Optimer Pharmaceuticals Management Discusses Q2 2012 Results - Earnings Call Transcript

Optimer Pharmaceuticals (NASDAQ:OPTR)

Q2 2012 Earnings Call

July 31, 2012 5:00 pm ET

Executives

David A. Walsey - Vice President of Investor Relations and Corporate Communications

Pedro Lichtinger - Chief Executive Officer, President, Director and Member of New Hire Stock Option Committee

Stephen W. Webster - Chief Financial Officer

Analysts

Ritu Baral - Canaccord Genuity, Research Division

Brian Skorney - Brean Murray, Carret & Co., LLC, Research Division

Steve Byrne - BofA Merrill Lynch, Research Division

Eun K. Yang - Jefferies & Company, Inc., Research Division

Alan Carr - Needham & Company, LLC, Research Division

Thomas J. Russo - Robert W. Baird & Co. Incorporated, Research Division

Christopher Holterhoff - Oppenheimer & Co. Inc., Research Division

James F. Molloy - ThinkEquity LLC, Research Division

Juan F. Sanchez - Ladenburg Thalmann & Co. Inc., Research Division

Heather Behanna - JMP Securities LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Optimer Pharmaceuticals Report Second Quarter 2012 Financial Results. [Operator Instructions] As a reminder, this conference is being recorded. I'd like to introduce your host for today's conference, Mr. David Walsey, Optimer Vice President, Investor Relations and Corporate Communications. Mr. Walsey, you may begin.

David A. Walsey

Thank you. Welcome to the Optimer Pharmaceuticals Second Quarter 2012 Conference Call. With me today from the company is our Chief Executive Officer, Pedro Lichtinger and our Chief Financial Officer, Stephen Webster. Please note that this conference call will include forward-looking statements regarding future events and the future financial performance of Optimer, future sales and adoption of DIFICID, including plans and initiatives to facilitate patient access, Optimer's co-promotion agreement, lifecycle management initiatives and commercial efforts, commercialization of DIFICLIR by Astellas Europe, Optimer's plans for additional international commercialization of DIFICID, and future financial results and expenses.

Because such statements deal with future events and are subject to many risks and uncertainties, actual results may differ materially from those projected in the forward-looking statements. Examples of such risks and uncertainties include whether Optimer and its partners will be able to drive further adoption in sales of DIFICID, including in new markets and territories, whether Optimer's lifecycle management initiatives will ultimately result in label expansion, risks involved in the regulatory approval process, and the uncertainty in forecasting future cash requirements and financial results.

For a full disclosure of these risks and uncertainties, please review Optimer's annual report on Form 10-K and subsequent quarterly reports on Form 10-Q as filed with the U.S. Securities and Exchange Commission.

Furthermore, this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, July 31, 2012. Optimer undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call. This conference call is also being webcast and will be archived on our website for 30 days after today.

Earlier today, we released financial results for the second quarter ended June 30, 2012. If you've not received this news release, or if you'd like to be added to the company's distribution list, please visit the Investor Section of our website at www.optimerpharma.com.

I would now like to turn the call over to Pedro Lichtinger, Optimer's President and CEO.

Pedro Lichtinger

Thank you, David. July 18 mark the one year anniversary of the launch of DIFICID, and we're very proud of our accomplishments. From launch last year, to the end of June, we achieved $51.1 million in net sales and shipped almost 20,000 treatments. We surpassed our 12-month sales gross established with Cubist. And so, Cubist has earned a $5 million bonus payment and a portion of the gross margin above that threshold.

Clearly, we have exceeded expectations for the first year after launch. Looking more closely at the second quarter, demand for DIFICID continue to grow. Ex-factory gross sales grew from $16.4 million to $18 million, an increase of over 9%. Ex-wholesaler sales grew by 11%. Net sales grew by 6% as discounts expanded the gross to net from 12.6% to 15.2% as a result of new contracts with group purchasing organizations, expanded coverage from providers and the impact of the Medicare Part D coverage gap, commonly referred to as the donut hole. Given the success we are seeing across all payors channels where Optimer contract, especially Medicare Part D, where we not only contract with the actual payors but also incur liabilities related to the Medicare Part D doughnut hole, and institutional care settings where Optimer also make contract, such as long-term care. We expect that our projected gross to net will moderately -- will be moderately higher than the 15% range previously guided.

Given that demand in this setting is continuing to mature, we're hesitant at this point to give a specific number. Ex-factory growth was affected by a quarter end decrease in inventory levels at the wholesalers, which led to a softer than expected June. This trend was the opposite of what happened in quarter 1 when ex-factory net sales grew by 21%, while ex-wholesalers sale grew by 19%.

In the first 4 weeks of July, we experienced a growth of 13% in the average exposure of demand when compared to the June weekly average demand regaining momentum.

I believe, we continue to make significant progress in executing an impactful launch. As one would expect, we have learned a lot about C. diff and how hospitals treat it.

Our flexibility and nimbleness to rapidly adapt to the market, as well as DIFICID's profile and the need for a new and innovative medicine to combat C. diff will allow us to continue to help patients execute an impactful launch and build value for our shareholders.

Before highlighting some key initiatives in progress to date, I'd like to formally introduce you to Stephen Webster, who joined Optimer as of June 25 as our CFO. He's a veteran of the biotechnology and finance industry and a very welcome addition to the team. With that brief introduction, I'll turn the call to him to review our financials.

Stephen W. Webster

Thank you, Pedro. I'm very excited to be a part of the Optimer team at this important stage at the DIFICID launch and happy to share the results of our second quarter with everyone on the call today.

Before reviewing the results, I'd like to take a moment to explain a slight refinement in the manner on which we will be reporting revenue in our financial statements.

Starting in the second quarter, we are reporting revenue on 3 line items. These are: net product sales, under which we will report U.S. and Canadian sales of DIFICID, contract revenues where we will report revenue received under our collaboration of agreements, including milestone payments, royalties on sales of fidaxomicin and for the sale of fidaxomicin drug product under our distribution agreements, and other, which will report revenues that did not fall into either of the 2 previously described categories. I believe this will better communicate our sources of revenue moving forward.

For the second quarter of 2012, total revenues were $49.8 million compared to $33,000 for the second quarter of 2011. Revenues included $15.2 million in net product sales, which was up 6% from the first quarter, $19.9 million from an upfront payment from Astellas Japan for the collaboration to commercialize fidaxomicin in Japan, a $12.6 million milestone payment from Astellas Pharma Europe for the first sales of DIFICLIR in a European territory, $750,000 for the sale of fidaxomicin drug product to Astellas Pharma Europe, and a $1 million milestone payment from Cempra related to the successful completion of a Phase II trial of CEM-101, which we licensed to Cempra in 2006.

Please note that Optimer recognizes product sales of DIFICID upon delivery of the product to the wholesalers. This is the ex-factory number that Pedro mentioned.

Our net loss for the second quarter was $300,000 or $0.01 a share on both the basic and diluted basis, as compared to a net loss for the second quarter of 2011 of $24.2 million or $0.52 a share on both the basic and diluted basis.

Selling, general and administrative expense for the 3 months ended June 30, '12 and '11 were $28.9 million and $14.8 million, respectively, an increase of $14.1 million in 2012. The increase was primarily due to our commercialization efforts on DIFICID. As we had higher headcount during the 2012 period, and thus incurred higher salary expense. We also incurred higher advertising and promotion expenses, as well as higher legal, consulting and other outside services.

Co-promotion expenses with Cubist for the 3 months ended June 30, 2012 were $5 million, representing certain expenses that may be due Cubist under our 2011 co-promotion agreement. Based on the level of sales to date, Optimer has achieved the first year sales target and has accrued $10.4 million, representing the quarterly service fee and a prorated portion of the $5 million bonus, as well as a portion of the projected gross profits. We did not incur similar expenses in the quarter ended June 30, 2011.

R&D expense for the 3 months ended June 30, 2012 and 2011 were $11.6 million and $10.3 million, respectively, an increase of $1.3 million. The increase was primarily due to higher health economics and outcomes research costs.

As of June 30, we held cash, cash equivalents and short-term investments of $130.6 million. This amount includes the receipt of the $53.6 million milestone payment from Astellas Europe, recognized in the fourth quarter of 2011. We had 47,531,412 shares outstanding at June 30. I'll now turn it back over to Pedro.

Pedro Lichtinger

Thank you, Stephen. I'd like to provide an update on some key initiatives supporting ongoing growth, expanding global access to fidaxomicin and pursuing potential new indications.

Optimer has continued to expand patient access. DIFICID is now included on formularies in approximately 900 or 60% of our 800 targeted hospitals. As physicians and institutions become more familiar with DIFICID, there has been increasing attention on developing treatment algorithms, and we see this as a generally favorable for DIFICID.

As shared previously, we are now focused on driving prescriptions in key hospitals with favor of formulary stands. 20% of targeted hospitals on formulary grew 305% in the first 6 months of the year, representing over 50% of DIFICID revenues. We expect to expand the number of targeted hospitals over time, as well as accelerate their growth. Optimer has expanded patient access to DIFICID to over 90% of commercial payor lives with 95% of both lives in a co-pay tier structure. Medicare Part B now has 80% of lives covered with 90% of them on a coinsurance tier structure. These levels are now comparable to those available to VANCOCIN prior to the entrance of generics. In some, approximately 88% of all insured patients in the United States have covered access to DIFICID. As part of our dedication to ensuring access to DIFICID, we are implementing various initiatives including programs to address reimbursement challenges.

For example, Optimer's DIFICID Rx assist program can facilitate the filling of a prescription, including benefit investigations, prior authorization assistance and research ops, and referral to out-of-pocket assistance foundations. We are committed to facilitating access to DIFICID for patients with C. diff, including to such programs and initiatives.

Additionally, we are committed to helping C. diff patients who may not be able to afford their medication through our Patient Assistance Program, as well as donations to our charitable foundation that provides financial aid to qualifying patients.

We are increasing our focus on identifying and partnering with select integrated delivery networks or IDNs. IDNs are networks of facilities and providers working together to offer health care in a specific market.

The review front on quality initiatives and understanding of total health care cost reflects an approach to patient care that we believe is a good fit for DIFICID.

Since IDNs may generally have a broader perspective on cost effectiveness, we believe they will become significant drivers of use.

Our strategy is to engage with some of the top, most influential and progressive IDNs. I've previously spoken about our efforts to expand the opportunity for DIFICID by approaching long-term care facilities. This does include an outreach to group purchasing organizations or GPOs and National Pharmacy Providers or NPP's, which enables further access to DIFICID.

Our outreach in this segment is focused on key LTC facilities representing over 1/4 of the LTC beds in the United States, which are an important source of growth. And we are starting to see the result of this effort.

Our cross functional efforts are also becoming more targeted in our approach to payors, facilities and decision-makers, and we've initiated new outreach such as to state and regional LTC associations as our strategy matures.

From quarter 1 to quarter 2, we observed a doubling in DIFICID sales within partner LTCs, GPOs and NPPs.

Our commercialization activities have included a robust research and publication effort. Over 90 published articles and presentations at key specific meetings have highlighted multiple aspects that we believe make DIFICID the product of choice for first-line use in patients of high risk of recurrence and with a high cost associated with the disease.

Our research and publication efforts continue, including the development of publications of the cost-effectiveness of the drug. The above market dynamics combined with projected annual increases in the 4% to 6% range and the ongoing market growth lead us to firmly believe that DIFICID should outperform big revenue your expectations.

Although, we see the opportunity for DIFICID and our current label are significant, we believe that additional clinical development intended to expand the label could support an opportunity, which is equally significant.

I previously discussed our plans to move forward in developing a new prophylaxis indication for DIFICID, initially for bone marrow transplant patients. The trial, the evaluating prophylactic use of DIFICID in patients undergoing BMT is expected to start in the fourth quarter of 2012.

If we are successful in our development efforts and obtain approval from NPA over prophylaxis indication for BMT, we'll plan to immediately pursue development in FDA approval of the second indication that we expect could provide DIFICID with a broad prophylaxis indication for immunosuppressed patients. It is estimated that immunosuppressed patients represent close to 50% of total CDI treatments.

FDA post-marketings studies are progressing well with the first pediatric study already initiated and the sensitivity monitoring implemented.

Our commitment to conduct a study testing DIFICID in C. diff patients who have experienced multiple recurrences is expected to be initiated in the second half of 2013.

In the addition to our efforts to commercialize DIFICID in the U.S. and Canada and pursue additional development to support expanded use of DIFICID, we are committed to making this drug available globally, where CDI is a problem to collaborators.

DIFICID was launched in Canada with broad media coverage and enthusiastic reception by the market. The price is in line with Europe, and we expect to obtain a compatible market penetration as in the United States. National and provisional reimbursement process have been initiated.

The recent launch of DIFICLIR by our partner Astellas Pharma Euro is proceeding well. The drug currently is available in the United Kingdom, Austria, Sweden, Denmark, Finland, Norway, The Netherlands and Portugal.

We anticipate that DIFICLIR will be launched in additional European countries over the next 3 to 12 months, including key markets. We received from Astellas approximately $65 million in milestones from Europe, of which $53.6 million was recognized in quarter 4. We also have milestone revenue of $19.9 million under our Japan collaboration with Astellas Pharma.

In June, an agreement in Australia was reached with Specialized Therapeutics Australia or FTA, a leading pharmaceutical firm in Australia and New Zealand, and we expect launch in that country in the second quarter of 2013.

Regulatory approval was obtained in Taiwan and launch of the drug is expected by Optimer Biotechnology Inc., OBI, a company, which Optimer has a noncontrolling 43% ownership interest.

Negotiations for other key countries are ongoing. We believe that the potential and value of fidaxomicin in international market is underappreciated, and we are committed to maximizing it's potential globally.

The level of interest from our collaborators and the terms of our agreement speak to the global interest in commercializing the drug.

That concludes my formal remarks. I will now turn the call over to the operator to handle the question-and-answer session.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Ritu Baral from Canaccord.

Ritu Baral - Canaccord Genuity, Research Division

Pedro, you mentioned that many of these hospitals are putting treatment algorithms together for use of DIFICID. Can you comment generally on where DIFICID is falling in these algorithms? Either the position or if there is a patient characteristic that a lot of these hospitals are guiding their treating physician to as far as who should get DIFICID?

Pedro Lichtinger

Most of these algorithms recognize the messages in publications that have been made on DIFICID. They try to identify the patients that are at high risk of recurrence, as well as those that have a higher cost impact and they include them in first-line use. Those algorithms have different levels of interpretation of what is a high-risk patient and what is a high cost. So some of them are relatively open, some of them can be more restricted, but all of them position the drug for first-line use. All of the algorithms position DIFICID as a viable alternative for all second-line use.

Ritu Baral - Canaccord Genuity, Research Division

Okay. And as far as the formulary restrictions right now, have there been changes or have the restrictions evolved now that we're reaching the one-year point in the launch?

Pedro Lichtinger

Well, I mean, at this stage where we are, there are 2 things that we have observed. One is we don't have enough time in the market to have a significant number of hospitals undergoing a utilization reviews. We believe those will happen within the next 6 to 12 months. And in general, we believe that they will be positive. As I have mentioned before, as with any new hospital product launch, you rapidly have a core group of hospitals that believe strongly in the value of the drug and make it a key component of their strategy. As I described before, those represent today about 20% of the hospitals that we target. And we expected those to continue to grow. Our work is going to be to move most or as many as we can of the 80% over time that are outside of those 20% into that category.

Ritu Baral - Canaccord Genuity, Research Division

And last question. Do you anticipate having any key analysis or data at the upcoming infectious disease conferences this fall?

Pedro Lichtinger

We do have a several abstracts and presentations to be made. As I said before, we will have a very strong focus on cost effectiveness and we have very exciting data coming along.

Operator

Our next question comes from Brian Skorney from Brean Murray.

Brian Skorney - Brean Murray, Carret & Co., LLC, Research Division

I noticed in your prepared remarks that you expressed confidence in DEFICID's potential to meet your expectations in 2012. I don't know if I missed, have you guys provided guidance for DIFICID sales in 2012? Or can you give us a little more color on what exactly your expectations are for the year?

Pedro Lichtinger

Well, we have not commented on our expectations, we have not provided a guideline and do not believe it's appropriate to do so as the maturity of the launch is not where it should be at this point in time. It is relative for our internal projections and we are very excited and we believe that we are on track to achieve them.

Brian Skorney - Brean Murray, Carret & Co., LLC, Research Division

Great. I know you kind of mentioned just what effects you saw in June versus July. And it certainly seems to hold on that script -- prescriptions that rebound a little bit over the last couple weeks. But could you just kind of review why we saw the decline in sales in July and how you think that can kind of be reversed in the next couple of months given that historically, CDI sales have kind of started lagging in the back half of most years?

Pedro Lichtinger

Well, first of all, we saw a decrease in inventory levels of wholesaler level in June. We also saw a beginning of the summer seasonality, where we know that the number of C .diff cases declines. Relative to the peak winter prescriptions, it declines about 15%. And we saw a similar reduction in vancomycin and in other antibiotic classes. We also saw a shift in some usage patterns at a select hospital due to changes in -- or more explicitly, additions to formulary that has reigned on the existing use at that point in time. These are one-time corrections in hospitals that we believe that they're over. I do want to comment on July. You know, many of the things that we have put in place are crystallizing or starting to crystallize in the month of July. As I already mentioned, we saw a growth versus the average of the quarter in -- I mean, on the previous quarter of 13% growth. Relative to the June performance, we saw a growth of 23%, which is solidly regains growth momentum. So as I said, we believe to the best of our ability, the effect on our June number of prescriptions was primarily driven by one-time events in select hospitals that is now passing our history, and that we have regained growth and are back on the momentum and the trend that we expect to be able to achieve our target.

Operator

Next question is from Steve Byrne from Bank of America.

Steve Byrne - BofA Merrill Lynch, Research Division

I wonder if you've seen in terms of the year-to-date trend, in terms of percent retail scripts lost, and what have you seen with respect to the impact of generic VANCOCIN?

Pedro Lichtinger

Well, let me first address the first question. As you know, all specialty products have, on average, about a 30% loss of prescriptions. In the case of VANCOCIN, they had a 34% loss of prescription before the entry of generics. We are higher than that. We have not reported what exactly it is, but we believe it is substantial. And as a result of that, we have launched the Rx Assist program so that we can get, at the very least, back to the 30% that is the average in the industry, and hopefully, improve on that. Now, the drivers of why that happens with specialty drugs is mixed. In our case, the key drivers were the need to have a prior authorizations in many cases. And the ability of certain physicians and/or hospitals to actually get the prior authorization through. We also see a significant issues of coinsurance, that again, are typical of specialty products in the Medicare part B population. And as a result of that, of course, patients do not want to pay $1,000 of coinsurance, so they request a generic medicine. And this is why our Rx Assist program covers a range of issues including both the prior authorization losses, as well as the coinsurance, to a large extent, through the use of a foundation that supports patients in need, as well as our own patients assistance program. We believe that combined, this new launch, and it became effective July 1, will have a significant material impact on those losses.

Steve Byrne - BofA Merrill Lynch, Research Division

And have you seen that percent loss go up in the last few months after VANCOCIN went generic?

Pedro Lichtinger

No. We have not seen an impact of -- at all in terms of vancomycin generic on us. We have seen a maintenance and increase in market share across most dimensions. And in no case, do we have evidence of a generic ingrowth into our specific sales. As I have already mentioned, we were already competing with the slurry in the hospitals, so it was already genericized. And we do not -- have not seen any response in our tier status or position with payors or request for either incremental prior authorizations or new peer status as a result of the generic entry. So we have not seen any impact on our drug at this point in time.

Steve Byrne - BofA Merrill Lynch, Research Division

And how would you characterize the impact of your efforts to refocus your hospital sales force on penetration?

Pedro Lichtinger

Well, the first I have -- as I have said from the beginning, refocusing on a team force takes time. When you move from focusing on getting formularies across all hospitals to actually now going to the select hospitals where you have a positive formulary status, you start visiting the 20 or 30 high prescribers of that hospital. It can take up to 7 visits, on average it’s 3 visits, to get them to prescribe, and it's 20 or 30 of them. So it takes momentum to have the substantial volume. As I mentioned, this strategy is already yielding a significant benefit to the company as we have seen a growth of 305% in the 20% of the hospitals where the formulary status is either unrestricted or less restricted that allows us to actually penetrate the hospital and share with key prescribers the strength of the data and the benefit it brings to the hospital and to the patient.

Steve Byrne - BofA Merrill Lynch, Research Division

And if I can squeeze one quick one in for Stephen. That $10.4 million accrual for the Cubist contract, has that already been expensed through the P&L?

Stephen W. Webster

No. A little bit of it hasn't. The $5 million was expensed in Q2 and we put about $15 million through for the 6 months ended June. If you remember that the service fee is $3.75 million a quarter, so the rest of it is working up to the $5 million, which was earned in June. And starting on a pro rata accrual of the profit share from the second half in June through July, which marks the end of year one of the agreement. I hope I answered your question.

Operator

Next question is from Eun Yang with Jefferies.

Eun K. Yang - Jefferies & Company, Inc., Research Division

Based on the growth of sales that were preannounced before April and May, it looks like June sales were lower than the previous 2 months in the quarter. And, Pedro, you mentioned that there was a decrease in inventory levels in the month of June. But in the press release, you guys are saying that, you mentioned the levels of wholesale will remain within the range of 14 to 28 days of demand. Can you comment on how many days of demand was decreased in the month of June?

Pedro Lichtinger

Well, we do not provide that guidance. There is no question that there was a significant change but no, we do not comment on that. But we do monitor it. Contractually, they are not allowed to go either above or below. But I mean, it's a wide margin if in one quarter, they go close to one of the limits and increase their inventories and then the next quarter, they go the other side. There could be a variance of 2 weeks that -- and I'm not suggesting that's the size of the variance. It certainly is not. But there is a destocking effect in the month of June. As I already said, the primary driver of June is lower performance. We had lower prescriptions, as I already mentioned, as a result of a one-time corrections in certain hospitals, as well as what we believe is the beginning of the summer season. And we have been able to overcome this June trend and as I already said in the month of July, when compared to the month of June, we have just closed the month and we grew 23%.

Eun K. Yang - Jefferies & Company, Inc., Research Division

Okay. And then also, based on the net sales growth, the net discount is, at this moment, is about 15.5% in the second quarter. And I know that you mentioned in the past that by year end, you would expect growth in net adjustment to be around 15%. So it looks like you're higher than what you've previously mentioned by the end of this year. And then it's a huge uptick from first quarter. So question to you is that, is the 15.5% growth in net adjustment, is it going to continue at this level or is it going to go up in the second half of this year?

Pedro Lichtinger

Well, the first comment is, we did experience a one-time event that really kick it up. This is the time of the year where the doughnut hole starts to kick in and other corrections that had to be made. So that has an effect on the quarter. But overall, as I just described before in my comments, we do expect it to go slightly up above the 15%. As a lot of our contracting with IDNs, GPOs and the full impact of a -- the doughnut hole stays with us for the remainder of the year. So the answer is that we don't provide a specific number because it's heavily dependent on the share of patients of a Medicare Part D that we get the are on the doughnut hole, and we don't have a reliable method for predicting that, as well as predicting the share in ingrowth that the IDNs and the GPOs will make once they get on starting. And most of the INDs are actually starting in the month of July, and they will grow. So we are confident in saying that there will be an increase. We are also confident in saying that, that increase will be relatively small.

Eun K. Yang - Jefferies & Company, Inc., Research Division

Okay. And then last question. I just want to make sure that I heard you correctly. So the royalty on fidaxomicin in Europe on Astellas, was that around $750,000 in the second quarter?

Pedro Lichtinger

No. No, no, no. Sorry, it was misunderstood. If I didn't express it with clarity, I apologize. The $758,000 is the sales of the materials that are -- because we sell them semifinished products that they use in completing, and it's sold basically at cost, plus a minor administrative fee. So in reality, it is a destocking that they have done for the launch and it's the sale of those materials.

Eun K. Yang - Jefferies & Company, Inc., Research Division

Okay. That's clear. And then when you book royalty, will that be a one quarter lag or are you booking on the same quarter?

Pedro Lichtinger

No, there will be normally a one quarter lag. No, I'm sorry, on the same quarter. I mean we will get a report. We did not report it this time because Europe is just starting. I mean, anecdotally, it's doing extremely well, but in all of the major countries, for example, in the United Kingdom, even though the product is available, it is just really starting. So in the month of June, it has a few days of sale. So we do not have yet those figures, but the next quarter, we will certainly be releasing the royalty.

Eun K. Yang - Jefferies & Company, Inc., Research Division

So the royalty, is going to be according to one quarter lag, that still is my question.

Pedro Lichtinger

No, no.

Stephen W. Webster

Well, we'll book them as we earn them.

Pedro Lichtinger

Yes.

Stephen W. Webster

We'll book the sales through the quarter as they occur, and obviously, the cash payment will be subsequent in the next quarter, but the cash would come in. Well, I mean, every quarter, at end of the quarter, at Astellas, you see, is contractually obliged to provide us with a report on their actual sales in their own calculation of what the royalty that is owed to our company. And based on that document, we will book it.

Operator

Next question is from Alan Carr with Needham & Company.

Alan Carr - Needham & Company, LLC, Research Division

I wonder if we could talk a bit more about ex-U.S. Germany in particular, do you have a sense of when -- DIFICLIR would launch in that country? That's one that you've said is particularly attractive.

Pedro Lichtinger

Yes, we expect it to be launched in the fall.

Alan Carr - Needham & Company, LLC, Research Division

Okay. And then, also in Canada, you launched this month. Can you talk about how that's going to -- is that in all provinces at once? I think in the past, you said they would we -- they would occur province by province over time. Can you tell us a bit more how that should work out over the next month?

Pedro Lichtinger

Okay. Let me first explain. The product is available for purchase in the whole of Canada. So, and the process today to get a purchase is you have to apply for an exception at the national level. And if granted, you get the product at the price that we're selling, which is $2,200. I mean, we are getting some patients. This tend to be patients that are multiple recurrence patients and basically with a severe suffering and at high risk of even dying. And as you know in Canada, it takes time. We have submitted our pricing dossiers at the national, as well as the provincial levels. And it is now up to those provinces to come back and tell us what their decision is. And once you get that decision, then you can go into inside the province and you still have to deal hospital by hospital on formularies. So it is a long process. And we do not expect a material revenues in 2012. But once it hits, we believe it's going to pick up relative to its size at a faster pace than the United States because the disease is highly visible and the market is very sensitized. But once you get a reimbursement approval, we believe that there will be a significant uptick.

Alan Carr - Needham & Company, LLC, Research Division

Okay. So this is a process that will take in well into 2013, sounds certain. Okay. And then last one, have you met with the FDA around the BMT trial?

Pedro Lichtinger

We have had now a discussion. Basically, there is a no, how to say, antagonism to the concept. The concept is accepted because, you know, the biggest fear when you introduce a completely new medical utilization of a drug, you never know how the FDA will react. Maybe they reacted positively, they understand the unmet need and the suffering and the impact of the disease on those patients, these are the BMT patients, and they agreed that this is something that they should be pursued. We are still in discussions of what is the right strategy. I mean, obviously, the FDA would like us to do a lot more than what we would like to do and that we see necessary. So we are still deciding what is the appropriate strategy. But we are committed to launching the study and as I mentioned, in the last quarter of this year.

Alan Carr - Needham & Company, LLC, Research Division

So I guess, the takeaway is that, you feel that there's enough agreement here that you'll be able to earn enough space between -- to come to an agreement on design to start this by the end of the year?

Pedro Lichtinger

Yes.

Alan Carr - Needham & Company, LLC, Research Division

Okay. You mentioned British pricing but not pricing in the other countries. Do you have -- is that -- do you have a price in euros for the other countries?

Pedro Lichtinger

No, no. Yes, I'm sorry. What I mentioned is the price in the United Kingdom is GBP 1,350, which is $2,200. The pricing in all other countries is at or above EUR 1,500, which is $1,950, that is this lower price that has been established. So we will only sell or Astellas will sell at or above that price, and those prices in several markets are already in place.

Operator

Next question is from Tom Russo with Baird.

Thomas J. Russo - Robert W. Baird & Co. Incorporated, Research Division

My questions. Maybe just a quick one for Stephen in terms of interpretation of the figures here. Is the right way to think about the wholesaler change, the difference between 9% sales from Optimer to the wholesalers and 11% growth from wholesalers to end markets? Is that directionally correct?

Stephen W. Webster

Yes. Yes. That's correct. And what we've seen is typically, at the end of each quarter, so in December, March and June, the wholesaler's sell down inventory. Their balance sheets are important to them and it's a trend we've seen in the last 3 quarters of launch that they do reduce their inventory at the end of the quarter. And bottom line is that difference between the 9% and 11% is they ship more than they bought in June.

Thomas J. Russo - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then, I just wanted to check in again. There were some figures provided early in June for April and May. And I think that implies that June was down a little more than 25% from May. So is the right way to think about it that July is now kind of back to the level that you're at in May? And you do, despite seasonality, you do expect to see a growth trend over the back half of the year? Is that all the correct understanding?

Pedro Lichtinger

Well, the answer is yes. We are very roughly at the same level of May in the month of July, even though we are now in the summer season, which has lower, lower demand. So the answer is yes, we believe that, as I said before, we are on the right trend. We are growing significantly and expect to continue to grow into August, September and beyond.

Thomas J. Russo - Robert W. Baird & Co. Incorporated, Research Division

Okay. And I just wanted to revisit and see if I could get a little more granularity on the one-time corrections. I guess, what I'm seeing is 900 hospitals where you're on formulary, and I think that's the same number that you gave in the beginning of June. So is that the explanation is that there were one-time corrections for some hospitals where you were on formulary, you came off and that was netted against new wins or...

Pedro Lichtinger

No. No. As we have said before, we have sold to 1,900 hospitals, even though we're only 900 in formulary, there are an additional 1,000 hospitals that have purchased, some of them with regularity, the product. And what happens in a hospital that -- those not have the drug on formulary. And basically, there is a lot more flexibility in the use, if you make the strong argument that as a transplant or an oncology physician. When the product goes on formulary, if it is restricted to a certain use, the uses that are outside of the formulary are no longer approved. So what we believe has happened is actually the opposite that in hospitals where we were not on formulary, but we had a sales or prescriptions because of a strong belief of individual physicians, those individual physicians were actually brought into order by adopting a restricted formulary in that particular hospital.

Thomas J. Russo - Robert W. Baird & Co. Incorporated, Research Division

Maybe I'm splitting hairs. I'm just trying to understand if the number that was given in the beginning of June for target hospitals on formulary of approximately 900 is the same as the number that you're giving now for the end of June? Is that -- although is that just rounding or am I -- trying to get too granular there?

Pedro Lichtinger

We never said that we're targeted on the 900. We have selected on the 900. We charged those that have a favorable formulary position. As I said before, those that actually have, how to say, unrestricted formulary or a relatively benign restricted formulary. So we're not focused at this stage on all of the 900. We have selected of the 900, which are the ones that it actually detailing to prescribers will make a difference. If you have a high restricted formulary, and I'll give you the extreme, but it dictates that DIFICID will only be used third line. I mean, you can visit the prescribers, they're not going to be able to use it in second line or first line. So even though it's on formulary, it is not in the company's interest to have an intense focus on that hospital. So 900 is where we have formulary. As I already said before, we have focused on 200 -- I'm sorry, on 20% of the 1,800, that's 360 hospitals, where we have a much more favorable formulary positions and on which we believe that we can grow and we have shown we can grow, because we have grown 305%. Our strategy going forward, of course, is to expand those 360 to get significant ingrowths in market share in them but also at the same time, bring new ones with a less restrictive policies so that we can actually detail. There is no point in detailing in a hospital that has adopted a highly restricted formulary.

Thomas J. Russo - Robert W. Baird & Co. Incorporated, Research Division

Okay. Apologies for one more, but just again, maybe for Stephen. The cash of $131 million, including milestones and reiterating expectations for breakeven within 3 years of launch, can I just get the current thoughts on the cash runway or sufficiency?

Stephen W. Webster

Yes. I think we're sticking to our comments that we hope to be cash flow breakeven within 3 years of the launch, which would give us another 2 years to get there. If you look behind the milestones and things, the cash burn for the quarter was in the $24 million range. And as sales continue to grow, obviously it will chip into that burn. We're bringing down about $0.85 of every sales dollar to the bottom line. So it's something we're watching. I think it's adequate for now, by all means, but cash is critical for young companies like us.

Operator

Our next question is from Chris Holterhoff with Oppenheimer.

Christopher Holterhoff - Oppenheimer & Co. Inc., Research Division

Just regarding prophylactic opportunity. Just wondering what your affirmation is on when you might be able to file for label expansion assuming you'd used up that study in the fourth quarter of this year?

Pedro Lichtinger

We expect to file in mid-'14, mid-to-late '14 and we expect -- we would expect to be the in the market in the second half of '15. Assuming everything goes well, of course.

Christopher Holterhoff - Oppenheimer & Co. Inc., Research Division

Okay. Perfect. And maybe just one question for Stephen as well. This is a minor point, but just on the product sales, does that include only U.S. sales or there are also sales from Canada in that $15.2 million number?

Stephen W. Webster

It's going to be U.S. and Canada. Canada, while it technically did launch in Q2, was really de minimis. So going forward, Canadian sales will be lumped with U.S. in that net sales line. And there was some sales level in Q2 because we're true to our word that we launched, but it's really rounding error at this point.

Operator

Next question is from Jim Molloy with ThinkEquity.

James F. Molloy - ThinkEquity LLC, Research Division

Can you talk a little bit about, I guess, the timing it was in the BMT, time in the pediatric timing, the next catalyst we should look for? And then second, a couple of nice milestones in the quarter, just walk through exactly what the next expectation should be for additional milestones coming through? And then finally, I know that you've spoken about the prophylactic implication versus the acute. Can you talk a little bit about -- and I know your expectation is a substantial step up potentially for the market, is it twice as big, is it 3x as big, 10x as big? Your thoughts on what should be able to get a BMT and then another one through, what kind of market uptick are you looking at?

Pedro Lichtinger

Well, it's simple to say when eventually, we get the second indication for immunosuppressed patients, and we get a broad immunosuppressed indication for a prophylaxis. We believe that the immunosuppressed patient group as a whole gets to about 50% of the patient population. If you consider that there is, on average, about 6% to 9% incidence on those immunosuppressed patients, we're talking about roughly a 15% expansion in number of patients to be treated, because you now try treating healthy, big patients. So instead of the 50%, you would have to go to 750% of the patients that are now accessible for the treatment that are immunosuppressed and would benefit from protecting themselves from getting the disease. I mean, obviously, you're not going to get all of them and the other thing that I would say is the dose that we have chosen is 1 pill a day, which is half of the therapeutic dose. And the length of treatment in the case of a BMT, we believe, is going to be about 30 days. But there are segments where that will go down to 20 days. So overall, this is, at least, like a tenfold increase, which means a fivefold increase in the total market size. So we believe it is very material. And of course, the most at risk immunosuppressed patients will be a no-brainer to get the disease. And as you cascade down in some of them, it will be more difficult to penetrate. But we believe that this is very, very sizable and we're very excited with the indication.

James F. Molloy - ThinkEquity LLC, Research Division

And development on the timing of potential additional milestones, we should expect second half of this year and then timing on the pediatric, next milestone on the pediatric trial?

Pedro Lichtinger

Well, the next pediatric trial is the beginning of the efficacy trial because the first trial was looking primarily at safety. So when the -- when we start the second pediatric trial, will be the milestone, obviously the successful completion of the first trial is also a milestone. And eventually, we do expect the other milestones from international. I mean, we do not comment on what are the revenues that our partner in Europe Astellas needs to achieve with DIFICLIR for the next milestone, but we believe this is in the -- hopefully, in the not too distant future. I mean obviously, not in the first 6 months, but it will come.

Stephen W. Webster

In Japan, there are some milestones for submitting an approval of the regulatory filings in Japan. You know, they're going be doing another tox test over there first, and then some sales milestones, and Australia has sales-related milestones.

Pedro Lichtinger

And obviously, the other milestone would be the pricing approvals in Canada and in other countries around the world.

Operator

Next question is from Juan Sanchez with Ladenburg.

Juan F. Sanchez - Ladenburg Thalmann & Co. Inc., Research Division

Only a couple of questions. The first one is, in what kind of hospital are you guys having more success -- talking about tertiary hospitals, primary hospitals, secondary hospitals? Second question is whether or not within the hospitals you have visibility on repeat prescribers, whether or not you have identified. Do you have any sense of whether or not a physician tries this drug and he keeps on prescribing the drug, going forward?

Stephen W. Webster

I'm sorry. Could you clear...

Pedro Lichtinger

We did not understand the second part of the question.

Juan F. Sanchez - Ladenburg Thalmann & Co. Inc., Research Division

If within the hospital you have visibility on repeat prescribers, where now the scripts are coming from several doctors or whenever a physician tries the drug for the first time, he keeps on prescribing?

Pedro Lichtinger

No, we do have full visibility on the prescribers, yes. And let me abbreviate your --

Stephen W. Webster

First question. What type of hospital?

Pedro Lichtinger

We have not really characterized the hospitals. What I would say is, in general, and we're not different, academic centers are the last ones to join the party. So the answer is, most academic centers at this stage are -- have not made a decision. We do have a few that have included us in formulary, most notable would be -- well, I'm trying to remember, Andy Anderson, but we have others. But in general terms, I would say, academic centers are not yet on board with our drug. It is not abnormal, most of them will wait, some will wait up to 3 years. So that is normal. The rest, we do not characterize them because they're all over the place. We have all types of hospitals.

Operator

Next question is from Heather Behanna with JMP Securities.

Heather Behanna - JMP Securities LLC, Research Division

In risk of beating a dead horse a little bit, I just want to go back to the inventory and the treatments that were shipped to the wholesalers and then shipped to the pharmacies. It looks like there'd be actually inventory build of around $800,000. So just, if you could help, once again, I'm trying to reconcile how we're getting the $18 million gross to the $15.2 million net without -- I mean, how the inventory works into that? Because you said there was a draw down, but it seems like more went into the wholesalers than went out to pharmacies.

Stephen W. Webster

The gross to net doesn't really impact the pharmacy shipments -- or excuse me, the ex-wholesaler shipments. Okay. So when we ship to a wholesaler, we generate gross revenue and then we take it down to net through the rebates and allowances and contractual obligations with those wholesalers. What we saw a lot of the change in the gross to net in this quarter was in the Medicare Part D doughnut hole. We had some payments to make up there. We started paying some GPOs in the long-term care end of the business, which took the gross to net a little bit higher, I guess, or lower, gross to net was lower. The percentage we lost was higher. But as far as the wholesalers go, we track those guys and while sales have generally been going up, June was a month in which we shipped less to wholesalers than they shipped out.

Heather Behanna - JMP Securities LLC, Research Division

Okay. So there wasn't -- over the quarter, there wasn't actually an inventory build that we should then be adding onto that $15.2 million?

Stephen W. Webster

No.

Pedro Lichtinger

I'm sorry, there is a -- the inventory difference is number one, the previous quarter, and that's why we have provided the previous quarter. The previous quarter, the inventories grew by 31%, the actual ex-wholesaler shipments grew by 19%. So there was a sizable inventory buildup at the end of the year.

Stephen W. Webster

At the end of March.

Pedro Lichtinger

At the end of March, I'm sorry. At the end of second quarter, then you'll have a gross in ex-wholesaler sales of 11%, while the purchases from wholesalers is only 9%. So they dished off that difference between 9% and 11%. There is a 2 points for the quarter destocking impact.

Operator

We have no further questions at this time.

Pedro Lichtinger

Okay. Well, I want to thank all of you for your attention and for your questions. And again, just to summarize, I think we are very excited with the performance in the month of July. We do acknowledge that we had a decline in our performance in the month of June. We believe we understand why. And it has been addressed and is now a part of our history. And as the company moves forward, we are very excited. So thank you very much for your attention.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.

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