BioDelivery Sciences' (BDSI) CEO Mark Sirgo on Q2 2016 Results - Earnings Call Transcript

| About: BioDelivery Sciences (BDSI)

BioDelivery Sciences International, Inc. (NASDAQ:BDSI)

Q2 2016 Earnings Conference Call

August 09, 2016 08:00 AM ET

Executives

Al Medwar - SVP Corporate and Business Development

Mark Sirgo - CEO

Ernie De Paolantonio - CFO

Analysts

Tim Lugo - William Blair

Scott Henry - ROTH Capital

Ken Trbovich - Janney

Ed White - FBR & Company

Matt Kaplan - Ladenburg Thalmann

Chiara Russo - Cantor Fitzgerald

Operator

Please standby we are about to begin. Good day, and welcome to the BioDelivery Sciences Second Quarter 2016 Earnings Call. Today's conference is being recorded.

At this time I would like to turn the conference over to Al Medwar, Senior Vice President of Corporate and Business Development. Please go ahead, sir.

Al Medwar

Good morning, and welcome to the BioDelivery Sciences second quarter 2016 earnings conference call. Leading us through the call today are Dr. Mark Sirgo, President and Chief Executive Officer, and Ernie De Paolantonio, Chief Financial Officer. A question-and-answer session will follow prepared remarks from Mark and Ernie.

I'll now read the company's Safe Harbor statement. Certain statements of BDSI's management made during today's call or in responding to questions and any other public documents of BDSI or statements of its management may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on management's current beliefs and assumptions about the future, but are not statements of fact and therefore involve and are subject to significant risks and uncertainties.

Forward-looking statements may include, without limitation, statements with respect to BDSI's plans, objectives, projections, expectations and intentions and other similar statements about the future. Forward-looking statements are typically identified by words such as projects, may, will, could, would, should, believes, expects, anticipates, estimates, intends, plans, potential, or similar expressions. These statements are based upon the current beliefs and expectations of BDSI's management and are subject to significant risks and uncertainties, including those detailed in today's conference call, as well as BDSI's filings with the Securities and Exchange Commission. Please note that actual results, including, without limitation, results of the commercial launch of BUNAVAIL and BELBUCA and the clinical trials for and FDA review of BDSI's products in development, may differ significantly from those set forward in the forward-looking statement.

The risks and uncertainties relating to forward-looking statements are also subject to change based on various factors, many of which are beyond BDSI's control. BDSI undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable law. You're advised to review BDSI's SEC filings for risk factors that could impact BDSI's ability to achieve these goals described in the forward-looking statements.

And with that I'll turn the call over to Mark Sirgo. Mark?

Mark Sirgo

Thank you Al. Good morning, everyone and thank you for joining BDSI's second quarter 2016 financial results conference call. The second quarter was one of important progress on multiple fronts for BDSI, and, most importantly BUNAVAIL. We remain confident that we have the right plan in place for BUNAVAIL and, as I will cover in more detail this morning our focus is on bringing BUNAVAIL to profitability by the end of 2017, a goal hopefully you will see as realistic and achievable.

As you will recall on our first quarter call in May we laid out a series of decisive actions aimed at proactively addressing the challenges of BUNAVAIL in the near term without sacrificing the product's longer term growth potential. On today's call we will provide you with an update on how we are progressing with each of these initiatives. In addition I'll give you a brief update on the progress Endo is seeing as it proceeds with the launch of BELBUCA.

I will then provide you with a quick update on our pipeline development activities and review our financial outlook for the remainder of this year and into 2017. Finally, we'll discuss our growth drivers for the next six to nine months. Then I'll turn things over to Ernie to go over the details of our financials for the quarter. Following that we'll take your questions.

So let me begin with BUNAVAIL, as I just said, the strategy we are pursuing for BUNAVAIL is focused on progressing the product to profitability by the end of 2017. So how do we get there? First, with the efficient deployment of our resources that is bringing our expenses more in line with revenue. Second, we need to increase patient access which includes using our Tennessee diversion data to help secure additional managed care contracts, driving more patients to BUNAVAIL behind the recent cap increase approved by Health and Human Services, and by increasing patient demand through our direct-to-patient program. Third and finally, through improving our operating margins.

Now let me review our scorecard for each of these initiatives for the second quarter. First, as it relates to the efficiently utilizing resources, we successfully completed the transitioning of our top-performing sales representatives from Quintiles to BDSI employees in May. As you will recall from our last call we also reduced the number of sales territories we are covering in order to focus on the most productive and visible growth areas in the country. Additionally, we decreased our marketing expenditures to focus on initiatives that have demonstrated a favorable impact on sales such as our speakers program. Following this restructuring, our current sales force now covers 85% of the overall market. These adjustments will lead to a $20 million savings over the next six quarters. Importantly, this reduced cost structure we did not see a falloff in prescription sales for Q2 nor so far in Q3 compared to Q1. And at this point in the process we now expect our representatives covering these top territories will not only maintain their existing business but continue to add new prescribers that will support future prescription growth.

We anticipate growth in these territories to be also driven by our BUNAVAIL growth initiatives, behind a Health and Human Services cap increase, our direct-to-patient or DTP program, both of which I will review momentarily. With our new structure in place we estimate that we will need to reach an annual run rate of approximately 4,300 prescriptions per week to achieve BUNAVAIL profitability. This means we need approximately an incremental 2,000 prescriptions from our current prescription level to reach this goal. Importantly, we believe we are already halfway to this achievement of 2,000 additional prescriptions based on anticipated prescriptions we believe we will secure from recent managed care contract wins alone. That figure does not include potential additional prescriptions and any gained from organic growth, the increase in the patient cap, our direct-to-patient program, or other future managed care contract wins through the end of 2017.

With that, let me review the two important managed care wins we just received and the impact these are expected to have. The first significant new managed care contract we secured was announced a couple of weeks ago and is scheduled to begin on January 1st, of next year. However, we anticipate the impact from it will begin a bit sooner as patients begin to transition from the market leader, Suboxone which will now move to a non-preferred position, to either BUNAVAIL or Zubsolv.

Now, subsequent to that win we have secured a second contract which we are announcing today that went into effect in July. Their second managed care plan is a significant player in two states where we already have a very strong presence. They now place BUNAVAIL in a preferred position alongside the market leader. The other branded product in the category is moving to non-preferred status, which is another positive for BUNAVAIL. And importantly, the majority of these prescriptions under both of these plans are commercial, where we typically have better margins versus Medicaid.

A final important note is that BUNAVAIL was non-preferred in both plans previously. These two new managed care contracts represent important opportunities for BDSI and will play a significant role in moving BUNAVAIL to profitability by the end of 2017. We also believe this illustrates the effectiveness of our managed care strategy that that we anticipate will continue.

Now let me move to some second quarter metrics starting with the sales of BUNAVAIL. BUNAVAIL prescription sales remained stable from first to second quarter. However, overall unit sales, meaning the number of films dispensed, increased by 2%. Although seemingly a small increase, these sales were achieved in light of the sales force reduction that took place in May. Therefore we are pleased with this outcome. Also, compared to the same period last year, BUNAVAIL film unit sales nearly doubled. In addition over 3,300 physicians have now prescribed BUNAVAIL as we added 364 new prescribers during the second quarter.

Now let me go back to the important initiatives underway that we believe will help contribute to BUNAVAIL's profitability by the end of 2017. I've already detailed two of them the reduction in commercial spending and the managed care contract success we've achieved in second quarter. But let me spend another minute on our managed care accomplishments before moving on from the initiatives. I want to reiterate that our experience with BUNAVAIL in the state of Tennessee, because that experience is applicable to other states and commercial plans. To support this, in June, at the International Conference on Opioids, our Tennessee conversion data was presented by Dr. Richard Soper, who's the Chief of Addiction Medicine for the Center for Behavioral Wellness in Nashville, Tennessee. The data was subsequently presented by the Pharmacy Director from Tennessee Medicaid at a national meeting of Medicaid pharmacists.

To remind everyone, these data show that prescriptions of Suboxone decreased from weekly consistent peak of more than 1,600 prescriptions to less than 200 within one month of the switch, while BUNAVAIL prescriptions increased from a low of 19 to approximately 600. This approximate 63% reduction in overall buprenorphine naloxone prescriptions in the plan remained throughout the measurement period, which resulted in a savings of approximately 14 million in the state budget. This significant decline in buprenorphine naloxone prescriptions is largely attributed to diversion.

Now, since presented at these two forums, these data have generated discussions between BDSI and several new states, and, in addition, are part of the decision being considered by a number of states whereby BUNAVAIL can be placed in a preferred or exclusive position this year. Unfortunately for a variety of reasons, final decisions have been delayed by some of the states that we shared with you in May until later in the year. Therefore we'll keep you posted on any new developments around these.

Another key to getting BUNAVAIL to profitability and beyond is the change the Department of Health and Human Services or HHS, recently announced that will allow eligible physicians to treat up to 275 patients with buprenorphine for opioid dependence from the previously allowed 100-patient limit. This change took effect yesterday, August 8.

Now, to increase their limit, physicians have to submit their request form and have it approved, which can take up to 45 days. Based on this increased cap HHS estimates that an additional 90,000 new patients could come into these practices in the first 12 months, which could equates to over 0.5 million new prescriptions per year. Importantly, the plan also necessitates that the providers affirm that they have a diversion control plan in place to minimize the risk that treatment will be misused or diverted. This aspect could be particularly favorable for BUNAVAIL, given that our product contains the least amount of buprenorphine per dose, that is putting less drug on the street and a delivery system that is difficult to alter for illicit use thus making it potentially of lower street value and less likely to be diverted. We believe the impact in the marketplace from the cap lift will begin in the fourth quarter of this year, but the full impact will not be realized until 2017 and beyond. An important reminder is that many of these patients will be new to therapy and are not influenced by prior Suboxone use which is a patient group where we have had our greatest success up to this point in our launch.

Also supporting further prescription growth in this category, last month the President signed the Comprehensive Addiction and Recovery Act or CARA, as it's commonly called. This further expands access to care including allowing nurse practitioners and physician assistants to prescribe buprenorphine for opioid dependence. The ability of NPs and PAs to prescribe buprenorphine for opioid dependence opens up the opportunity for a significant number of new prescribers, which are sorely needed and could be particularly important to BUNAVAIL, because again these are practitioners that may not be quite as biased in their prescribing habits and may be more open to new treatment options such as BUNAVAIL.

Overall, significant progress has been made this past quarter to address the national opioid epidemic and the limitations on access to care and treatment with buprenorphine. We believe that the entry of new patients into the market based on these government initiatives could particularly be a good opportunity for a product with the benefits of BUNAVAIL and we will be focusing efforts in these practices that we believe are in position to expand in the coming months.

Our fourth growth driver involves focusing on improving patient awareness of BUNAVAIL. As we said on our last call, we have initiated in four geographic areas a highly targeted, BUNAVAIL-focused, direct-to-patient digital advertising campaign. This pilot program began at the end of the second quarter. While it's too early to assess its impact particularly its impact in increasing the number of prescriptions, we are encouraged by early signs demonstrating that the program is driving meaningful interest in BUNAVAIL, as evidenced by the more than sevenfold increase in visits to bunavail.com in the test markets since the program was initiated in late June.

We've also seen our social media engagements that is interactions, likes, comments, etcetera, grow to 10,000 engagements per week. Measures of the performance of the campaign that assessed the ability of the advertisements to capture the attention of the reader and to encourage the reader to seek additional information such as click-through from the ad to the website or other sources of information on BUNAVAIL is also at or above pharma industry benchmarks. However, the true effectiveness of this initiative will be measured by the ability to drive prescription growth by the end of this quarter which we will analyze at the end [indiscernible]. But at this stage we are certainly increasing the awareness and visibility of BUNAVAIL among patients in these test markets which we believe is important to the success of BUNAVAIL.

Now, in addition to reducing commercial expenses related to BUNAVAIL and executing on initiatives to drive prescription growth, we are also focused on further improving our operating margins. To this end in the second quarter our new high-speed packaging equipment went online and allowed us to decrease cost of goods sold by 16% versus the first quarter. And we anticipate that these cost reductions will continue through the end of 2017 of up to another 30%.

Additionally, we remain focused on improving our net profitability for BUNAVAIL. In the second quarter our net revenue per prescription improved from $72 per prescription to $74. Now, while we still face significant challenges with BUNAVAIL we are encouraged by the early results of our consolidated and highly focused commercial effort and growth initiatives. So, in summary we have seen a number of positive signs for BUNAVAIL this past quarter and have initiatives in place to support future prescription sales growth including new managed care contracts driven by BUNAVAIL's product benefits in our anti-diversion platform, the lifting of the physician patient cap and future expansion of the prescriber base to include PAs and NPs, and promising potential impact of our direct-to-patient initiatives. Together, these drivers of prescription growth along with the actions taken to bring our commercial expenses more in line with our revenue and the improvement of our operating margins for BUNAVAIL should allow us to move this product to profitability by the end of 2017. Now, this concludes my formal remarks on BUNAVAIL.

Let me briefly move on to Endo's BELBUCA launch. This has been a challenging time in the pain space as healthcare providers continue to adapt to the CDC guidelines and increase the tension over the use of opioids. However, despite this, Endo continues to make solid advances with BELBUCA launch, making good progress with payers, with 85% of patient lives covered while 70% of those lives are unrestricted and also increasing prescriptions, and along with growing the number of repeat prescribers. BELBUCA prescriptions grew to over 1,300 last week which is an all-time high.

Now, Endo continues to focus on accelerating the launch and remains fully committed to BELBUCA. As a matter of fact, on their earnings call last night they indicated they are actually increasing investments in new promotional efforts behind BELBUCA based on feedback from the marketplace since launch. I was also fortunate to have the opportunity to spend some time in the field with a BELBUCA representative very recently and I was pleased at the genuinely positive receptivity to BELBUCA and the favorable outcomes from those prescribing it. The analgesic needs of patients are being met, and that includes both opioid-naive patients and patients being switched from C2 opioids. There also seems to be favorable receptivity to the film which is always encouraging with a new dosage form in a traditionally tablet marketplace.

So at this time of increased focus on the problem of opioid misuse, abuse and addiction, BELBUCA has the opportunity to play an important role in the treatment of patients with chronic pain who require around-the-clock opioid treatment. We look forward to the continued growth of BELBUCA as we move through the second half of this year and particularly in 2017.

Okay, let me now move on to our own pipeline, beginning with clonidine topical gel for the treatment of painful diabetic neuropathy. We are pleased with the progress we're making with the Phase 2b clinical study and as we announced last week, we've reached our target number of patients for randomization and expect to have top-line data prior to the end of the year, which is well ahead of schedule. And this is a tribute to the excellent work done by our clinical team with site selection and site management. And as I've said previously, we believe this is a market with a high unmet need and a significant market opportunity. Sales of current products for the treatment of neuropathic pain total over 3 billion in the United States. And should we be able to meet the study objectives we believe clonidine topical gel could play a very important role as the first topical product for the management of this painful condition. This is also an asset that had previously gathered significant interest from potential partners, both inside and outside the U.S. As such, we would reengage these interested parties around a licensing opportunity, particularly outside the U.S., if we have a positive outcome with this Phase 2b study.

In regards to our 30-day sustained release buprenorphine injection, we are making progress with this formulation and now the compelling preclinical data demonstrating the ability to provide therapeutic plasma levels of buprenorphine out to one month. As a reminder, this product is being developed for both pain and opioid addiction, where the biggest challenges that this dosage form could potentially overcome for current buprenorphine dosage forms are compliance and divergence.

We are now completing a preclinical study to characterize the time for elimination of the formulation polymers at the injection site beyond the 30-day period of buprenorphine exposure as requested by FDA during our pre-IND meeting. The FDA also requires demonstration of a minimum toxic dose in animals, this study is also underway. The completion and analysis of these two studies will determine the timing of our IND submission. However, we don't expect this submission to have an impact on the overall development timeline, as we continue to move forward with the activities to support the initiation of the first-in-man study in the fourth quarter of this year.

Finally, let me provide you with an update on ONSOLIS. During the second quarter we signed a licensing agreement under which BDSI granted the exclusive rights to develop and commercialize ONSOLIS in the U.S. to Collegium. Collegium will be responsible for the manufacturing, distribution, marketing and sales of ONSOLIS in the U.S., both companies are collaborating on the ongoing transfer of manufacturing which includes submission of a prior approval supplement to the FDA. On the approval of the supplement the NDA and manufacturing responsibility will be transferred to Collegium. Under the financial terms of the agreement BDSI receives a $2.5 million upfront nonrefundable payment and receives another 4 million upon the first commercial sale of ONSOLIS in the U.S.

In addition, we're eligible to receive up to 17 million in potential payments based on the achievement of performance and sales milestones as well as an upper teen royalty on net sales, keeping in mind that our previous commercial partner, Meda shares in a significant portion of these proceeds, placing the target in return to the market for ONSOLIS in mid-2017. Now let me briefly turn to the financial outlook for the Company. We continue to believe that under our current operating plan our cash runway extends into the third quarter of 2017. As such at this time we have no immediate plans to raise any additional capital.

So let me summarize by focusing on our key value drivers over the next several quarters before turning things over to Ernie. For BUNAVAIL we are focused on bringing this product to profitability by the end of next year. And as I mentioned earlier, this is an important, clear, meaningful and realistic objective. To reiterate, our plan for accomplishing this includes our reduced commercial expenses of 20 million through the end of 2017 while driving prescription growth by securing new managed care contracts, attracting new patients resulting from the cap lift and from our direct-to-patient program, while we improve operating margins. And as you just heard, the plan for BUNAVAIL profitability is already taking shape and we are confident that we will report further progress in the second half of this year towards this critical objective. In addition to the progress we're making with BUNAVAIL, we remain extremely optimistic about Endo's BELBUCA launch and its prospects for continued growth which was clearly stated in their earnings call last evening.

Buprenorphine represents an alternative to the widely abused, misused and diverted C2 opioids that are so prevalent in today's society. [Indiscernible] our own pipeline remains on target to meet our objectives for this year and in 2017. And, finally, we remain in strong financial position, with a cash runway that extends into the third quarter of next year.

So with that I will turn things over to Ernie, and then we'll come back and take your questions. Ernie?

Ernie De Paolantonio

Thank you, Mark. Good morning, everyone. I will now review our key financials for the quarter ended June 30, 2016. For a more thorough review of our second quarter financial results, please see our 10-Q, which we will file this morning. Before we get into the numbers I have one reminder and then one new accounting item to share.

First as a reminder, BUNAVAIL revenue was based on third-party pull-through data that we receive on a one-month lag basis. For the second quarter of 2016 BUNAVAIL revenue includes the months of March, April and May, but not June. Second is a new item involving BELBUCA revenue which was based on data from the first quarter launch and was de minimus and fully offset by deductions associated with distribution and stocking fees related to the launch and resulted in no net royalty to BDSI. Importantly, this is a launch event and not expected to have a material effect going forward. We expect to receive a BELBUCA royalty in the third quarter and beyond. The royalty booked in the third quarter of 2016 will be based on second quarter 2016 actual BELBUCA sales. Also keep in mind, we did pay one-quarter in arrears on our BELBUCA royalty.

Total net revenue for the second quarter of 2016 totaled 5 million, and consisted of 2.1 million of BUNAVAIL revenue, 2.5 million from the upfront payment from Collegium Pharmaceutical for the licensing rights to ONSOLIS in the U.S., and 0.4 million of royalty revenue for BREAKYL. It's important to note that a significant portion of the milestones and royalties that we will receive on ONSOLIS in the U.S. are based on the -- are subject to the royalty agreement with Meda. As such, Meda will be paid their portion of the upfront payment during the third quarter. Net revenue for the second quarter of 2015 was 1.7 million and included 0.8 million of BUNAVAIL and 0.5 million of royalty revenue from the sales of BREAKYL.

Operating expenses for the second quarter of 2016 were 16.5 million, including 3.4 million of noncash-related stock compensation expense versus 17.8 million, including 4.2 million of noncash related stock compensation expense for the second quarter of 2015.

Sales and marketing operating expenses in the second quarter of both 2016 and 2015 were $6.5 million, with 2016 expenses including the digital direct to patient marketing program for BUNAVAIL and the onetime expense for the conversion of the sales force from Quintiles in May. As such, the savings from our BUNAVAIL commercial expenses secondary to the consolidation that will total approximately 20 million through the end of 2017 will be approximately 3 million per quarter beginning in the third quarter and continuing through the end of 2017. General and administrative expenses for the second quarter were 6 million, including legal accounting and other professional fees, versus 6.7 million in 2015. And R&D expenses for the second quarter were 4 million and 4.5 million for 2016 and 2015, respectively.

Net loss for the second quarter ended June 30, 2016 was 16.5 million, or $0.31 per diluted share, compared to $19.2 million, or $0.37 per diluted share in the second quarter of 2015. Net loss excluding stock compensation expense of $3.4 million was $13.1 million, or $0.25 per diluted share, in 2016, versus $15 million, excluding the $4.2 million of stock compensation expense, or $0.29 per diluted share, in 2015.

Now for second quarter BUNAVAIL financial highlights in more detail. With BUNAVAIL net revenue in the second quarter $2.1 million, or similar to that of our first quarter, for the second consecutive quarter there was meaningful growth in BUNAVAIL net revenue per script, which increased to $74 from $72 reported in the first quarter and is significantly higher than our estimate of the upper $60s that we produce during the first quarter call. This reflects the increase in more profitable mix of sales from the commercial and cash sectors. As for the cost of manufacturing, again, quarter over quarter our unit cost of BUNAVAIL production decreased by 16% due to the use of our recently introduced high speed packaging equipment. We anticipate that the cost reduction will continue as we work on other programs and initiatives that will drive cost out of the manufacturing process by as much as an additional 30% by the end of 2017. BUNAVAIL gross profit in the second quarter also increased for the second consecutive quarter, where there was an improvement of nearly 200% versus the first quarter of 2016. This reflects the improvement in our overall cost structure.

Now turning to our financial results for the six months ended June 30, 2016, where revenue totaled $8 million, including $4.2 million of BUNAVAIL revenue, $2.5 million from milestone payment from Collegium, and $1.3 million of royalty revenue for BREAKYL versus 2015 six month revenue of $14.8 million, which consisted primarily of $11.8 million related to BELBUCA, including the $10 million milestone for the FDA acceptance of the NDA as well as $1.8 million of R&D reimbursement revenue.

Net revenue for BUNAVAIL for the first half of 2016 was $4.2 million and a substantial increase versus 2015 BUNAVAIL net revenue of $1.5 million. For the six months ended June 30, 2016, operating expenses were $34.9 million, including 7.5 million of noncash-related stock compensation expense versus 37.5 million including 7.7 million of noncash-related stock compensation expense for 2015.

Sales, marketing and other commercial expenses for both 2016 and 2015 were 13 million. General and administrative expenses were 12.5 million and 13.4 million for 2016 and 2015, respectively, while R&D expenses were 9.4 million in 2016 compared to 11.5 million for 2015. Net loss for the six months ended June 30, 2016 was 35.2 million or $0.66 per diluted share compared to 27.4 million or $0.53 per diluted share for the six months ended June 30, 2015. 2016 net loss excluding the 7.5 million of noncash-related stock compensation expense was 27.8 million, or $0.52 per diluted share. This is compared to 19.7 million or $0.38 per diluted share excluding 7.7 million of noncash-related stock compensation expense for 2015. The difference in the six month year-to-date earnings year over year is due to the $10 million milestone received from the BELBUCA NDA acceptance in 2015 offset somewhat by lower operating expenses in 2016.

Finally, our cash balance of 57.5 million at June 30th, represented an 11.9 million net cash reduction and our Q1 ending balance is 69.4 million. With the reduction in commercial operating expenses going forward announced on the first quarter earnings call we expect our cash will extend into the third quarter of 2017 based on current operating plan and objectives.

Now let's turn it back over to Mark for the Q&A session.

Mark Sirgo

Thank you, Ernie. I'll turn it over to the operator for the questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And we will take our first question from Tim Lugo with William Blair.

Tim Lugo

Congratulations on the progress of BUNAVAIL on a new payer contract. For the net revenue per script of $74, should we expect that metric in Q4 to be improving, and as the major contract kicks in 2017 where do you think that should be trending over the next few quarters?

Ernie De Paolantonio

Yes, we do expect that metric is going to improve as we move into the more profitable commercial and cash sales. And the new contracts will also continue to improve that metric going into 2017.

Tim Lugo

Oh, great to hear. And the contract announced, I guess, or disclosed this morning, can you give us some more flavor around how many covered lives, how impactful you believe the contract will be, maybe, and the timing of that impact? Are we going to start to see some scripts soon, or should we expect kind of a ramping through Q4?

Mark Sirgo

Yes, hi Tim, this is Mark. Let me take that one. Yes, we expect it to be ramping into Q4. So, the fact is the product that was move to non-preferred, these patients can remain on that for a given period of time, so it won't be an immediate, necessarily immediate impact, but it also gives us an opportunity to get in these offices where we really haven't had the opportunity because we weren't on this plan before. So, good opportunity for us. We should start to see things in the fourth quarter from it. It's focused on two states, as I mentioned, where we have a very strong presence already. So we expect to do reasonably well here. But we're not giving any guidance or talking about the number of lives covered as of yet. We'll put that information out going forward.

Tim Lugo

Okay. And the it sounds like there might be some states that are also looking to make a decision, potentially. It sounded like maybe earlier in the year they were expecting to make a decision, then pushed it into Q4. I guess should we be expecting some additional announcements, like the contract signed today, or the contract that was closed today?

Mark Sirgo

Yes, Tim. I think I'm comfortable in saying I expect that we'll see additional contract or contracts before the end of the year. I'm not prepared to talk about those right now. But there's a number of them both on the state Medicaid side and on the commercial side that we're in discussions with. And we expect those to provide additional contracts prior to the end of the year. So we would expect to have more announcements to make. But some of these just have a way of getting delayed for a variety of reasons, as I mentioned in my formal remarks.

Tim Lugo

Understood. Thanks for the questions.

Operator

And will take our next question from Scott Henry with ROTH Capital.

Scott Henry

I guess starting on BUNAVAIL, and you've probably kind of answered this already, but I'm just going to directly ask it a little, as well. When as we watch these script prescription data from week to week, when will you expect to start seeing a visible inflection point?

Mark Sirgo

Hey, Scott. This is Mark. Well, as I just mentioned in the last question, I think from the plan that we just announced this morning we'll start to see a slow ramp of that in the fourth quarter. The plan we announced a couple of weeks ago doesn't really have its major impact until January 1. So, I hate to say that you're not going to see a major inflection until then, because it really depends on a couple of these others that we're in discussions with now that could have an impact later this year.It's tough to answer that question right now, but I do expect to see some improvement in fourth quarter, and certainly in the first quarter of next year, based on current plans under agreement. But that could change in a positive way, and we'll obviously make those announcements as it's appropriate to do so in the remainder of the year.

Scott Henry

Okay, that's helpful. Thanks, Mark. And then I guess a question for Ernie, with regards to the cost savings on BUNAVAIL, when I look at the quarterly numbers obviously the COGS jumped significantly in Q2. Should I expect that to drop back down in Q3, or is this a volume situation where you need the volume to catch up? Just trying to get a sense of how to look at that COGS line going forward.

Ernie De Paolantonio

Hi, Scott. It's Ernie. Good morning. Don't forget that if you're looking at that total COGS line that includes all of our royalty revenue, including the royalty revenue that's due to Meda. That's not just our cost of sales.

Scott Henry

Okay. So if you took in that $2.5 million milestone, would you pay some of that out through the COGS line?

Ernie De Paolantonio

That's where it's captured.

Scott Henry

Okay. All right. That makes sense then.

Ernie De Paolantonio

That's part of royalty revenue, which totals up into COGS. But to answer your question on BUNAVAIL COGS, we do continue to see improvement going through the end of the year, another significant improvement, and then through the first half of 2017, as we said in our script, another additional 30% going forward. So if you're just capturing the BUNAVAIL cost of sales, that piece of it we'll be defining on a per-unit basis going forward.

Scott Henry

Thank you, Ernie. Mark, I guess, I don't know if this question has come up recently, but are there any opportunities to perhaps think about leveraging this BUNAVAIL sales force, bringing in new products to leverage across these individuals?

Mark Sirgo

You know, Scott. It's a good question. When we made the decision to consolidate back in May, we really redirected everyone's attention on BUNAVAIL. And I think that's where it's going to continue to be for the next several quarters, particularly behind these managed care wins because we've got opportunities now behind them that we didn't have before. We've got offices that there really wasn't a purpose to be in before and now there is. So I think for the foreseeable future we're clearly focused on just driving BUNAVAIL sales. Now, we've always been opportunistic as a company, so if something would happen to come along that might fit into what you're describing, we'd certainly consider it. But there isn't an ongoing program right now to do so.

Scott Henry

Okay thanks Mark. And then final question, and I think you touched on this a little in your prepared remarks, Mark, but when you've talked to the people over at Endo and receive some of their early response on BELBUCA, how has that response been with regards to how patients are dealing with the film versus a more traditional delivery mechanism? And I'm just trying to get any color on that that you would have.

Mark Sirgo

Yes, it's a good question. And Scott, I mean I've been pleasantly surprised, because typically, although we didn't see any issues with ONSOLIS with the film utilization, with BUNAVAIL we were hearing feedback initially about gumminess, difficulty sticking, all those types of things, which in retrospect I question the legitimacy. But here we literally have heard very little if anything negative about the film. So it's been very well received, as I said in my remarks, and I've been in the field, so has Al, and I've asked that very question, expecting to have some concern or pushback on it, but absolutely nothing to this point. So it's very, very encouraging, needless to say, at this point in the launch.

Operator

And we will take our next question from Ken Trbovich with Janney.

Ken Trbovich

Ernie, I guess a question I've got really pertains to the recognition of the next milestone in terms of the revenue recognition. Can you help us with that as it relates to ONSOLIS and the $4 million payment? Is that something we should see in the onetime or deferred and recognized over future periods?

Ernie De Paolantonio

That's a onetime revenue recognition that will occur during the launch of ONSOLIS. So when ONSOLIS is launched that $4 million payment will be made.

Ken Trbovich

Okay.

Ernie De Paolantonio

It can be recognized immediately.

Ken Trbovich

Okay. And then likewise the cost we would see, we would see the offsetting cost, then, in that period, as well.

Ernie De Paolantonio

Correct. There'll be royalty paid on that.

Ken Trbovich

And then, Mark, I guess just to help us put the sort of opportunities that still lie in front of you with regard to the states that haven't made decisions yet, can you help us understand in terms of the context of what those look like relative to the size and the scale of these two? I know you're reluctant to talk about specific details, but certainly your competitors know what they've lost. Obviously from a capital markets perspective we're not all sure of what you've gained and how that compares to what still remains as a potential opportunity in front of you.

Mark Sirgo

Yes, so for the state Medicaid opportunities there are still several in front of us through the remainder of the year. And, as I've said, there's been delays in decisions on several of those for a variety of different reasons. So it's hard to put a finger on it. But there are a couple of those that are sizable. I mean, for us at this point in time it's all relative, but the denominator being where it is, any added win where we get an exclusive arrangement would be significant. So there are plans that, or states that range from around 30,000 prescriptions a year up to 70,000 prescriptions per year that we're still in front of.

Ken Trbovich

Got it. And to your point, the exclusive nature of those contracts obviously makes them far more certain in terms of the upside and the potential that they would represent once you secure them.

Mark Sirgo

Yes, I mean, for those states that are taking this diversion situation seriously, it does little good to put us on a preferred status with the market leader. The only way you're going to see the benefits of what was accomplished in Tennessee is if you made us exclusive. So having said that, being in a preferred equal status basis is better than non-preferred. So we'll wait to see how these decisions cut through later this year.

Ken Trbovich

Sure. And then just last question on the clonidine program, if the data is positive, can you tell us sort of what the commercial plan would be or what your intentions would be for the commercialization status?

Mark Sirgo

Yes, sure. So certainly we'd look for a commercialization partner outside the U.S. So I think in the U.S. it's something we still have time to work through. We'll have another Phase 3 trial that we'll need to run here in the U.S. Having said that, outside the U.S. we think there's an opportunity to combine the information we've already collected and then potentially file a regulatory application, say, for instance in Europe without any additional work. It's still to be determined. We think there's a possibility around that. So ex-U.S. probably more favorable near term than U.S. But in terms of commercialization here in the United States, we really haven't worked through that yet. It's certainly a partnerable asset if we decide to go down that pathway.

Operator

And your next question is from Ed White with FBR & Company.

Ed White

So first on the sales force size for BUNAVAIL right now, can you tell us a bit about the size of it, and are you right sized now to cover the new contracts that you just landed and the future contracts that you could potentially land?

Mark Sirgo

Hi Ed, this is Mark. Good question. I'm not going to share where we are right now for competitive reasons. But your question about do we have the right number in place for the new contracts, we think, although we're still evaluating, with few exceptions we do. So we're still finalizing plans around that. If we think we need to add a few headcount to cover a plan, particularly where we're in a preferred position without the [indiscernible] market leader in place any longer, we'd do that to take advantage of the situation. We think it would more than pay for itself. And of course for future plans it's the same, sort of the same philosophy. We'll take a look at where those plans are positioned in the U.S., and if we've got good coverage I doubt that we'd need to add anything, and if we don't then we'd make that consideration at the time.

Ed White

Okay, thanks, Mark. And then just regarding the potential new contracts that you said have been delayed a little bit here, would they go into effect on January 1, or because of the delay in signing them would it be later on in 2017?

Mark Sirgo

Yes, the likelihood is January 1st. Some of these do come online in October 1st. So there'll be some decisions around the September 1st, so we're not too far away. And the others would be January 1st, so somewhere between fourth and first quarter.

Ed White

Okay. Thanks. And then just on the depot, I am thinking into the Phase 1 trial, just wondering if you can give us any comments on what you're thinking for the size of the Phase 1 trial. And then also besides looking at safety, are there any other secondary endpoints that you'd be looking for in that Phase 1 trial?

Mark Sirgo

Yes, sample size is probably going to be somewhere in the neighborhood of about 30 patients. Right? It's single dose, looking really at plasma concentrations and safety. So we're not going to be looking at any endpoints from an efficacy perspective.

Operator

And we will take our next question from Jim Molloy with Laidlaw.

Unidentified Analyst

Hi. Actually, this is Frank in for Jim. Thanks for taking the questions. So in terms of the COGS, I guess, those are the same thing as Scott, is the royalty revenue issue that explains that 16% decrease in the press release. Is that also what explains the BUNAVAIL increased profitability by 200% in the financial statements? Is that part of that royalty revenue issue?

Ernie De Paolantonio

Yes.

Unidentified Analyst

Okay. It makes sense. And when do you anticipate royalties start coming in through -- from Endo for BELBUCA?

Ernie De Paolantonio

In the next quarter, as we said in our statement. We expect to get a royalty in the third quarter.

Unidentified Analyst

Got you, great. And then should we be expecting the quarter-to-quarter decline in R&D and SG&A by about 1 million a quarter here, like it happened from the first quarter to second quarter? Is it continuing?

Ernie De Paolantonio

Yes the sales and marketing expense are going to decline $3 million a quarter.

Unidentified Analyst

Okay. And then how much from the increase of the 100 patients to 275 per doc do you anticipate BUNAVAIL should capture?

Al Medwar

Yes, this is Al. I'll go ahead and I'll answer that. It's difficult to say exactly, but traditionally we've had a higher share among new patients compared to share of trying to switch patients. So, while I can't give you an exact number, Mark did mention that we expect there could half a million or more new prescriptions. I would just say that it we're pretty optimistic that we'll get a share that's above what you see as our overall market share.

Mark Sirgo

Yes, I agree, Al. And I'd add to that that, as I mentioned in my formal remarks, we're focused on offices where there's a higher probability they'll be adding patients that'll apply for the cap lift. So, we have a pretty good idea of where these physicians are, and we're going to make sure that we've got resources around it, because we do believe that many of these physicians have already told us that although they don't like switching patients from one treatment to another, they certainly like the attributes of BUNAVAIL and for new patients it's certainly top of mind. So, we think we've got a good shot at these patients. We can't give you an exact percentage. But we know where these offices are, and that's where we're focusing our attention.

Unidentified Analyst

Okay, great. And then one last one. Any chance of getting another [Indiscernible] contract in the second half of 2016, or are we looking more 2017? And then sort of where do you think you are in terms of securing another one of these contracts?

Mark Sirgo

Yes, so, as we said, there are several in the queue. And if we're fortunate to secure one we would certainly have an announcement before the end of the year on the Medicaid side. And, of course, the process starts all over in 2017. So, I think what's encouraging is that we've got some more momentum now on the managed care front. And then now a year and a half, we're in front of people a second time. We've got added credibility. We've got the TennCare data behind us, besides the product attributes that we've always had. So, I think the traction's improving. Our credibility's improving. And I just think that we've got momentum and I think we should be able to sustain it. And I'm very encouraged as we head into 2017 based on what we're seeing so far this year.

Operator

And our next question comes from Matt Kaplan with Ladenburg Thalmann.

Matt Kaplan

So a couple of questions to follow up on some and then with BELBUCA, you mentioned that you were on the road [Indiscernible] with a rep. Can you talk a little bit about the titration protocol and how that has impacted the uptake? And, I guess, the question is can you augment the label going forward to address that?

Mark Sirgo

Yes. Good question. So usually for opioid experienced patients we're talking about this titration requirement. So, as we did in our clinical study, that's what's being followed here. So, we had patients in the study that had run up to 160 mg of morphine sulfate equivalent that had to be down-titrated to 30 mg before they could be started on BELBUCA. So that's what's being taught by the Endo salespeople to these physicians who are transitioning patients off C2 opioids. It's another step that they're not accustomed to, but it's not onerous. It's not difficult. It's always happening. But if it could be eliminated, yes, it would make things a little bit easier for physicians that are using it in that fashion.

We had a study, Matt. It was part of the NDA. It showed that you could take people straight across to whatever dose of buprenorphine that you wanted to, needed to. It was double-blinded, well-controlled, etc., etc. FDA wouldn't allow it in the label at the time. We didn't want to argue it, because there was no point in holding up an approval because of it. But Endo is taking steps, already have, to go back in, discuss this with the agency to see if that can be adjusted. So to answer your question, yes, there's a current interest and process in place to get that study and that language into the label. And keep in mind, and obviously no one's going to promote off label here, but having said that with buprenorphine for opioid dependency like BUNAVAIL, we tell patients on the induction phase to stop taking their heroin or whatever it is the night before, come into the office the next morning to get your first BUNAVAIL dose. They're already in withdrawal symptoms, right? They're already in withdrawal symptoms when they come in. You give them a first dose of BUNAVAIL, what happens? They get better. They don't get worse. So the concern on the chronic pain side and down-titrating, they're afraid if you go straight across, because buprenorphine's not a pure agonist, then you might put somebody into withdrawal. Well, in fact, it's rarely ever been seen.

And in fact when you -- like I just said, when you look at how you induce somebody that is taking BUNAVAIL, you've got them in withdrawal intentionally and you give them another dose, instead of them getting worse they actually get better. So it's just a matter of time. Sorry to belabor the point, but it's just, I think, a matter of time before there's more friendly labeling that will help doctors in this regard. I think those people that are more concerned about that are really your primary care docs. The pain docs, they're -- they understand this a little better and find this less of a hurdle.

Matt Kaplan

But are you finding that that's had an impact, or is that something that salespeople have to spend a lot of time educating doctors on, or…

Matt Kaplan

Yes.

Mark Sirgo

I think they're 80% through the educational process. It was more challenging at launch. It's certainly much less so now, and, as I said, I was in some of these offices, and I think primary care, more of a teaching situation. Not so with pain docs.

Matt Kaplan

Great, thank you. And then I guess we were talking about cost of goods, can you tell us what the exact margins are right now for BUNAVAIL and where do you think the margin is going to go to?

Ernie De Paolantonio

Yes, we're not going to comment on that right now.

Mark Sirgo

We'll comment on margins, Matt. I think certainly the idea is we're going to see improvement there as we move along based on all the initiatives that we've got in place to accommodate for that.

Ernie De Paolantonio

Yes, and they'll be getting substantially better, especially in the beginning of 2017.

Matt Kaplan

Got it, thanks. And then just in terms of the lift of the cap, the 275 patient, talk about your plans to leverage that increase. And then how are you going to compete against the competitors that you have in the marketplace now to grab some of that market share?

Mark Sirgo

Yes, so for competitive reasons we're not going to comment on that other than to say we know where these offices are, at least the majority of them, and we'll make sure that we're properly focused in calling on them for the reasons we've already stated. So, and we do have some initiatives that we won't comment on that we think might be of particular interest that will help secure additional BUNAVAIL business in these offices.

Matt Kaplan

Great. And then in your prepared remarks you mentioned that 4,000 scripts per week will drive you to profitability for BUNAVAIL, and you need another 2,000. With your visibility I guess you have to negotiation with the states potential, Medicaid and then also managed care organizations, when do you think you could get to that level with the additional scripts? I guess with the two that you have right now, the two new, that should probably put you maybe 1,000 scripts off, or something like that? Can you comment on that?

Mark Sirgo

Yes, I think in my formal remarks I did state that with the two plans that we just announced we think it'll secure about 1,000 prescriptions going forward. So it gets us half the way there. And we certainly expect to have to be able [Indiscernible] to other plans, either improving our position on a current plan, or being put on one that we're not currently on. So, yes, and that's just the managed care side of it. We've got the cap lift side. We've got our direct to patient program running that we think will provide additional patients, as well. So, there's a number of things besides managed care wins that we think are going to allow us access to additional prescriptions that'll get us to that number by the end of 2017. But I think the good news is we made a big leap forward to that goal with these two plans that we've announced just recently. And we're still in 2016.

Matt Kaplan

Yes. Yes. And then just one final question, not to beat it dead, but can you comment in terms of the number of states you're in discussions with? You don't have to say which ones, but just the number of the states you continue to be in discussions with this year that could potentially materialize?

Mark Sirgo

Yes, I think, Matt, it probably is about, I'd say about a half dozen.

Matt Kaplan

Okay, great. Well, good luck and…

Mark Sirgo

And they're in various they're in various stages, right? Some of them are further along than others. But some have delayed decisions, as I mentioned. But I think it's probably [Indiscernible] about that number.

Matt Kaplan

But you have multiple shots. Well, congrats on the progress, and good luck with your [indiscernible].

Operator

And our next question comes from Chiara Russo with Cantor Fitzgerald.

Chiara Russo

I think my first question, if you could just touch on you said that the NPs and PAs could actually start writing addiction scripts. Could you just remind me, do they have to be data waivered in order to do that?

Al Medwar

Hi, Chiara, this is Al Medwar. There's not a lot of information that's available. The legislation was signed late in July, and they haven't yet specified exactly what will need to be done. There is going to be education that's going to be developed specifically for nurse practitioners and PAs. I have heard, but I can't confirm this, that instead of doing an eight-hour training, I was listening to a webcast earlier this week and there was some reference to the training being a little bit more extensive in duration than what's been done for the physicians. But potentially the answer is they are going to have to go some specific training that will allow them to prescribe. I don't know, but I suppose it's similar to the physicians, and you could consider that essentially being waivered.

Chiara Russo

Okay, so they would start off again with the first 30 patient limit and moving up through the ladder like other additional physicians.

Al Medwar

They haven't set out any specific guidelines, so it's hard to say. I mean, otherwise we're just assuming that the same limits would follow for a nurse practitioner, but, to be honest, at this point they've been very light on details, though some of that information is supposed to be coming.

Chiara Russo

Okay. All right. Great, thank you. So then also going back to the patient cap being lifted, do you happen to know or ballpark the number of physicians that are already at that 100-patient cap nationally?

Al Medwar

I'll go ahead and answer that question. It's a little bit difficult. There's no great data source to specifically look at and say the number. But from the work that we've done and also some of the work that's referred to in the Health and Human Services analysis that they did as part of the ruling, you'd estimate it somewhere in the 2000, 2,500 or so range roughly, that are sitting at that capital with top level.

Chiara Russo

Okay, got you, okay. And then I think -- so my next question, in terms of the new insurance coverage plans that have you guys with Zubsolv on the preferred list, with Suboxone being moved to non-preferred, I'm curious because to me it sounds like that's sort of revving up to be a little bit of a battle of the discount cards in order to get the scripts on the books. How are you guys planning on maximizing the value out of that plan?

Mark Sirgo

Chiara, this is Mark. Hi. Yes, so no not true. That was not a discount battle whatsoever. And I won't disclose, obviously, who it is or why they made the decision, but I think if you consider the things that we've been talking that we've brought to I think, the forefront since we've launched our product, that's starting to play through, not only on the state level but on a lot of these commercial plans. And that's why I'm excited about where we are the momentum we've got. I think hopefully it'll continue into next year. But it was not a discount battle whatsoever, quite the opposite. So it's a great opportunity for us, lots of commercial patients within this PBM. There is some Medicaid within it, but the majority is commercial, so great opportunity for us and it was not [indiscernible] because we highly discounted.

Chiara Russo

Okay. Are you doing any sort of discount plans, then? For instance, I know that you did like 14 day free, seven day free when you initially got into the TennCare Plan.

Mark Sirgo

Yes, no. I mean, no. Not with that particular plan. I mean, we still offer the seven day voucher to patients. We've got a copay card that's still in effect for plans like this. So, but nothing outside of that we're not planning to do at this point in time.

Chiara Russo

Okay. And just a last quick question on BELBUCA, where do you see the majority of your scripts coming from, or if Endo lets you know that? Are you specifically coming from those pain doctors, or are they looking at the primary cares?

Mark Sirgo

Yes, it's really too it's really too early to call. I mean, they're split focused on [Indiscernible] primary care docs, and they're definitely focused on pain doctors. So, at this point we haven't been given good visibility, and I don't think they're prepared to make that call quite yet.

Chiara Russo

Okay. All right. Great, guys. Thanks for taking the questions.

Operator

And that does conclude today's Q&A session. This also does conclude today's conference. Thank you for your participation. You may now disconnect.

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