostate tumors don't appear to express a lot of PD-L1, which is why clinical studies of PD-1 antibodies in prostate cancer conducted to-date have been so disappointing.

As you might recall, in a clinical study by Suzanne Topalian published in the New England Journal of Medicine of 17 metastatic CRPC patients treated with the anti-PD-1 antibody, nivolumab, not one patient had an objective response. However, as you can see on slide eight, in a publication in Oncotarget last year by Jennifer Bishop, significant up regulation of PD-L1 was demonstrated after enzalutamide treatment in both prostate cancer cells in vitro on the left as well as in dendritic cells in patients on the right.

And in a second publication, also in Oncotarget, by Julie Graff just a few weeks ago, as you can see on slide nine, metastatic CRPC patients who were given enzalutamide plus Pembrolizumab, another PD-1 antibody, after they progress on enzalutamide, had a 30% response rate, clearly, a different response rate from the anti-PD-1 antibody alone arm in the New England Journal of Medicine study.

As you can see in the table, responding patients in the Graff study experienced dramatic PSA reductions. One patient's PSA dropped from more than 70 to 0.08. Another's dropped from 46 to 0.02. And yet another's dropped from more than 2,500 to less than 0.01 nanograms per milliliter. And two of three responding patients had measurable soft tissue disease and both had objective responses, with one of the patients experiencing a response in liver metastases, a very difficult metastasis to treat.

In addition, if you look at slide 10 you may recall data presented at this year's AACR meeting which demonstrated that enzalutamide treatment resulted in increased lymphocyte and natural killer cell count and potential immune activating properties in patients with non-metastatic hormone-sensitive prostate cancer. We find these data compelling and they confirm our belief that the combination of enzalutamide with a PD-1 antibody should be evaluated in clinical studies. This is yet another example of how we believe enzalutamide will become the backbone of therapy for prostate cancer patients.

Let me now pass the call over to Marion to provide additional detail on XTANDI's commercial performance.

Marion McCourt - Chief Operating Officer

Thank you, David, and good afternoon, everyone. First, let me say that we had an impressive and highly productive quarter in which XTANDI delivered another sequential quarter of market leadership in total prescriptions and dollar revenue within the NHT market. XTANDI has become the most exciting product in prostate cancer treatment today, and as you can see on slide 12, it is projected to be the world's sixth largest oncology drug according to Evaluate Pharma, demonstrating significant value for both our patients and shareholders.

Robust U.S. and ex-U.S. XTANDI sales made a meaningful contribution to our financial performance while fueling investment in our industry-leading, and rapidly developing late-stage oncology pipeline. Turning to slide 13, during the second quarter, XTANDI worldwide net sales reached approximately $595 million. This represents an increase of over $108 million or 22% versus the second quarter of 2015. In the U.S., net sales were $330 million in the second quarter of 2016, which represents an increase of $32 million, or 11%, over the second quarter of 2015 with demand growth of approximately 18%. First half XTANDI U.S. net sales totaled $638 million, a $116 million or 22% increase over 2015, driven by demand and market share gains.

As we show on slide 14, to which David spoke earlier, in the NHT market which is defined as XTANDI and abiraterone treated patients, we continue to make important gains in competitive share growth. For the second consecutive quarter, XTANDI surpassed Zytiga in market share, securing 51% of the total NHT market for Q2, according to IMS data. XTANDI has also surpassed abiraterone in total scripts for the last two consecutive quarters, and continues to lead in new scripts. Additionally, XTANDI net sales have exceeded abiraterone for the last five consecutive quarters with a noteworthy first half 2016 lead of approximately $80 million, driven primarily by demand.

Market research and physician preference data remain robust with the latest survey data confirming XTANDI as the preferred agent in the NHT market based on two key elements of its product profile, first, demonstrated efficacy in terms of improved overall survival and delayed (20:08) chemotherapy, and ease of use including no concomitant steroid use, no baseline or ongoing lab monitoring, including required liver function testing and no food restrictions.

The numbers are compelling. A significant majority of oncologists and an impressive 80% of urologists indicate preference for XTANDI over abiraterone based on the latest survey data. Preference, a leading indicator of future performance, indicates we are very well-positioned to extend our leadership in the NHT category and prostate cancer therapy more broadly.

XTANDI has broad coverage across U.S. Medicare Part D and commercial prescription plans. The majority of third-party payers reimburse XTANDI at parity with oral oncology products as measured by restrictions to access and copays. While disappointed by CVS's announcement to exclude XTANDI from its 2017 standard commercial formulary which impacts a portion of commercial lives managed by CVS, we believe this action will have minimal impact on XTANDI's overall performance for the following reasons. Physicians will be able to prescribe XTANDI for new patients through medical justification. Patients currently taking XTANDI will have ongoing coverage under a grandfathering provision. Physician choice of NHT prescribing for all metastatic prostate cancer patients is essential and a must for those who may not be able to take steroids, have even moderate hepatotoxicity issues or have previously progressed on abiraterone.

To that last point, we have heard from the prostate cancer patient advocacy community about their dissatisfaction with the CVS decision and understand they are taking steps to voice their opposition to the decision by CVS to take away choice from physicians and patients with metastatic prostate cancer. We believe strongly in XTANDI's clinical differentiation and distinction within the NHT category.

Our near-term second half 2016 XTANDI growth platform is based on four important levers, and I will provide summary comment on each: number one, sales force expansion and training are now complete; two, acceleration in urology while continuing to build on our strong oncology base; three, duration of therapy growth as we capture mCRPC patients earlier in their treatment and XTANDI gains in use as first-line therapy in the NHT market; four, the TERRAIN label amendment anticipated by October 22 PDUFA date which will allow for compelling promotion of XTANDI's clinical superiority over Casodex, a standard of care in mCRPC patients.

First, as reported, the 40-person expansion of our sales force and sales leadership team was completed in late March. Early critical success metrics indicate that the expansion to create separate, specialized, high-impact urology and oncology teams is having a favorable effect. XTANDI now secures number one share of voice leadership in both oncology and urology, according to the latest ImpactRX data.

Our new expanded sales force delivered an impressive 29% increase in sales calls in Q2 2016 versus Q1 2016 with a strong focus on our prioritized Tier 1 customers. We're pleased to see that over the past three months the XTANDI sales force was given significantly higher post-detail brand perception scores where we led Zytiga by 26% and intend to prescribe results were significantly higher than our primary competitors, as measured by ImpactRX.

The XTANDI promotional effort continues to go with the opportunity ahead. In addition our partner, Astellas, has just recently expanded their XTANDI promotional effort with additional sales calls being added in urology. Second, in urology, our ambition to treat mCRPC patients earlier in their metastatic disease and establish XTANDI as the first choice in HT is being realized. As you can see on slide 15, XTANDI is the number one prescribed NHT in urology, achieving an impressive 69% urology market share.

In Q2 2016, 25% of XTANDI units were prescribed by urologists, up from 20% historically. This marks an important shift in XTANDI prescribing to earlier lines of treatment with corresponding longer durations of therapy. Additionally, in the second quarter, we grew our base of active urology prescribers by 38% over Q2 2015, which now stands at an all-time high of close to 1,500 urologists. Over 1,100 new XTANDI patient starts came from urology in the second quarter of 2016. While today most XTANDI prescriptions are written by oncologists, urology is our most significant near-term growth opportunity, and we are pleased with continued progress in Q2.

Of course, oncology remains an important and significant portion of our business, representing approximately 75% of demand, and XTANDI captured 47% of oncology NHT IMS TRx scripts. XTANDI continues to grow in this important line of business, and in second quarter, we saw 12% growth in prescriptions versus the same period last year as reported by IMS.

Third, duration of therapy, or average months on treatment, is a key driver for future XTANDI growth. As you see on slide 16, analysis of retrospective or discontinuation duration data through May 2016 demonstrates that duration has accelerated to a mean of nine months, with the most rapid acceleration occurring in the last month as a result of our recent NHT leadership and increased upstream use. Duration of therapy has tripled in the past three years and doubled since June of 2014. Further, as illustrated on this slide by the yellow dots above the red solid line, 25% of XTANDI patients in the retrospective data analysis were on therapy for greater than 13.7 months.

Last, but certainly not least, the fourth XTANDI 2016 growth driver is the TERRAIN label amendments which would advance the next chapter of XTANDI growth. Should FDA approve a label amendment, XTANDI would be the only NHT to achieve significant improvement in overall survival and progression free survival as well as head-to-head superiority versus a standard of care for mCRPC.

Inclusion of the TERRAIN data in the XTANDI label would mark an important new opportunity for promotion, especially among urologists for whom addressable barriers to XTANDI adoption include habit and lack of awareness of the TERRAIN data. In fact, recent market research has revealed that 80% of urologists and oncologists were highly compelled or compelled to prescribe XTANDI after seeing TERRAIN data. However, a significant percentage of prostate cancer drug prescribing urologists had still not yet written a prescription for XTANDI, and on the basis of survey data, we believe the vast majority of physicians are unaware of the TERRAIN data.

So you can see why I am extremely excited for the future as we look to further advance into an area with significant growth potential, equipped with the market leadership position and a world-class salesforce, primed and ready at the call to leverage data demonstrating our superiority against the current standard of care. At Medivation, our mission is to serve patients with serious illness, and our ambition is to have a remarkable impact on their lives, and the lives of their loved ones today and in the future.

We are incredibly proud and privileged to have treated approximately 64,000 patients in the U.S. with XTANDI to-date. I am reminded daily of the impact XTANDI can have on the lives of our fathers, grandfathers and men diagnosed with mCRPC. We routinely hear stories from oncologists and urologists that touch our hearts and underscore how we at Medivation are delivering for patients by profoundly impacting their lives.

I'll now turn our call over to Jen.

Jennifer Jarrett - Chief Financial Officer

Thank you, Marion, and good afternoon, everyone. I would like to now direct everyone to slide 18 in the webcast.

Starting with U.S. sales of XTANDI, as Marion mentioned, net sales as recorded by Astellas were $330.3 million in the second quarter of 2016, an 11% increase over the second quarter of 2015 driven by an impressive 18% increase in underlying demand. The growth in underlying demand for XTANDI was partially offset by a lower net price for XTANDI due to a year-over-year increase in the gross-to-net rate, or GTN.

Our second quarter 2016 GTN was impacted by a change in payer mix to more discounted segments and slightly higher fees to specialty distributors. The gross-to-net rate in the second quarter of 2016 was consistent with the first quarter of 2016, and we expect minimal change to our gross-to-net rate for the remainder of the year.

U.S. net sales of XTANDI increased 7% on a quarter-over-quarter basis. This quarter-over-quarter increase in U.S. net sales was driven by growth in underlying demand of 3% as well as inventory movement. As a reminder, there was a price increase for XTANDI in the U.S. on June 28, 2016, which had a negligible impact on net sales for the second quarter of 2016.

Turning to slide 19, outside the U.S. where Astellas conducts all sales, marketing and distribution, net sales were approximately $265 million in the second quarter of 2016, an increase of 41% compared to the second quarter of 2015 and a 10% sequential increase over the first quarter of 2016. This robust growth was driven by the continued launch of XTANDI in the pre-chemotherapy setting on a country-by-country basis. Outside the U.S., XTANDI uptake by both oncologists and urologists continues to be strong. As a reminder, XTANDI's label in Europe has included data from the head-to-head TERRAIN trial of XTANDI versus bicalutamide since April.

Now turning to slide 20 and to Medivation's income statement, non-GAAP collaboration revenue was $206.2 million for the second quarter 2016 compared with $174.8 million for the second quarter of 2015, an increase of 18%. Our second quarter 2016 collaboration revenue was comprised of $165 million from XTANDI sales in the U.S. and $41 million from our royalty on XTANDI net sales outside the U.S.

As a reminder, under our collaboration with Astellas, we earn a tiered royalty based on net sales that resets at the beginning of each calendar year. Our effective royalty rate for the second quarter of 2016 was 15.5%, and we expect the rate to increase in the third and fourth quarter of the year. As a point of reference, the effective quarterly royalty rates for 2015 were 12%, 14%, 16% and 19% for Q1 through Q4, respectively.

Now I'll turn to operating expenses, starting with slide 21. Non-GAAP R&D expenses for the second quarter 2016 were $60.5 million compared with $41.3 million in the second quarter of 2015, an increase of 47%, primarily due to expenses associated with our talazoparib program, which we acquired in the fourth quarter of 2015. On a quarter-over-quarter basis, our non-GAAP R&D expense decreased by 12%, as we shifted our R&D efforts from discovery to clinical development activities. We expect R&D expense to increase going forward as we initiate new clinical studies for talazoparib in the second half of the year.

As a reminder, for XTANDI, we incur only one-third of the development expenses for studies that support marketing approvals in both the U.S. and either Europe or Japan, which accounts for the majority of our ongoing and planned trials for XTANDI and one-half of the development expenses for studies that support marketing approval only in the U.S. Astellas is responsible for the remainder of these expenses.

Turning to slide 22, non-GAAP SG&A expenses for the second quarter 2016 were $68 million compared with $57.5 million for the second quarter of 2015, an increase of 18% due primarily to higher head count costs related to expansion of our sales force completed in March 2016, higher royalties paid on XTANDI and expenses related to talazoparib.

You probably noticed the significant increase in our GAAP SG&A expenses for the quarter, which was due to a noncash charge of $674 million. This charge resulted from an increase in the fair value of the contingent consideration liability related to our acquisition of talazoparib from BioMarin. As a reminder, as partial consideration for talazoparib, we agreed to pay BioMarin up to $160 million upon the achievement of defined regulatory and sales-based milestones as well as a mid-single-digit royalty on talazoparib net sales.

At the time of the acquisition, we recorded an estimate of the fair value of these contingent consideration payments as a liability on our balance sheet. In the second quarter, due to the occurrence of several positive events for talazoparib, our estimate of the fair value of talazoparib increased significantly, which increased the value of the contingent consideration liability on our balance sheet and resulted in a noncash charge.

These events include positive Phase 3 data from TESARO's PARP inhibitor, niraparib, two successful FDA meetings for talazoparib that resulted in a meaningful acceleration of our clinical development timelines for two important indications, small cell lung cancer and prostate cancer, and the generation of new clinical data for talazoparib. We describe the events driving the increase in the fair value of our talazoparib contingent payments in more detail in our 10-Q, which is being filed today.

Our operating margin for the quarter on a non-GAAP basis was 37.7%, and we expect our non-GAAP operating margin to increase in the second half of the year.

Turning to slide 23, non-GAAP EPS was $0.29 for the second quarter of 2016 compared with $0.29 in the second quarter 2015. Consistent with prior years, we expect our non-GAAP EPS to increase in the second half of the year due to higher XTANDI net sales, a higher royalty rate on ex-U.S. net sales and increasing operating leverage. Our second quarter 2016 GAAP EPS was impacted by the noncash SG&A charge of $674 million related to the increase in our contingent consideration liability for talazoparib discussed previously, as well as a noncash tax benefit of $236.4 million related to this SG&A expense.

Turning quickly to our balance sheet, at June 30, we had cash, cash equivalents and investments of $349 million compared with $226 million at the end of 2015.

Lastly, we are reaffirming the 2016 full year guidance. The 2016 guidance information is included in our press release issued today. The non-GAAP to GAAP reconciliation are provided in our press release and will be posted on our website.

With that, I'll now hand the call back over to David.

David T. Hung - Founder, President, Chief Executive Officer & Director

Thanks, Jen. Now I'd like to turn your attention to our wholly-owned late-stage pipeline, starting with talazoparib an exciting drug that we consider a potentially best-in-class PARP inhibitor. Let's start with slide 29.

Talazoparib positions us for long-term sustainable growth by creating a number of near, mid- and long-term opportunities in our pipeline. By the end of this year, we expect to initiate multiple, including some potentially registrational, studies in breast cancer beyond BRCA, prostate cancer, small cell lung cancer and ovarian cancer.

With the recent positive results from TESARO's Phase 3 trial in ovarian cancer with niraparib, the second most potent PARP trapper in development today, second only to talazoparib, we are more confident than ever in the direction in which we are moving with our talazoparib development program. We have made important strides in advancing the development of talazoparib and expect to read out top line results from our first talazoparib registrational study EMBRACA, in Germline BRCA-mutated breast cancer in the first half of 2017.

We've also concluded successful meetings with the FDA to align on clinical development plans in several indications. In addition, we are evaluating additional tumor types, such as GBM, and other talazoparib treatment settings, such as in combination with radiation in which talazoparib's PARP trapping should be particularly synergistic and where talazoparib may have the potential to be the first PARP inhibitor approved. As we discussed in detail on our talazoparib investor call last month, we strongly believe talazoparib has a differentiated mechanism and profile and we look forward to presenting new clinical data at an upcoming medical conference.

Moving on to pidilizumab on slide 30, we were particularly excited about clinical data presented a few months ago from a Phase 1/2 study evaluating pidilizumab in pediatric patients with diffuse intrinsic pontine glioma, or DIPG. DIPG is an extremely aggressive type of brain cancer with an average life expectancy of less than 12 months and it is responsible for the highest brain tumor mortality in children. In this trial of nine pediatric patients, the mean event-free and overall survival estimates were 12 and 15.6 months respectively. Three patients were reported to have remained progression free at 16, 22 and 24 months, respectively, and one patient experienced a partial response. We plan to meet with FDA to explore potential approval pathways for pidilizumab in DIPG based on these remarkable clinical results.

I know you have heard from me a lot over the last several months, as I have met or spoken with many of you to walk through the current performance of our company and the exciting near, mid- and longer-term opportunities that abound on our horizon, and I want to thank all of you for your support over the years and your continued support of us, and for sharing in our excitement about our company and its prospects.

Before I turn the call over to the conference call coordinator, I want to remind you that today's call was about Q2 earnings, and accordingly, we will not be taking questions about the confidentiality agreement announced on July 5 or about future events or developments that may result from our interactions with parties that have entered into confidentiality agreements with us. In addition, we will not be providing updates concerning any such future events or developments unless public disclosure is required to be made.

With that, I will pass the call over to the conference coordinator to open up the call for Q&A.

Question-and-Answer Session

Operator

Our first question comes from the line of Yigal Nochomovitz with Citigroup. Your line is open.

Yigal Dov Nochomovitz - Citigroup Global Markets, Inc. (Broker)

Yeah. Hi. Thanks very much for taking the question. David and Jen, on the guidance, is it possible at all to narrow the range that you've stated from $1.425 billion to $1.525 billion? And relatedly, how much does the price increase at the end of June bear on the maintaining the guidance? Thank you.

Jennifer Jarrett - Chief Financial Officer

So we are not narrowing or revising our guidance range. So as I said, we're reaffirming the guidance that we previously issued, Yigal. And then on the second point, just on the price increase, obviously, that didn't affect us until the very, very end of the second quarter, so we didn't really see any benefit from a gross perspective in the second quarter, but obviously, we will benefit from that price increase going forward, and we do capture the majority of that price increase. There's a little bit of price protection, but for the most part, we will capture the majority of it.

Yigal Dov Nochomovitz - Citigroup Global Markets, Inc. (Broker)

Okay. Got it. And with regard to the PDUFA date for TERRAIN and STRIVE inclusion in the label, at this point, we are midway through the year, a little more than midway through the year, haven't heard anything yet about the inclusion of TERRAIN or STRIVE in the AUA guidelines. Would it be fair to assume at this point that the AUA is basically waiting for the FDA to weigh in on the label before issuing an updated guidance?

Mohammad Hirmand - Interim Chief Medical Officer

Yeah. So this is Mohammad, and thanks for your question. So I think it's obviously hard for us to speculate on actions by outside parties. So again, what AUA and other guideline committees do is that after a trial is published, and ours were recently published earlier in the year, they look towards some of their future meetings where they review the emerging data and decide whether to update their guidelines or not. And obviously if – it may happen either before or after, sometimes some of these guidelines committees, and I think AUA has some set times where they meet, so we can't really speculate when that might come, and obviously, whether it comes or not also is up to them. And I think that the general thinking is that when you have an approval, then the chances of a guideline being updated obviously goes up, because that's another independent body reaffirming the importance of that clinical data.

Yigal Dov Nochomovitz - Citigroup Global Markets, Inc. (Broker)

Right. Got it. And, David, just two science questions. Number one, if you could comment briefly on the failure of the Tokai trial and how that may or may not impact your development strategy? And then secondly the data you showed for the M0 to M1 reclassification was pretty interesting. I was just wondering if you've also seen any of that data in the hormone-sensitive population? And if that trend continues in terms of reclassification to M1, how does that impact your thoughts on the value of the EMBARK and PROSPER trials, given that you might see less patients showing up as M0 upon diagnosis? Thanks.

David T. Hung - Founder, President, Chief Executive Officer & Director

Okay. So let me answer the first question about Tokai. I think we've been pretty consistent historically about our thoughts on AR-V7. We made the point several times that we did not think that that was really a clinically validated target, and I think that the results of the Tokai trial are consistent with that. So clearly, we've always said that this is a hard space to break into because given the overall survival requirements from a regulatory standpoint, it's really hard with crossover contamination to do agents that have made it through the gauntlet to get a new drug through. So we think that XTANDI is a protected franchise for years to come because it's really hard to get another agent to prove overall survival in this class and space. So I don't think Tokai was a surprise, but I think that any other agents that try to get an overall survival label in this space are going to have a very difficult time.

On your point on M0 and M1, the point we've made is that if you don't have a prostate because you've either had it taken out by a prostatectomy or had it ablated by radiation, since the prostate's the only organ that makes PSA, technically, your PSA has to be zero. And if your PSA is higher than zero, it means that you have prostate cells some place in your body, even if you can't see them. And I think what we're seeing from the Evan Yu paper and other papers that I cited is that when you really look for metastatic disease in patients who have a rise in PSA, if you have a sensitive enough scan, you're going to find it. So in many ways M0 disease is a misnomer because if you have a rise in PSA, you by definition – and you don't have a prostate, by definition, you've got prostate cancer cells some place in your body even if you may not be able to see it.

So what does that do for the upstream trials? Well I think what it tells us is that over time the vast majority of patients who are thought to be M0 will be identified as being M1 and on current label. So in some ways, if scanning technologies were to become perfect today, ARCHES and EMBARK would be different trials because they probably wouldn't be non-metastatic. Now, one distinction between ARCHES and EMBARK and our current trials is the hormone-sensitive element of that. So right now our label is metastatic castration-resistant prostate cancer and we talked about how we are moving upstream to try to capture the hormone sensitive market, so that is a distinction. But with regarding metastases, I think that if you have a rise in PSA, over time, as technologies improve, those patients are actually going to be shown to be metastatic because you just can't have a PSA if you just don't have a prostate.

Yigal Dov Nochomovitz - Citigroup Global Markets, Inc. (Broker)

Thanks very much.

Operator

Thank you. Our next question comes from the line of Geoffrey Porges with Leerink. Your line is open.

Geoffrey C. Porges - Leerink Partners LLC

Thank you very much. I appreciate you taking the questions. A couple first on the trials. David, could you confirm the situation in Europe? I know it's not in actually your hands, but with the TERRAIN upgrade? Secondly, that we should only be anticipating TERRAIN in both European and the U.S. label?

And then on the PROSPER study, what is the targeted normal that you're aiming for and how soon after that enrollment could you take a look and under what circumstances could that occur? And then lastly, for Jen, I just wanted to get a sense of SG&A going forward. Now, you've stepped up the sales force. You appear to have the forecast carried in the Q2 results. Is this sort of the level on a non-GAAP basis that we should be modeling going forward roughly or are there some other things that could drive it higher?

Mohammad Hirmand - Interim Chief Medical Officer

Okay. So, Geoff, this is Mohammad, maybe I can start then hand it over to Jen. I think you had a couple of questions regarding TERRAIN. So as you may be aware today, we have already received positive patient peer opinion (46:23) in Europe and indeed, the SMPC, which is their European label is already updated to include TERRAIN PFS data. In the U.S., we are still waiting for the PDUFA date. The PDUFA date is October 22. We have provided the FDA with both TERRAIN and STRIVE. As we have mentioned, the indication statement is metastatic CRPC. So our thought is that the FDA will likely gravitate toward the TERRAIN trial preferentially over STRIVE given the fact that again, that was the whole study was in metastatic patients. But obviously, we have to wait for the assessment of the FDA to be completed to see whether any of the STRIVE data will end up in their label or not.

Geoffrey C. Porges - Leerink Partners LLC

Okay. Great. Thanks.

Jennifer Jarrett - Chief Financial Officer

And then with respect to SG&A, we will see a little bit more of a jump in the Q3 and then much less of a jump in the Q4. And Q3 will be impacted by some activities related to the TERRAIN label, such as preparing for the inclusion of that data into the label. So you will see a little bit more of a jump in Q3, and like I said, a little bit more of a flattening in Q4.

Geoffrey C. Porges - Leerink Partners LLC

Okay. Thanks. And then on the PROSPER study, David?

Mohammad Hirmand - Interim Chief Medical Officer

Yeah. I forgot about that. On the PROSPER study, so I think David mentioned that we're making good progress in terms of enrollment in that trial. As you know, the SPARTAN trial, which is the ARN-509 trial, has a target enrollment of 1,200. We are actually going to be reaching that target number in our own study later this year. Our trial is a little bit larger. The total sample size we are currently targeting is 1,560. So we think we're going to reach that target probably in mid-2017.

And right now, when we look at kind of the timelines in terms of top line results as well as approvals, you may recall from a prior earnings call David talked about unblinding in 2018 and approval in 2019. But given the fact that now we have very strong STRIVE data where we also looked at a subset of patients in M0 CRPC where we saw some very robust data, we think that the trial was pretty conservatively designed and there's an opportunity for us to be more aggressive and unblind the trial earlier. And we will certainly be considering that very seriously if a competitor trial such as SPARTAN were to unblind ahead of us. Needless to say, whenever we change unblinding criteria for a Phase 3 trial, we'll interact with the FDA just to make sure that they are onboard with our decision.

Geoffrey C. Porges - Leerink Partners LLC

Okay. Thanks. Thanks very much.

Operator

Our next question comes from the line of Geoff Meacham with Barclays. Your line is open.

Geoff Meacham - Barclays Capital, Inc.

Hey, guys. Thanks for taking the question. I have two quick ones. David, I wanted to get your perspective as to what the real-world adoption could look like for the more sensitive PET scan that you showed on slide six? I'm assuming that urologists may need some sort of incentive here. And the second question, when you look at the – sorry, on the PD-1 XTANDI data, I know you guys have prostate patients on XTANDI for a very long time. But is there anything in common to the patients who become XTANDI resistant? Just trying to get a perspective on the mechanism for XTANDI in immune activation? Thank you.

David T. Hung - Founder, President, Chief Executive Officer & Director

Yeah. So on the real-world situation with PET scanning, we've certainly seen an increase in the use of PET scanners. Just a few years ago, they were pretty much only seen in academic medical centers, and now you're seeing quite a few centers get them. So I don't really know what the pace is going to be, but eventually I think it's going to be important information to know. Because, as you know, if you just look at XTANDI and the time to PSA progression as a metric of progression, 8.3 months in the post-chemo population, 11.3 months in the pre-chemo population, 19 months in the TERRAIN population and 25-plus in STRIVE. Clearly, the earlier you use it, the better off you are.

And so being able to diagnose men as early as possible with metastatic disease and trying to treat them as soon as you can, we think is going to be important, and so I think that's going to be information that not only physicians, but especially patients will want to know. And we think that eventually, medical necessity is what drives medical practice. And so I think that over time, we do think that these new technologies will become more widespread but I just can't predict the pace of that. But, I think it's inevitable that if, as I said if you don't have a prostate, you really can't have a PSA. So, if you've got a rise in PSA, you've probably got mets and you either have to look for them or presume that they're there and seek treatment accordingly.

With regard to your second question – oh, actually, what was it? Can you repeat your second question for me?

Geoff Meacham - Barclays Capital, Inc.

Yeah. So, David, it just has to do with if there's anything in common to patients who become XTANDI resistant, trying to get a sense for the mechanism for XTANDI and immune activation. Is it just antigen presentation or is there something else that you guys have researched or discovered?

David T. Hung - Founder, President, Chief Executive Officer & Director

There's a pretty robust literature on XTANDI or enzalutamide in the immune area. So, we've made the point several times, if you look at the literature on AR antagonism, this goes back now years, over a decade; when you inhibit antigen signaling as XTANDI does, that process potentiates the growth and function of the thymus gland. The thymus gland is that gland in your upper chest where all your white cells go to become immuno-competent and also recognize self from non-self. And we've shown in animal models that XTANDI can cause a tripling in thymic weight in animals as well as a significant improvement in thymic function and actually causes an increase in CD8 positive lymphocyte's ability to kill, in this case, prostate cancer cells.

So that's certainly one end of the equation. But the other end of the equation that's really relevant to the recent publications is that the one problem that immune therapies like PD-1s have not worked well in prostate or even breast cancer because those two tumors don't tend to express a lot of PD-L1, which is the ligand for PD1. So, what was so interesting about the recent Oncotarget paper, the Julie Graff paper, is that when patients are progressing on enzalutamide, these tumors and clearly trying to find a way to escape otherwise a very, very potent drug. And one way they do that is trying to up-regulate PD-L1, and in that scenario PD-1 antagonism appears to be effective.

So I think that there's probably multiple way that XTANDI can potentiate the immune response. One is by improving thymic function. Number two is by increasing just immune cell counts, as I cited in the AACR paper. So if you're looking at the NCI study that we cited and we presented just in April. XTANDI also caused increases in lymphocyte counts and natural killer cell counts and we know if you look at any study, whether it was HIP-B (53:20) or other agents, the higher your immune cell counts are the better those therapies do. And the third mechanism is up-regulating the PD-L1 so PD-1 has something to interfere with. So I think those are at least three different mechanisms by which XTANDI may be beneficial in the immune system.

Geoff Meacham - Barclays Capital, Inc.

Got you. Thank you.

Operator

Our next question comes from the line of Tazeen Ahmad with Bank of America. Your line is open.

Tazeen Ahmad - Merrill Lynch, Pierce, Fenner & Smith, Inc.

Hi. Good afternoon. I apologize in advance for any background noise. David, I was hoping that you could give us a little bit more color on the doctor survey that you had mentioned in your prepared remarks. How much of the feedback have you been getting from academic physicians versus community-based physicians in the urology setting? And when do you think you'll be able to provide any color on how much of the use of XTANDI is coming from the urology community versus oncologists?

David T. Hung - Founder, President, Chief Executive Officer & Director

So I had a little bit of a hard time hearing you, but I think you were asking about a physician survey?

Tazeen Ahmad - Merrill Lynch, Pierce, Fenner & Smith, Inc.

Yes. I'm sorry. I just wanted to see some color on how much of those physicians were community-based versus how many of them might be academics? Are you getting more interest from academic-based physicians right now? Or are you seeing an increase in community-based physicians?

David T. Hung - Founder, President, Chief Executive Officer & Director

Okay. So just to rephrase your question, you're asking whether or not the physician preference that we cited was mainly in academics or community-based, is that right?

Tazeen Ahmad - Merrill Lynch, Pierce, Fenner & Smith, Inc.

Yes. That's right. That's the first part.

David T. Hung - Founder, President, Chief Executive Officer & Director

Great. All right. I'll let Marion answer that.

Marion McCourt - Chief Operating Officer

Thank you. And the survey information and physician preference survey that I mentioned, it was about 20% from academic and the remaining for community for urology specifically. And then to the second part of your question where I think you were asking a bit about how much business is coming from urology opposite oncology for XTANDI, as I mentioned now we're seeing 25% of use in second quarter coming from urology opposite 75% in oncology, and of course that's representative of a very positive shifting to treating patients early in their metastatic treatment. It also correlates of course to what we're seeing in terms of increased retrospective duration as we've reported with now the mean looking backwards, looking retrospectively with at nine months and we're now seeing that over 25% of our patients at the 12 months – excuse me, 25% of our patients are now on therapy for over 13.7 months.

Tazeen Ahmad - Merrill Lynch, Pierce, Fenner & Smith, Inc.

Okay. Thanks. And again, I apologize for the connection, but maybe can you give us a little bit of color on the nine-month duration in use that you had talked about, is that coming from use primarily in your original labeled group of patients? Or are you seeing doctors trying to put patients on therapy earlier than they have been historically?

Marion McCourt - Chief Operating Officer

So we're seeing physicians move to put patients on therapy earlier. And this is part of the evolution of treatment that we've talked about with XTANDI, so we see the durations we are now seeing as a very, very positive indication. Certainly, it's the uptake in urology prescribing, but it's also across the patient population, earlier treatment with XTANDI, and of course, now we're seeing XTANDI, as I reported with market share of 51%, now becoming the first choice in NHT therapy.

Tazeen Ahmad - Merrill Lynch, Pierce, Fenner & Smith, Inc.

Okay. Thank you.

Operator

Our next question comes from the line of Katherine Xu with William Blair. Your line is open.

Katherine Xu - William Blair & Co. LLC

Hi. Good evening. I'm just wondering, with regard to discontinuations, can you just give us some sense of what they are, disease progression versus adverse events versus others? That will be very helpful. And also can you break down the duration of treatment in urology versus oncology if you have that data?

Mohammad Hirmand - Interim Chief Medical Officer

Sure, Katherine. This is Mohammad. Maybe I can start. So obviously, we have now done a number of studies in the metastatic CRPC so we have a very good handle in terms of in the trial setting what are the reasons for patients coming off study drug, and I think what we're seeing in the real world is paralleling that. And a very vast majority of when patients come off study drug, the reason is disease progression. We've had very few instances where patients have discontinued for other reasons, including adverse events, and indeed as you may know there's actually a potential for a dose interruption and reduction to mitigate and manage that. Certainly, the vast majority of patients are coming off for disease progression, and I think I'll hand it over to Marion in terms of talking about durations of therapy.

Marion McCourt - Chief Operating Officer

Yes, and Katherine, I can't give you the specific months for oncology versus urology breakdowns, but I can give you that overall because urologists tend to be treating patients earlier in their disease. That when you look at retrospective duration discontinuation, it tends broadly to be higher for urology than oncology, but I don't have the specific numbers.

Katherine Xu - William Blair & Co. LLC

Thank you.

Marion McCourt - Chief Operating Officer

View (58:54) that we reported was patient based.

Operator

Our next question comes from the line of Kennen MacKay with Credit Suisse. Your line is open.

Kennen MacKay - Credit Suisse Securities (USA) LLC (Broker)

Hey. Thanks for taking my question, and congrats on the quarter. David, one for you. I guess after the failure of Bristol's CheckMate-026 trial, this could really open the door to agents that increase PD-L1 on tumor cells as well as other combinations with checkpoints such as PARP. Can you talk a little bit about how this changes your development plans for XTANDI or talazoparib?

David T. Hung - Founder, President, Chief Executive Officer & Director

Yeah. So I think you're absolutely right. I think that clearly the ability to up regulate PD-L1 is an important feature for, about this drug and it can make it really synergistic with PD-1 agents. So just like you saw in the Julie Graff paper, we think it would be very interesting to study this in other tumors where PD-1 might have less than stellar results. So I think that certainly does open a door. And also, we've indicated that among the six tumor types that we're interested in pursuing, that one of them is actually non-small cell lung in addition to our small cell programs. So we do think that PARP inhibition would be very exciting in non-small cell lung, and it is one of the indications that we are targeting. So we do think that that space is a little bit less crowded, and we are – we do intend to pursue that opportunity.

Kennen MacKay - Credit Suisse Securities (USA) LLC (Broker)

Got you. Thanks. And maybe just a quick follow-up. I was wondering if there could be anything else maybe later this year that you could provide on a potential mechanism for pidilizumab?

David T. Hung - Founder, President, Chief Executive Officer & Director

You know, we're still looking into that, and certainly we have confidence in pidilizumab that when we can report it, we certainly will. But I think right now, the most important thing that we'll say about the molecule now is that it's pretty clear from the published studies and its most recent data set that this molecule has clinical activity. And that's still the absolutely most important thing. So we think this is a pretty interesting antibody. Of course, we're interested in finding out the MOA, but we are very excited about the fact that we have seen activity especially in an indication like DIPG where nothing works. And to have a kid out two years on this drug is pretty startling in some ways. So we think that that – we're very optimistic about it and do intend to try to pursue that indication on top of the other hematologic indications that we have already spoken about previously.

Kennen MacKay - Credit Suisse Securities (USA) LLC (Broker)

Got you. Thanks so much for taking my questions.

David T. Hung - Founder, President, Chief Executive Officer & Director

Thanks.

Operator

Our next question comes from the line of Simos Simeonidis with RBC Capital Market. Your line is open.

Simos Simeonidis - RBC Capital Markets LLC

Hi, guys. Thank you for taking the questions. I was wondering if you could speak about any potential impact you may – we may see from the recent news out of CVS, the CVS announcement? First of all was this something that was a major surprise to you? Could we see more of these? And if you can talk maybe about what kind of things you're doing from a commercial standpoint and a payer standpoint to counteract that?

Marion McCourt - Chief Operating Officer

This is Marion. I'll take that one. First off, on the first part of your question, to answer, we expect to see a minimal impact to our XTANDI performance in the U.S. because of the CVS decision. As I mentioned, the decision is disappointing. The reason we point to a minimal impact, though, relates to the fact that while not similar exactly to the CVS situation, we have seen XTANDI perform very, very well in situations of having whether, oh, step edits, things of that sort. Specific, however, to the CVS situation, there has been experience within CVS that started back in April of last year where a line of business had a similar medical justification required, and we saw minimal impact to XTANDI performance in that line of business.

So the next part of your question related to do we expect to see more of this? We do not have any indication that we will see more of this. In fact there's been significant outreach on the part of patient advocacy groups, physicians and others, indicating the fact that they're concerned with this sort of a restriction to physician's choice of NHT therapy. And then additionally, going forward, we certainly will make sure that we are staying close to access and affordability for patients working closely with physicians and supporting patients to make sure that they're able to get XTANDI.

The other piece I would comment on is that certainly this is a category, NHT therapy, where XTANDI has a highly differentiated clinical profile. Several aspects of our clinical profile are such that these products are by no means interchangeable, and in fact, the recent change in the hepatotoxicity warning for the abiraterone label is significant. Further, we have many physicians that are just not comfortable concomitantly prescribing steroids for their patients that they want on NHT therapy, and they prefer XTANDI.

There's another very, very important clinical differentiation even beyond that, and those are reasons enough today that physician justification is an easy step, but certainly, as we move closer to the October timeframe and we also potentially have the TERRAIN label addition to our label for promotion, that creates another significant change in clinical profile. So we feel very strongly about this and do not believe that we will see extensive decisions of this type. And then similarly I go back to confirm that we expect we expect minimal impact to our XTANDI business because of this.

Simos Simeonidis - RBC Capital Markets LLC

Great. That's very helpful. And one final one. We're 8 to 10 weeks away from the PDUFA and you had a positive decision from Europe. Are similar types of topics brought up during your discussions with regulators? Or perhaps talk about your level of confidence that you have a similar outcome in the U.S.

Mohammad Hirmand - Interim Chief Medical Officer

Yes. So this is Mohammad. I can tackle that. So obviously, we don't go into the details of our regulatory interactions, either with the U.S. authority, FDA, or in Europe. But we remain very positive and we look forward to the completion of the assessment by the FDA on or before the PDUFA date.

Simos Simeonidis - RBC Capital Markets LLC

Okay. Great. Thank you very much.

Operator

Thank you. And our next question comes from the line of Peter Lawson with SunTrust Robinson Humphrey. Your line is open.

Peter Lawson - SunTrust Robinson Humphrey, Inc.

I guess a question for David or perhaps Marion. Just back to Simos' question around CVS, what processes do you have in place that can help reverse that decision from CVS? Or is it a matter of renegotiating in price? And is there any way you can kind of break out revenue exposure there? Is there like a 5% exposure or less?

Marion McCourt - Chief Operating Officer

It would not be appropriate for me to talk about any of the specifics of negotiation. We have a partnership with Astellas, and Astellas takes the lead on contracting and pricing.

Peter Lawson - SunTrust Robinson Humphrey, Inc.

Gotcha. Okay. And then just on the revenue exposure. Do you know where that is? Is that like a 5% level for CVS?

Jennifer Jarrett - Chief Financial Officer

It's a very small percentage of our U.S. groups flow through that formulary, so the revenue impact would be very small.

Peter Lawson - SunTrust Robinson Humphrey, Inc.

Gotcha. Thank you. And then, David, I wonder if you could elaborate on the new clinical data around talazoparib that drove up valuation? Is that something we could see at ESMO or later on in the year? Or is that kind of a 2017 event?

David T. Hung - Founder, President, Chief Executive Officer & Director

I'm not at liberty to tell you what conference new data is coming out at, but there is – there are some new data that I think are, really speak to the differentiated profile of talazoparib against other PARP inhibitors. So we look forward to making those data public. They will be later this year.

Peter Lawson - SunTrust Robinson Humphrey, Inc.

Got you. Is that your research or IST?

David T. Hung - Founder, President, Chief Executive Officer & Director

These are from different ISTs. There's one data set that's coming out relatively shortly later this year but I think it will be very interesting.

Peter Lawson - SunTrust Robinson Humphrey, Inc.

Perfect. Okay. Thank you so much. Thanks for taking the questions.

Operator

Thank you. Our next question comes from the line of Salveen Richter with Goldman Sachs. Your line is open.

Salveen Richter - Goldman Sachs & Co.

Thanks for taking my questions. Just a couple of questions. With regard to the higher gross-to-net that we've seen in the first half, I'm just wondering if you've accounted for that in guidance and how to think about this going forward into 2017 and beyond. And then with the XTANDI scripts, it looks like it's been relatively flat the last couple weeks. I just wanted some color around that. And then, finally, I think on a prior call, you'd mentioned with the TESARO study you could reevaluate the events you needed for the Phase 3 PARP breast study so just curious if you have any update here. Thank you.

Jennifer Jarrett - Chief Financial Officer

So as far as a higher GTN, so first of all, as I said, we don't expect a material change in GTN for the remainder of the year. And looking at our current business today, we don't expect a very significant change going forward either. We've seen kind of 1% to 2% increases in GTN, historically, so our current expectation is that that will continue to be the case. And as I said, the driver of the higher GTN was really two factors. One was just a shift in payer mix to a relatively small patient segment for us, but it's a heavily discounted segment, so even just a small shift in a small patient segment had a fairly significant impact on the GTN and the other was related to a one-time increase in distributors fees. So these are not things that should continue to increase going forward.

Marion McCourt - Chief Operating Officer

I think that the next part of the question – this is Marion. I'll take the part of the question related to performance. I think first comment just as we reflect on our Q2 performance for XTANDI and our first half performance, just a quick comment that that performance in the first half represented a 22% increase versus first half of last year. As well, if I compare quarter-on-quarter, we are looking at a 7% increase in net sales quarter-on-quarter from Q1 to Q2 of this year.

As we start to take a look at the second half of the year, we are quite confident in our growth moving forward. Certainly, we are really excited about our sales force. Their track record is fabulous. We have now expanded the sales force and everyone is trained up and running and has been in their sales territories, even the newest members, for about 90 days, if not more. We're excited with what we are seeing in urology and that being a growing component of our business which carries with it increased durations, which also were very significant not only to patients here but also to business performance.

And then finally, as we start getting to the October timeframe, as mentioned previously, we look at the opportunity for our label amendments which will add in potentially the TERRAIN data and a promotional opportunity to promote versus our clinical superiority with XTANDI versus Casodex bicalutamide. So we feel very confident and quite optimistic about our performance in the second half of the year.

Mohammad Hirmand - Interim Chief Medical Officer

Yeah, and this is Mohammad. I can tackle the last part of your question regarding the potential for unblinding our breast cancer trial with talazoparib a little bit earlier. So certainly, we think that the niraparib data are very positive and especially given the fact that talazoparib is even a more potent agent. So that evaluation is ongoing right at the moment.

Salveen Richter - Goldman Sachs & Co.

Thank you.

Operator

Thank you. Our next question comes from the line of Mike King with JMP Securities. Your line is open.

Mike G. King - JMP Securities LLC

Good afternoon, guys. Thanks for squeezing me in here. Just a couple of follow-up questions from the others. I just wonder if you can speak to any appeals process or other negotiating tactic that may be available to the relationship with CVS? Not to belabor this point too long, but it would just seem once, assuming success with, on the PDUFA date for STRIVE and TERRAIN that you would have a very strong argument to – you've gone head to head with another anti-antigen which is unprecedented in the category. It seems like you have a pretty good case to present. So I just wonder if there is any kind of formal appeal mechanism for CVS?

Marion McCourt - Chief Operating Officer

Mike, this is Marion. Thank you for the question, and I cannot comment on appeals process.

Mike G. King - JMP Securities LLC

Okay. If I could switch then, on talazoparib, I guess Salveen asked part of the question I was thinking about, but was just curious if other than likelihood of success, if you could maybe talk about how else niraparib success changed your methodology on talazoparib?

Mohammad Hirmand - Interim Chief Medical Officer

Yeah so this is Mohammad. Maybe I can start, and David may want to add as well. So again, we really think that the niraparib data are very positive on a number of fronts. I think one of them we talked about regarding how potent this class of agents is, especially with talazoparib as a much more potent agent, the other thing that we were very intrigued by was the potential for a PARP trapper to actually work in HRD (1:12:39) negative patients as well. And again, talazoparib, this is where it really shines. We already have a robust development plan in terms of pursuing a number of tumor types around all-comers. So we really think that with talazoparib being a very potent PARP trapper, like being the most potent PARP trapper, that we can really leverage that differentiated pharmacology and hopefully translate that into the clinic in a number of tumor types, both as monotherapy as well as with a combination of low-dose chemotherapy where we see good synergies to see whether we can actually see good benefit in an all-comer patient population, which would be again the next chapter in the use of PARP inhibitors.

David T. Hung - Founder, President, Chief Executive Officer & Director

Yeah. And I think that also the point we've made, the two mechanisms by which PARPs work is through either enzymatic inhibition or PARP trapping, and we've cited the literature as you know, that compared to olaparib, the AZ drug, niraparib is actually 10 times weaker at enzymatic inhibition. And yet if you look at the clinical data from NOVA, to have a 21-month PFS in the drug arm for niraparib compared to eleven months in the drug arm for olaparib, it really makes the point, we think, that enzymatic inhibition is not the key to the castle, and the only other difference between those two drugs is that niraparib is a better PARP trapper. So we do think that speaks to the importance of PARP trapping and we also think that given the fact that talazoparib is 50 times better than even niraparib at PARP trapping, I think that opens up a lot of opportunities for us.

The other thing you can notice if you look at the niraparib data set in just the adverse event rate, and we think that the talazoparib adverse event rate compares very favorably to the niraparib adverse event rate and we've made the point several times that if you look at the specificity of talazoparib for PARP 1 and 2, it appears to be the most selective of the PARP inhibitors and we believe that that may play a significant role in its tolerability profile. So to have by far the best PARP trapper and the most specific PARP we think is going to open up a lot of opportunities for us and that's why we intend to really pursue this asset and develop it in as many indications as we can.

Mike G. King - JMP Securities LLC

All right. Great. Thanks for that thorough answer. And then just quickly, finally, I just want to be sure you guys feel like you're appropriately investing in the business. I understand that there are certain exigencies about transferring your spend from clinical trials to marketing, but I guess the sequentially lower SG&A has me a little bit concerned that maybe you guys aren't investing appropriately in the business. So maybe you can help alleviate any concerns I might have there? Thank you.

Jennifer Jarrett - Chief Financial Officer

There's really two drivers of the quarter-over-quarter decline. One was just a reduction in spend on some of our early-stage discovery programs. So that was one component of it. A second component was a reduction in chargebacks related to Astellas' R&D spend on XTANDI. So it's a little bit of a one-time event, and you will see R&D ramp up starting in Q3 as a result of both talazoparib and XTANDI.

David T. Hung - Founder, President, Chief Executive Officer & Director

Yeah, I would reiterate. We are not cutting back on talazoparib spend. We are developing this in six different tumor types. We've got five trials and four indications starting this year and we intend to pursue two more large indications, GBM and non-small lung next year. So we're investing pretty thoroughly in this asset.

Mike G. King - JMP Securities LLC

Okay. Great. Thanks again, guys.

Operator

Thank you. And our next question comes from the line of Eric Schmidt with Cowen & Co. Your line is open.

Eric Schmidt - Cowen & Co. LLC

Hi. Good afternoon, and thanks for taking my questions. Maybe just for Jen. Even before the CVS issue it looks like your net pricing was down about 7% on a year-on-year basis. We're accustomed to seeing net pricing move the opposite direction in oncology, so I know you said this was a payer mix issue, but is there some sort of discounting that's going on? Or what actually drove that year-on-year decline?

Jennifer Jarrett - Chief Financial Officer

There's no discounting. What I would say is yeah, year-over-year is a little bit tough because last year we took a price increase in March. This year we took it in June, so we lost about three months of the price increase. Our Q2 GTN last year was sort of abnormally low, but Q2 and Q3, so the year-over-year comp was a little bit difficult from that perspective. But there's really not much going on other than the two factors that I mentioned, that really accounts for the majority of the increase in GTN that we observed.

Eric Schmidt - Cowen & Co. LLC

Thank you. And then for Marion, you gave a bunch of leading indicators for why you're pleased, I guess, with the sales force expansion and the greater focus in urology. That's great. But when would you expect us to see an actual sort of growth in prescription trends? We haven't seen a lot of growth in scripts of late.

Marion McCourt - Chief Operating Officer

Right. I gave the numbers previously for the performance comparing Q2 to prior year and first half to first half. What I would point to in terms of ongoing inflection points is the continued effort of sales force now in market. Traditionally you would expect to see the expansion teams' full effort come on board as we move into the latter portion of the third quarter, and certainly our plan was always to make sure that we were fully prepared for the TERRAIN launch which will occur in the fourth quarter.

But as I go back to, I do want to reemphasize the other points that I made related to fundamental growth drivers that we have currently in place related to performance with urology, our base of oncology, the fact that we're seeing a step change in duration right now is very, very significant. That we're seeing mean retrospective at nine months and now 25% of our patients retrospectively at 13.7 months; that combined with a promotional effort in market not only from our sales force expansion, which I commented on, but also the increment of the Astellas sales force that is also going to be promoting with an experienced team in urology. So the expectation would be to see all of that coming together, combined with TERRAIN in fourth quarter, in the second half of the year.

Eric Schmidt - Cowen & Co. LLC

Thank you.

Operator

Our next question comes from the line of John Newman with Canaccord. Your line is open. If your phone is on mute, please unmute.

John Newman - Canaccord Genuity, Inc.

Hey, guys. Sorry about that. Thanks for taking the question. I just wondered, you may have quantified this on the call already, but what percentage of the second quarter growth versus the first quarter was inventory? And then if there were any negotiations or discussions on discounts and rebates for XTANDI in the U.S., would Astellas be responsible for those? And the finally, I just wondered if you had built the potential label expansion in the U.S. into the 2016 guidance or if that's not in there. Thanks.

Jennifer Jarrett - Chief Financial Officer

So in terms of the quarter-over-quarter grade (1:19:58) just over 3% of that was underlying demand. The bulk of the rest of that was inventory movement. There was a little bit of an impact from GTN because our GTN was just a tiny bit higher in Q2 relative to Q1 because we had a one-time benefit to our Q1 GTN related to the reversal of a prior period accrual but like I said the bulk of that was inventory movement.

Marion McCourt - Chief Operating Officer

I want to go to the last portion of your question and yes, anticipation of TERRAIN inclusion in the label is anticipated in our full-year guidance. And then I wanted to ask you to please repeat the kind of the middle question related to contracting. I'm not sure if I caught that completely.

John Newman - Canaccord Genuity, Inc.

Sure. Sorry. So if there were negotiated on discounts and rebates with the payers for expanding in the United States I'm just wondering if that would be conducted by Astellas. Thanks.

Marion McCourt - Chief Operating Officer

That is correct. Yes. Astellas would conduct the negotiations and place contracts.

John Newman - Canaccord Genuity, Inc.

Great. Thank you.

Operator

Thank you. And our last question comes from the line of Biren Amin with Jefferies. Your line is open.

Biren Amin - Jefferies LLC

Yeah. Thanks for fitting me in, guys. Just on the duration trends that you're seeing, David, for April and May. Can you share what the duration trends were for June for XTANDI? And also given the inventory stocking in Q2, would you expect inventory de-stocking in Q3?

David T. Hung - Founder, President, Chief Executive Officer & Director

I'll take the first part. So I would – we don't have the June data yet so I can't comment. What we put out there is what we have last. But I will say that we were a bit surprised by how much acceleration there appeared to be since we crossed the market share with abiraterone and we made the point before that you're either first or you're second. And if you're first, if you look at first time use and especially in the urology setting, if you look at just time it takes to progression for TERRAIN and STRIVE, it's somewhere between 19.4 months and 25 plus months.

So and if you look at – I think we cited nine previous studies where one androgen receptor antagonist – or androgen signaling inhibitor has been used behind another, whether it's abi after enzo or enzo after abi and you get like three months or less. So there's a big difference from being first and we made the point many times that once you're first, we expect that duration to increase significantly. Think about the up slopes that we're seeing now with this last May number is consistent with that and clearly we look forward to future months. But there's a big difference between 19 plus to 25 plus months and three months. So getting more than 50% market share is a really important metric.

Jennifer Jarrett - Chief Financial Officer

And then just as far as inventory movements, inventory drawdown was actually in Q1. So when you look at the Q1 to Q2 growth you just have to factor in the inventory drawdown that occurred in Q1. In Q2 our inventory was stable. It will be stable Q3. And then Q4 will likely see another build-up of inventory that again will contribute to revenues consistent with what we've seen in prior years.

Biren Amin - Jefferies LLC

Got it. And then just a question on pidilizumab, how many of the nine patients in the Phase 1/2 trial that you reported received radiation therapy?

David T. Hung - Founder, President, Chief Executive Officer & Director

I would – I don't have that information on top of my head.

Biren Amin - Jefferies LLC

Great. Thank you.

Operator

Thank you. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a wonderful day.

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