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Executives

Ted Schroeder - President & CEO

Bill LaRue - SVP & CFO

Jim Breitmeyer - EVP & CMO

Scott Byrd - SVP & Chief Commercial Officer

Analysts

Charles Duncan - JMP Securities

Richard Lau - Wedbush Securities

Imran Babar - Cowen

Michael Schmidt - Leerink Swann

Patti Bank - DISCERN Securities

Juan Sanchez - Ladenburg

Greg Fraser - Bank of America

Cadence Pharmaceuticals, Inc. (CADX) Q2 2012 Earnings Call August 2, 2012 4:30 PM ET

Operator

Good afternoon and welcome to the Cadence Pharmaceuticals second quarter 2012 financial results conference call. On the call today are Ted Schroeder, President and CEO, Bill LaRue, Senior Vice President and Chief Financial Officer, Jim Breitmeyer, Executive Vice President and Chief Medical Officer, and Scott Byrd, Senior Vice President and Chief Commercial Officer.

At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the company, we will open the conference up for questions-and-answers after the management presentation.

Our first speaker is Bill LaRue. Go ahead, sir.

Bill LaRue

Thank you. Good afternoon everyone. Before we begin, I would like to remind you that statements included in this conference call that are not a description of historical facts are forward-looking statements. Forward-looking statements include statements regarding financial guidance, expectations regarding sales and demand, formulary approval, revenue growth, expenses and the market opportunity for OFIRMEV. The status of the recalls of OFIRMEV and related investigation, our expectation that no supply shortages will result from the July 2012 recall, knowing the cost of this recall have a material impact on our financial statements and the date on which we expect to commence enrollment in our post approval pediatric clinical trial of OFIRMEV. You are cautioned not to place undue reliance on these forward-looking statements which speak only as of the day that hereof.

Our actual future results may differ materially from our current expectations due to the risks and uncertainties inherent our business. These risks are detailed under Risk Factors in our most recent Form 10-Q and elsewhere in our periodic reports and other filings made with the Securities and Exchange Commission from time-to-time. All forward-looking statements are qualified in their entirety by this cautionary statement which is made under the Safe Harbor provisions of Section 21E of the Private Securities Litigation Reform Act of 1995 and we undertake no obligation to revise or update the information discussed during this call to reflect events and circumstances after this call.

If anyone has not seen our press release issued today, you can access it on our website at www.cadencepharm.com. We also post and maintain the current version of our corporate presentation on the Investors portion of our website under events and presentations and then corporate overview. Additionally, this conference call is being webcast through our website and will be archived there for future reference. We use the Investors portion of our website as one means of disclosing material non-public information, so we encourage investors to monitor our website in addition to following our press releases, SEC filings and public conference calls and webcasts.

Ted?

Ted Schroeder

Thanks Bill. Good afternoon and thank you for joining us today. I will open by providing a brief overview of the second quarter next Scott will provide an update on our commercial activities for OFIRMEV and then Bill will discuss our financial results. Following our prepared remarks, we will open the call to your questions.

I am very pleased to report that we had a strong second quarter achieving net product revenue growth of 38% compared to the first quarter of 2012; importantly our net product revenue of $11.1 million for the quarter exceeded the financial guidance that we provided last quarter. We believe we are effectively executing on our sales and marketing strategy and that the adoption of OFIRMEV will continue to generate strong revenue growth.

I would like to take a moment to put context around our launch of OFIRMEV. As of June 30, 2012 we sold a total of 3.1 million doses of OFIRMEV since the product launched in January of 2011. When compared to available data on comparable new hospital product launches during the past five years that we have reviewed, on average approximately nine times as many doses of OFIRMEV was sold and doses of those products during the first 18 months after launch. We believe this creates a strong base of OFIRMEV users that will continue to drive growth.

At this point, I would like to turn the call over to Scott who will discuss our commercial operations and sales performance during the second quarter.

Scott Byrd

Thank you, Ted. The second quarter was our best commercial quarter yet, during the quarter we sold over 1.1 million vials of OFIRMEV, an increase of over 300,000 vials or 38% as compared to the first quarter of 2012.

As a result, OFIRMEV’s quarterly IV analgesic unit market share grew to 1.93% in the second quarter of 2012 versus 1.41% in the first quarter. OFIRMEV continues to make inroads in the medical community and gain acceptance to the foundation of a multi-modal approach to acute pain management. There are three drivers that we believe account for the growing demand of OFIRMEV; growth in new customers, increasing order frequency and increasing average of quantities of product ordered by our customers.

The number of unique accounts that have ordered OFIRMEV as of June 30, 2012, increased to nearly 300,200 accounts, which is up 17% from the end of the first quarter of this year. We believe that this is indicative of physician demand for new methods to manage pain and the recognition of the role that OFIRMEV can play in a multi-modal approach to acute pain management.

We also continue to make gains with repeat customers. As of June 30th, approximately 2,500 accounts or 78% of our customers have placed multiple orders for OFIRMEV. This reflects approximately 21% increase in the number of repeat customers as compared to the end of the first quarter.

The frequency of customer orders in the second quarter of this year increased by 11% as compared to the first quarter of 2012, with an average of 4.4 orders placed per customer during the quarter.

Finally, our customers are also placing larger orders. In the second quarter, our average order size increased over 5% over Q1.

So to summarize, we've seen a number of customers expand by 17%. We've seen an 11% increase in ordering frequency and 5% growth in average order size, all resulting in a 38% growth of OFIRMEV sales in the quarter.

The growing demand for OFIRMEV is not only evidenced in the sales metrics I just reviewed but also in the feedback we receive from physicians and customers. We periodically performed field market research to access our customers’ additives, trial and usage of OFIRMEV.

For example, we completed surveys in the last fall and again in May of this year. These surveys tell us that as more and more physicians try and subsequently adopt OFIRMEV into their practice, their satisfaction and optimism about future use continues to rise; 98% of the users we surveyed reported that OFIRMEV’s efficacy met or exceeded their expectations.

As a result, approximately two-thirds of physicians indicate they’re highly likely to recommend OFIRMEV to their colleagues. Physicians in our survey have reported significant increases in both the percentage of patients they're currently treating with OFIRMEV and the percentage they expect to treat in the future.

In short, as more customers adopt OFIRMEV, their experience and satisfaction continues to improve. We believe that positive experiences with our product form a critical foundation upon which to build our brand and it gives us a great confidence in the future opportunity for OFIRMEV.

In addition to the events of the second quarter, there are two additional commercial items that merit discussion during the call. In early July, we announced a 6% price increase for OFIRMEV that increased the wholesale acquisition cost to $11.40 per vial. This is the first price increase for OFIRMEV since its launch and we believe that the timing and the amount of price increase are in line with other recent pharmaceutical product launches and reflect the value of our product to patients.

With regard to the voluntary recall of certain lots of OFIRMEV that we announced last week, I want to emphasize that we have seen no adverse events and have received no product complaints involving the particular matter that resulted in the recall. Importantly, we do not expect any supply shortage as a result of this action because the recall lots were manufactured between January and March 2011 and will expire between July and September of 2012.

We believe that fewer than 10,000 vials from these lots remain on the market at the present time. Manufacturing operations for OFIRMEV were suspended in back to earlier in the year following a similar observation. Since that time, we've been receiving products from our alternate supplier and the supply chain is operating smoothly.

We are proud of the efforts of our commercial team and the results they delivered to the first half of the year through the growing demand and positive feedback that we are receiving, we believe our customers increasingly share our view that OFIRMEV should become the foundation for acute pain management in the US.

With that I will turn the call over to Bill who will review the financial results.

Bill LaRue

Thanks Scott. During the second quarter of 2012, we achieved net product revenue of $11.1 million which is an increase of $3.1 million or 38% from the $8 million for the first quarter of 2012 and an increase of $9.4 million from the $1.7 million for the second quarter of 2011.

For the six months ended June 30, 2012, our net product revenue was $19.1 million which is an increase of $17 million from $2.1 million for the six months ended June 30, 2011. During the second quarter of 2012, we reported a net loss of $21 million or $0.25 per share compared to a net loss of $19.2 million or $0.30 per share through the second quarter of 2011.

For the six months ended June 30, 2012, we reported a net loss of $43.7 million or $0.51 per share compared to a net loss of $43.6 million or $0.69 per share for the comparable period in 2011. Our cost of products sales for the three months ended June 30, 2012 was $5.8 million and $10 million for the six months ended June 30, 2012.

In each period, this expenditure represented approximately 52% of net product revenue. For the six months ended June 30, 2011, our cost of product sales represented approximately 62% of net product revenue. We have realized economies in scale on increased sales volume during 2012 that have contributed to the reduction of our cost of product sales on a percentage basis.

As previously discussed following the voluntary recall of one lot of OFIRMEV in February of this year, we temporarily suspended the production of OFIRMEV by our initial contract manufacturer and in the outcome of the related (inaudible) investigation.

As a result, we incurred higher freight cost for assignments we expedited certain shipments of OFIRMEV from our ultimate supplier in order to meet demand for the product. Additionally, we incurred unabsorbed manufacturing costs due to fixed costs and we continue to incur despite the suspension of production by our initial supplier.

The expedited freight costs and unabsorbed manufacturing costs realized during the three months ended June 30, 2012 represented approximately 20% of our cost of product sales for the period. As Scott mentioned in July 2012, we've voluntarily recalled all remaining lots of OFIRMEV manufactured by our initial contract manufacturer as a precautionary measure due to the presence of unidentified visible particles in a number of vials from one lot which were detected during the routine stability testing.

We do not expect the cost of the second recall to have a material impact on our financial statements. Our research and development expenses decreased to $1.7 million for the three months ended June 30, 2012 as compared to $2.6 million for the same period in 2011. These expenses also decreased to $3.2 million for the six months ended June 30, 2012 as compared to $5.3 million for the same period in 2011.

These reductions were primarily result of the restructuring we implemented in fourth quarter of 2011 in which our total workforce was reduced by approximately 7% primarily in the development and general and administrative areas.

In the third quarter of this year, we expect to begin enrollment in a post approval clinical trial in the form in pediatric patients under two years of age. We anticipate that this study will increase our R&D cost moving forward. Our selling, general and administrative expenses increased by $2.1 million to $23.2 million for the three months ended June 30, 2012 as compared to $21.1 million for the three months ended June 30, 2011.

For the six months ended June 30, 2012, our selling, general and administrative expenses increased by $5.7 million to $46.8 million as compared to $41.1 million for the comparable period in 2011. This increase was primarily attributable to the legal cost that we incurred relating to our patent infringement litigation as well as to increased commissions payable to our hospital sales specialist as a result of increased revenue.

In addition, we accelerated the timing of a variety of marketing programs planned for 2012 which front loaded the expenses related to this program to the first half of the year. As a consequence of the front loading of these marketing and legal expenses, we expect that operating expenses will decline in the second half of the year over the first six months. As of June 30, 2012 we had cash, cash equivalents and short-term investments of $90.8 million and net accounts receivable of $5 million.

I will turn the call back over to Ted.

Ted Schroeder

Thank you, Bill. As you have heard, we are very pleased with our continued progress in the second quarter based on the current uptake of affirmatives and our ongoing market research; we believe OFIRMEV will become foundation for multi-modal acute pain management in the US. We are continuing to provide guidance for our net product revenue on a quarterly basis. For the three months ending September 30, 2012 we expect net product revenue from sales of OFIRMEV will be between $13.7 million and $14.2 million. We will now open the call to your questions.

Question-and-Answer Session

Operator

The question and answer session will begin at this time. (Operator Instructions) Our first question is from Charles Duncan of JMP Securities your question please.

Charles Duncan - JMP Securities

So here is a thing the last two months of the quarter you showed strong above trends, script trends or script trades and I know summer is usually though but what is the catalyst for those trends, can you identify one or two I know you laid out three reasons that you have got but is there a new message or something or are you just giving traction and is there any reason that can't continue?

Ted Schroeder

Charles, this is Ted. I will take step back but invite Scott to add color. It's not a new message. It's the same message but I do think it reflects our shift towards the end of last year to focus more on pull through and specifically that’s a focus on the surgical audience. And so the number of things that the representatives are doing in the field to not only promote the product to surgeons but make the product easy for surgeons to use and that means working on things like point of care, stocking. We are taking a very aggressive effort to work with [our] staff to get the product closest to the point of care and we believe that’s one of the big accelerators at the customer level.

In addition, some of the market research trends that Scott noted that you know, 98% of physicians, when they use the product, they like the product and they continue to use it. It's very stick when you get trial. So we believe that increasing trial leads to increasing usage. Now like every other product, that needs to get in to the physicians habit or daily use [patents] and that’s where our sales force comes into play but I think its really those two things. Easier access to the product and its increasing trial and a sticky trial that leads to ongoing use as part of their (inaudible).

Scott Byrd

The only other thing I would add Charles is that we have been spending as you know, tremendous amount of time working to partner with our pharmacy customers, and they play a critical role not only in the formulary process of course but in assisting and improving that stocking and the access for physicians post the formulary decisions and we have seen a growing number of accounts I guess less than their restrictions, both formally and informally into the product as they have gotten personal experience with the product, seen it's impact on their patients and on opioid utilization in their institutions as well as really rationale thoughtful use by anesthesiologists and surgeons.

So as that continues to happen we think we are going to be able to leverage better and better partnership with pharmacy and I think that will support long term growth. I would say in terms of your other question around the summer time dynamics, I don't see any reason to believe we are going to see anything, but growing demand as Ted outlined from physicians and frankly better support from pharmacy.

But we do see disruption in hospitals over the mid summer period, July of course is the most disruptive month for hospitals as they change over staff particularly in the academic settings and we talked about that last year at this time and saw some softening in the procedure volumes in hospitals in the July and August timeframe.

And I would anticipate to see some of that occur this summer, but no fundamental changes in the adoption rates or the longer-term growth.

Charles Duncan - JMP Securities

And then your reorder rates, both the frequency and increasing size, those appear to be good numbers. But you did mention that approximately 22% or so customers have not reordered any diagnostics as to why that is or can you just kind of forget about that 22% and go on and try to continue to build new accounts.

Scott Byrd

Yeah, most of those accounts had only ordered one time are pretty new accounts are pretty new accounts and as you know many accounts will actually order a case or two prior to even making a formulary decision or they will order a case or two to get some early experience and there can be a pretty long lag. I mean a couple of months lag between their first order their second and repeat orders. I don’t know see any concerning patterns in the one order accounts because most of those don’t last more than a month a two and that it’s really a reflection of bringing new customers on board.

The ones that have been one order accounts for an extended period of time tend to be very, very small accounts. Ambulatory surgical centers or other small rural hospitals that we are not expecting to grow from and we are not calling on.

Ted Schroeder

Charles keep in mind that we call on about 1,800 hospitals. We have 3,200 hospitals that have ordered the product. So it’s a remarkable number above what we are calling on and we don’t intend to make personal calls to those accounts. We are focused on our -- where the target market is 80% of the market resides in those 1,800 accounts.

Charles Duncan - JMP Securities

And then final question perhaps for Bill, do you think at the end of this year you will have enough kind of experience on an annual basis to be able to provide guidance for full year 2013 or continue to go on a quarter by quarter basis?

Bill LaRue

Charles, we haven’t come to a final conclusion as to the timing of writing annual guidance. That is something that we are working towards, so we will continue to give quarterly through the end of the year and we will asses that as we move into early part of next year.

Operator

Your next question is from Richard Lau of Wedbush Securities.

Richard Lau - Wedbush Securities

First one is you guys have talked quite a bit about the product being stocked closer to point of cares being a pretty big driver for utilization. I was just wondering what sort of that dynamic – is it really the surgeons and may be nurses going to the pharmacist (inaudible) on where it is stocked. Is the pharmacist the ultimate gatekeeper there?

Ted Schroeder

Well I wish it were really simple answer to the question. It is a really good question of course, but the answer is all the people that you described are integral part of that decision. There has to be demand and pull from anesthesiologist particularly in the OR setting to help get the stocking closer to the point of care.

The surgeon support adds great emphasis to that and as you probably know, the folks that do a lot of the heavy lifting related to where the drugs are stocked and going and getting them and getting them hung is really the staff, the nursing staff or CRNAs.

So you know often times they are the ones actually executing the decision and the one customer you didn’t mention that ultimately is a pretty important partner because they play the keeper role is pharmacy. Pharmacy in most circumstances need to sign off on where the product is ultimately stocked.

So the reason we like point of care stocking so much is because it is of course very central to making the product easy to use for physicians and there is probably no one thing you can do to help increase utilization for folks that are interested and like the product and they make it easy.

But it’s also a good metric for how well coordinated the adoption of OFIRMEV in account but it takes so many of those key players to be aligned and work on the project to get it stocked. It ends up being a sort of good measure for us to see how well we’re doing and in coordinating care across healthcare provider.

So it’s a bit of a long and complicated answer. I apologize for that, but it gives you a sense on -- what the representatives' mission is right now as they walk in to that account. They have a very singular view and that’s about creating the demand and interest to get it stocked at the point of care.

Richard Lau - Wedbush Securities

Is there any standard timeframe that you guys have been seeing for when the product is on formulary hospital to when you seeing it move from the central pharmacy to closer to point of care?

Ted Schroeder

You know, I don’t have good metrics on that. We haven't captured the timing of that decision in a way that allows me to give you a hard and fast number but you know, it certainly isn’t overnight process. We've talked about that before. It can take between three and six months after that formulary decision is made before generally speaking, the physicians have relatively free access and that would include the stocking decision as it were.

But you know, so no new information there. It’s a pretty arduous process but you know, I think the aha in there is really is that ease of access is really well defined by how the product is stocked.

Richard Lau - Wedbush Securities

And next question is you guys mentioned in your surveys, 98% of physicians had met or exceeded their efficacy expectations. Was it highly recommended, was there any sort of reason one third did not – say it was highly recommended or is it just sort of broad?

Ted Schroeder

Well, just to give you maybe some background on the formation of the question of the market research. When we say the two thirds are indicating that they will, they are highly likely to recommend it. On a seven point scale two thirds of it rated at six or seven. So that is a very high degree of emphasis on their intention to recommend.

I don't have the three, four and five numeric answer here sitting in front of me, but I would guess a substantial portion of that other third is in the upper end of that intention to recommend. It's just not that it’s the most intense positive response.

Jim Breitmeyer

Yeah, I can tell you Richard from experience with other products, having two thirds of physicians after 18 months on the market saying that they are highly likely to recommend to a colleague is outstanding. In fact almost one third of it, particularly for a product with such a broad market opportunity like OFIRMEV, it's really a phenomenal amount of support.

Richard Lau - Wedbush Securities

And then you guys mentioned, you guys filed for Canada approval, can you maybe talk a little bit about your strategy for that market and remind us how big of a market that is? I imagine not too big?

Ted Schroeder

Yeah, the market in Canada is not that big, it's probably a bit smaller than California. It's a territory where we have rights and so it's essentially the US NDA kind of repackage for Canada and our strategy is to seek a partner in Canada and we expect to be able to inform the market of who that partner is prior to approval in Canada.

Richard Lau - Wedbush Securities

Okay. And then I noticed there is a pediatric FDA panel on September 11th and that you are going to be talking OFIRMEV; is there anything significant there just sort of standard procedure?

Jim Breitmeyer

This is Jim Breitmeyer, Richard. It is standard, there is nothing for cause going on at all; the OFIRMEV is one of a series of products that are undergoing pediatric review which is part of the pediatric committee’s mandate to look at products in the one to two year post launch timeframe.

Operator

Our next question is from Imran Babar of Cowen. Your question please.

Imran Babar - Cowen

I am a little curious, a little bit about, were there any supply disruptions and how that might of influenced this last quarter?

Scott Byrd

Hi Imran, this is Scott. No, we haven’t had any supply disruptions since we have the recall at the end of January last year.

Imran Babar - Cowen

I mean actually with respect to the market?

Scott Byrd

Last quarter, I see, I understand, the supply disruptions for IV analgesics in general.

Imran Babar - Cowen

Yeah, I am sorry.

Scott Byrd

Yeah, that’s also a good question. We have talked about it before. We have seen some supply interruptions or shortages for a number of different injectable analgesics over the first part of the year. We saw then across the board, the two most prominent that come to mind are Ketorolac and (inaudible) I also think there were some shortages of morphine along the way and that contributed to the first five months of the year, the class volume was down pretty substantially over the previous four quarters. We did see [Technical Difficulty] of OFIRMEV what’s been interesting about that though is that once they try it, they continue to use it even when they are availability for the other analgesics returns. So it’s a very sticky trial and we have seen that pretty consistently across the country so far this year.

Ted Schroeder

Yeah, I think it’s also important to note that the kinds of supply disruptions we saw of the IV analgesics tended to be regionally focused. So it was something there was a general stock out across the country that tend to be kind of rolling storages and clearly they were managing the inventory into whole sort of distribution centers, but the overall effect was a decrease in the overall market size.

Imran Babar - Cowen

Just a next question if I can, are there any update on your litigation from Paddock; I think it came from that and (inaudible)

Ted Schroeder

Yeah, we are moving forward as the process you know kind of moves forward and we mentioned in the script today that we’ve had a fair number of legal expenses in the last quarter associated with the discovery issues along with doing or getting prepared for as the litigation moves forward. So its kind of on the timeline, as we move forward, we're really looking at this point, a bench trial is scheduled to commence in May 2013, in Delaware and so that’s really the key date that we’re working toward.

Imran Babar - Cowen

My last question is just, have you guys given anything in terms of cash flow breakeven in terms of timeline on that and what your latest thinking is?

Ted Schroeder

We haven't been specific in terms of that forward-looking guidance other than that we’ve been very clear that we believe that given our plans, we have adequate cash to get to breakeven and we don’t see anything at this point to give us any concern that that won’t be the case.

Operator

Our next question is from Michael Schmidt of Leerink Swann. Your question please.

Michael Schmidt - Leerink Swann

I was thinking around business development and especially with respect to timing and how will the upcoming Markman decision potentially influence your approach to end licensing on additional product candidates?

Ted Schroeder

Yes, so let me take the last part of that first. I don't think the upcoming Markman hearing will have any impact on our business development strategy. It’s an event that will happen and we have high confidence in the strength of our patent that we look as I said, looking forward to the May 2013 trial scheduled in Delaware.

Our business development strategy, you can really think about it as a near-term and a longer-term strategy. As we gain more market penetration with OFIRMEV and are more comfortable in our market position with OFIRMEV. We have capacity in our sales force. So in the near-term, we would be interested in adding products to the sales force that could be promoted immediately.

All market products that would fit in to the sales bag. Now keep in mind, as we define our hospital marketplace, we look at the hospital to channel distribution. So we are somewhat therapeutic category agnostic but we are more interested in therapeutics that will be used within the walls of the hospital, products that are on the market and would facilitate the promotion of OFIRMEV.

I think its important to recognize that we under any scenario, the full focus on growing OFIRMEV is front center and anything we add to it needs to facilitate that growth. So in the short-term that consistent of co-promotions, asset purchases in licensing etcetera to help us execute on that. I wouldn’t say that we have anything imminent but we're back in the process to look for those kinds of assets. Longer and there would be smaller assets. Let's call them sub-$75 million market opportunity assets in the US.

Longer-term as we get closer to breakeven and have different financing options available to us across the cost of capital goes down. We would take a similar approach to the type of products but maybe more willing to take on launch risk in addition to just come revenue generating current on market products. And so and our appetite could reasonably expand to things like M&A etcetera. I would also put our option for incline in the longer term bucket, given the cost of that transaction it's squarely in the longer term bucket as we get rewarded for the increasing growth of OFIRMEV.

Michael Schmidt - Leerink Swann

And with regard to the situation at the Baxter facility, what potential timeframe are we looking at with regards to resolution and how should we convert gross margin going forward and then return?

Ted Schroeder

It has no significant impact on gross margin because our agreement with our current supplier, really the costs are about the same, there were some impacts in the first quarter and a little bit into the second quarter mostly related to the expedited shipping to get the supply chain refilled but at this point, there's no real difference in the margin regardless of supplier. The timeline for resolution is actually not defined. Baxter’s still working through the issues of understanding what areas to look at and how experiments can be set up to identify the root cause. So it’s a bit open ended at this point but as those experiments become narrowed down we would get a better sense of timing.

Just to add to that last point, I want to be clear that we have plenty of supply into the future from our current manufacturer. As far as we can see into the future we have a secure supply from our manufacturer and that's mostly because they have multiple product lines available. So instead of being dependent on just a single manufacturing line we actually have multiple product lines that can be used to supply the US market and we are very comfortable with that situation.

Operator

Our next question is from Patti Bank from DISCERN Securities. Your question please.

Patti Bank - DISCERN Securities

Just a quick one. I just want to confirm that with the price increase in July that the net price we should be using in the second half is about $10.30 per vial. Is that right?

Scott Byrd

Yes that is correct, Patti.

Patti Bank - DISCERN Securities

And then also follow-up on the previous conversation I had with you, can you just talk through and walk me through the delta on the gross to net pricing which I think has increased a little bit over time and just again give me a clear understanding as to what affects that and whether that's a function of discounting or what else goes into that?

Scott Byrd

Yes. The primary categories between the gross to net, I mean the biggest is your distribution charges I mean that's the single largest item but and that kind of varies depending upon volume. So as volume goes up, you can get potentially some efficiencies there. You also have cash discounts charge backs. We are contracted with all the GPOs you have some GPO administration fees, bad debt and kind of a returns, so those are the typical categories that you have. So we expect at least through the end of this year and moving into next year that the gross to net percentages will be similar host of price increase as pre-price increase.

Patti Bank - DISCERN Securities

Okay. And then back on the business development just one quick for Ted so now that you had in the last couple of months with a little bit of inflection point, can you kind of just talk about whether you had more unsolicited calls coming in and opportunities are whether I guess I am wondering are people starting to take notice on the business development side as to looking affirmative as may be on asset now that you can leverage more?

Ted Schroeder

And the answer to that is absolutely. We have had a lot of down calls particularly for linked stage development assets that folks are looking for a launch partner. The good news about that is most of those are several years away so there are conversations that we can continue to develop. I would say that majority of those are not actionable.

On the other hand, we are in the short-term I think every hospital product that someone’s thinking about doing a business development transaction with we get called from one source or another either directly from the company or from whatever advisors that are using we get called. So we are getting a very broad look of what’s available, very pleased with the quality and quantity of products opportunities and we will continue to carefully assess and how they fir strategically within our plan.

Patti Bank - DISCERN Securities

And then lastly just couple of clarification questions, is there any update on the vials for patients I know that 2 to 2.5 was kind of the end of last years number, but I just want get an update on that? Then also on the pediatric data just I know that it was supposed to start in the third quarter how long will it take to get the data back on that?

Scott Byrd

I will answer the vials for patient. We, the best data that we have, we collect from [Premier] about 500 hospitals that they have access to the in-patient billing records on and that gives us a look back about six months from where we are today. So we don’t really have any recent data to help us put a number on it. We do see in our market research that physicians are saying that they are increasing the number of vials that they are using for patient.

I wouldn't expect to see any material changes in that two to 2.5 for the next several quarters anyway and the reason is because as we bring on new customers whether it's a new hospital or it's new surgeons inside of the hospital, we are getting trial and usage of the product on the front end of that adoption on the low end on number of vials per patient.

So they often start of course with of course with one vial per patient and try it out, because we have been so rapidly increasing our new customer base that offsets the increases that we are seeing in the more mature customers. So I think as we stabilize that growth and the breadth of use then we are going to see deepening of use that will be driving the growth and acceleration in outer quarters.

Patti Bank - DISCERN Securities

And then just on the pediatric data, when we will get that back?

Jim Breitmeyer

Well, Patty, it's Jim Breitmeyer. The time table will be dependent upon enrollment and then as you can imagine, enrolling newborns is one of the most challenging things you can do in clinical research. Best guess would have us in 2014-2015 timeframe.

Operator

Our next question is from Juan Sanchez of Ladenburg. Your question please.

Juan Sanchez - Ladenburg

A couple of questions. Are you planning on adding more manufacturing redundancies in case something goes wrong with Bristol-Myers? And the second question is as revenue is growing in the business, how much additional investments you had to make (inaudible) have a product sale at $150 million or so? How much above and beyond that current run rate on the marketing and commercialization you have to spend?

Ted Schroeder

Good questions. We are absolutely looking to expand our manufacturing capability with backup suppliers and that has always been our intent and we continue to work with some parties in that area. And so nothing to report on that at the moment, but we continue to work on that. As far as expenses, that’s actually one of the beauties of the hospital business. As sales go up, you really don’t have to make additional investment to keep those sales growing.

Unlike in the retail environment where there's heavy sampling, that tends to drive marketing expenses up as a percentage of sales because of such a big element of the marketing budget. In the hospital, actually the marketing budget is actually the highest in the early part of the launch years and tends to moderate over time.

We don't anticipate we would need to add additional sales force capacity for OFIRMEV and we don't anticipate that we would have to add additional marketing dollars particularly as the product grows. So I think we are looking at a moderating marketing spend as we move past the launch period.

Juan Sanchez - Ladenburg

One last question, what's the average order size in terms of vials or boxes?

Ted Schroeder

About in the second quarter, it was just about 80 vials maybe just under that. It’s a little – it's a bit more than three and half cases of vial.

Operator

(Operator Instructions) Our next question is from Greg Fraser of Bank of America.

Greg Fraser - Bank of America

Were there any adjustments to our quarter’s sales in 2Q that were related to the [retrial]

Ted Schroeder

Greg there were not, no.

Greg Fraser - Bank of America

And the 3Q sales guidance, is that a pure demand number.

Bill LaRue

It will be.

Greg Fraser - Bank of America

Okay. Then on gross margin…

Ted Schroeder

And Greg on that point just to remind everyone on the call, we book sales when they are ordered by hospitals, we are not bookings sales in the wholesalers. So there's no reflection in our numbers of any wholesaler activity. These are pure demand sales when they are shipped from wholesalers to hospital customers.

Greg Fraser - Bank of America

On gross margin, will you continue to have to book unabsorbed manufacturing costs as long as Baxter is not supplying vials?

Ted Schroeder

Yes as long as they are not supplying vials and we are under the working towards resolution yes. It’s primarily a non-cash number, it does hit the margin, but it’s primarily non-cash. The larger impact that we have in the first half was the expedited freight cost and that’s all behind us. That kind flush through during the first and second quarter. So it is ongoing, it’s not significant and it’s primarily non-cash.

Greg Fraser - Bank of America

Okay. The 20% of cost that you mentioned that was related at the higher freight and how much are costs, the majority of that was for the higher freights?

Ted Schroeder

That is correct, yes.

Greg Fraser - Bank of America

Okay. And based on your experience so far, would you say that there is a certain level of experience that accounts tend to get to after which they start to place more and bigger orders. What I am wondering sort of how important of the experience using a fair amount versus just having relatively free access to the drug on formulary?

Scott Byrd

Both are important at different stages of the adoption. I would say the experience is important particularly to the broader hospital administrative support. The support that we are seeing from pharmacy often comes from the experience reported from physicians or from evaluations that they are doing of a [firm's] impact. On that shorter term, however the accessibility of the product probably has the most prominent impact on the utilization rates.

Operator

Next question is a follow from Charles Duncan of JMP.

Unidentified Analyst

Hi guys this is [Roy] on the call for Charles. We were wondering about the July price increase and whether it has had an impact on orders in this quarter.

Ted Schroeder

We haven’t had any significant negative feedback from our hospital customers at this point, Roy. So there is no way to associate their ordering patterns with that decision, but there hasn’t been anything that we've picked overtly in the ordering patterns and may be more importantly we haven’t had any significant direct feedback at this point.

Scott Byrd

And our price increase was right in the middle of the pack. It's in the middle of the range of price increases by products at this stage of their launch over the past several years. So I think it's somewhat probably anticipated and not outside the range and in fact I think within the couple of weeks that we took our price increase, there were 9 other hospital products that had price increases. And at least I think the average of those price increase were 9%. So we were well below the average with the class of products that took prices increases in early July.

Unidentified Analyst

I am sorry if I missed it, but did you guys give any gross margin guidance going forward?

Bill LaRue

We have indicated in the past that we would expect with appropriate volumes and efficiencies that it would be in the mid-60s range?

Operator

At this time, there are no further questions. So I will turn the conference back to Mr. Schroeder.

Ted Schroeder

Thank you everyone for joining us on the call today. I appreciate our continued interest and questions and we look forward to speaking to you throughout the next few months.

Operator

Ladies and gentlemen, this concludes our conference call. All parties may disconnect. Good day.

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