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Executives

Vincent J. Milano – Chairman, President and Chief Executive Officer

J. Peter Wolf – Vice President, General Counsel and Secretary

Charles A Rowland – Vice President, Chief Financial Officer

Colin Broom – Vice President and Chief Scientific Officer

Daniel B. Soland – Vice President and Chief Operating Officer

Analysts

Brian Abrahams – Wells Fargo Securities

Geoff Meacham – JPMorgan

Thomas Wei – Jefferies & Company

Rachel McMinn – Bank of America Merrill Lynch

Lisa Bayko – JMP Securities

Brian Skorney – Brean Murray

Mario Corso – Caris & Company

Philip Nadeau – Cowen & Company

Stephen Willey – Stifel Nicolaus & Company, Inc.

Joseph Schwartz – Leerink Swann Llc

ViroPharma Inc. (VPHM) Q2 2012 Earnings Call August 9, 2012 9:00 AM ET

Operator

Good morning everyone, and welcome to the ViroPharma Second Quarter 2012 Results Conference Call. Today’s call is being recorded and is expected to last one hour. At this time, I will now turn the call over to ViroPharma’s Chief Executive Officer, Vin Milano. Please go ahead.

Vincent J. Milano

Thank you, Operator. Good morning, and welcome to everyone joining us on today’s call to discuss our performance for the second quarter of 2012. I’m joined by the other members of the ViroPharma management team, as well as Rich Morris, Will Roberts, and Bob Doody. Before we proceed, Pete Wolf, our General Counsel will provide you of our potential to make forward-looking statements. Pete?

J. Peter Wolf

Thanks, Vin. During this call, we will make forward-looking statements certain statements such as those regarding our expectations for financial results including guidance, peak year, net sales for Cinryze, peak year European net sales and tax rates, manufacturing capacities, the timing of clinical studies, potential or product candidates and clinical development, changes in channel inventory, our commercial launches of Cinryze, Plenadren and Buccolam in Europe and our ability to continue to identify additional Cinryze patients are examples of such forward looking statements.

As you know forward-looking statements are subject to factors that may cause our results and plans to materially differ from those expected. Please refer to the press release issued this morning and to our filings with the SEC for more information regarding the risks and uncertainties that could cause future results to differ materially from those expectations expressed in this conference call.

In this call, we will also discuss some non-GAAP measures in talking about our Company’s performance and you can find the reconciliation of those measures to GAAP measures in our press release issued this morning.

I’ll now turn the call back over to Vin.

Vincent J. Milano

Thanks, Pete. As you may recall, we provided our last update in May. I spoke of how we viewed the entry of generic Vancocin, as the opportunity for new beginning of positive strong growth and momentum for ViroPharma. I am very pleased to be providing you with an update this morning that eliminates any doubt about the positive direction we believe our company is heading throughout the rest of 2012 and beyond.

The agenda for today’s call is that I will provide an overview of the company’s recent progress, Charlie will then provide the financial overview of the quarter and I will return for a few closing comments before taking your questions.

For some areas of the company, our comments will be brief as we are preparing more robust content for our Analyst Day on September 21. We plan to distribute the formal invitation through this event next week.

As we reported a few days ago, the FDA approved our prior accrual supplement for industrial scale manufacturing of Cinryze. We believe this approval paves the way for us to provide for and ensure that any patient who can benefit from Cinryze has access to an uninterrupted supply.

Secondly, it also opens up the ability for our clinical development teams to more aggressively pursue additional development of Cinryze, whether it would be our subcutaneous administration program or other serious conditions of unmet need that could benefit from C1 inhibitor.

I am very proud of the can do attitude of the joint ViroPharma/Sanquin team in achieving the PAS approval. And I am extremely thankful to the patients, physicians, HAEA and many others for their willingness to work with us and work through any challenges that confronted us. I would also like to note the efforts of the FDA’s CBER review team, who also worked together with us in a very professional manner.

So now, let’s move into some of the facts that how this approval impacts the business moving ahead. As we noted earlier, the industrial scale line is capable of producing on a single shift between 100,000 and 110,000 doses annually. We have plans in place to add additional shifts as well as increase in production through various other means.

As it pertains to 2012 specifically, we expect that we’ll be able to produce more than enough doses to not only meet the expected demand for the year, but also all of our clinical needs. We anticipate product produced at risk from our industrial scale manufacturing line to start being available for sale on approximately six weeks.

Our first priority is to get all patients back to receiving monthly shipments as opposed to the weekly shipments they have been and are currently receiving. We expect this to occur during the third quarter. In the fourth quarter, we expect our SPs and SDs will be in a position to be begin to rebuild their inventories.

Moving on to Cinryze demand; since the launch, we’ve demonstrated a very steady and consistent demand growth every quarter, and the second quarter of 2012 marked yet another very impressive period of growth. During the quarter we added approximately 60 gross new patients on Cinryze therapy, and across the first half of 2012 we have added over 120 gross new patients on the Cinryze therapy. As further evidenced of the tremendous strength of our demand growth, I’ll also add that in July we had the second strongest month of new scripts generated in the past three years.

Clearly, our team is firing on all cylinders. We also continue to make strides into the conversion of patients who had previously prevented their attacks through chronic use of anabolic steroids. During the first half of 2012, roughly 47% of our new patient additions had previously used anabolic steroids to prevent their attacks.

Also of the patients we’ve added this year nearly half of them had been diagnosed with HAE in the time since Cinryze launched. So these clearly qualify as newly found patients. We also continue to see discontinuation of true prophylactic patients at a rate in the low single-digits.

As a matter of convenience we are providing the update that at the end of Q2 we had 820 patients on active therapy dosing at rate of $1.8 doses per week. We now intend to resume our previous practice of providing patient updates on an annual basis.

For the closeout the Cinryze U.S. discussion, although there had been many moving parts to the story, at the end of the day it is abundantly clear that Cinryze growth continues to be very strong and consistent. We’ve expanded our capacity greatly and the future for this product appears to be very bright.

As a result, we now see this as at least a $700 million peak year sales opportunity for HAE/IV therapy in North America and Europe. That is up from our previous projections of up to $550 million. We are going to talk about other potential upsides for this franchise at our Investor Day.

Moving onto our European commercial operations, the launch of Cinryze continues to advance. In the countries, we’ve launched in first half of this year, physicians are beginning to adopt the concept of Prophylaxis, and our converting patients onto Cinryze therapy. Pricing and reimbursement is thus far met our expectations, and we continue to prepare for the launches in the remainder of the big five countries.

The Buccolam launch continues to also move forward and is in many ways following a fairly similar territorial launch sequence as Cinryze. On Plenadren, our progress towards the fourth quarter launch is very much on track and enthusiasm for this product is extremely high. We also intend to meet with the FDA later this year to discuss the pathway for Plenadren here in the United States.

Overall, we are making strong progress with our European business and inclusive of our European Cinryze, Buccolam and Plenadren products, we are increasing our view of the peak year sale potential for our European business to a range between $300 million and $500 million, driven primarily by our optimism for Plenadren. This is in comparison to the up to $200 million we had previously referenced for this business.

In clinical development, we continue the enrollment of patients into our VP20621 Phase II study to prevent recurrence of Clostridium difficile Infections. And look forward to seeing data from an interim analysis later this year. We are also performing non-clinical studies with our VP20629 compound to treat Friedreich’s Ataxia; and expect to submit in IND and subsequently commence clinical studies in the first half of 2013.

And you may have noted a weeks ago that we initiated two separate clinical studies with maribavir; one in the United States and one in Europe for the treatment of active CMV infections. This is different from the previous Prophylaxis approach, and one that has the potential to fill void of a serious unmet medical need evolving due to viral resistance and intolerance to current therapies.

In fact Encouraging data from our name patient program experience in France was just presented at the International Transplant Congress last month. We maybe in position to have some of the data from our Phase II studies prior to year end as well.

Finally, as it pertains to our subcutaneous Cinryze development and the news of last week related to the combination with PH20.

As you all know the FDA has place the combination development on a temporary clinical hold. We also announced that we will be advancing our own subcutaneous program. At this point, we’re still working on the details internally, and we’ll openly, we’ll be having further discussions with the agency. In the absence of those facts, we will wait until we are in a better position to provide a more complete update.

Overall the second quarter did mark a strong period of both commercial and clinical progress for our company. And indeed sets us up very well, to have a number of successes both in the short and the long-term.

I’m now going to turn the call over to Charlie. To provide you the financial details of the quarter, and I’ll return for a few closing remarks. Charlie?

Charles A Rowland

Thanks, Vin, and good morning. First, let’s summarize a few items that impacted our financial results for the quarter, record Cinryze sales for the quarter and the six months driven by continued strong demand. Entry of Generic competition for branded Vancocin, continued progress of our European expansion and execution of our clinical programs. And further execution of our share repurchase program.

Now moving onto the financial results, sales of Cinryze for the second quarter were record $77 million, compared to $62 million in the prior year. For the six months period, sales were $145 million representing 22% increase over the $119 million reported last year. Sales of Cinryze were reflective of one, continued strong new patient adds, and two, consistent patient dosing rights. The $75 million of U.S. Cinryze sales generated in the quarter were more reflective of demand and channel inventory continues to remain below normal levels.

During the second quarter, we shipped roughly 19,000 doses to specialty pharmacies and specialty distributors. Also we reached the Cinryze cumulative sales milestone of $600 million in the second quarter, which triggered the contingent value rights liability to former Lev shareholders.

This payment will be made in mid-August, and for your modeling purposes, the total cash payments are approximately $92 million, this includes the CVR and other deal-associated expenses. We’ll also receive a tax benefit of approximately $6 million, thus goodwill was increased by a net amount of $86 million. These items do not flow through the P&L.

As you are aware, Generic competition for Vancocin started on April 10, the impact of generic competition has been significant. Our oral vancomycin franchise revenues were $16 million for the quarter declining by 76% from the same period in 2011. The average selling prices of our remaining vancomycin franchise will be significantly lower than our historical retail prices.

Also note, our reported sales including the revenues generated by our authorized generic. Cost of sales excluding amortization of product rights for the second quarter was approximately $25 million, compared to approximately $21 million for the prior year period. For the six month period, cost of sales grew by $70 million over the prior period to $57 million. Product mix and the Genzyme royalty payment drove the increase period over period. We continue to anticipate our Cinryze margins excluding amortization to remain over 70% for the remainder of the year.

Next, regarding our operating expenses, our combined SG&A and R&D expenses were $58 million for the second quarter, compared to $53 million for the same period in 2011. For the six months period, our combined expenses were $111 million compared to $91 million in 2011. Our selling general and administrative expenses for the quarter were approximately $41 million, compared to $32 million in last year's second quarter. This increase was driven primarily by launch-related costs for Cinryze, Buccolam and Plenadren in Europe. Our second quarter in 2011 included a $9 million upfront payment to Halozyme. Net of this, R&D expenses grew by $4 million to $17 million.

The expenditures were for the continued development of other modes of administration for Cinryze as well as the advancement of development pipeline. The operating income for the quarter decreased from $42 million in last year’s second quarter to $3 million.

For the six months period, we reported operating income of $43 million, compared to $102 million for the prior year. The primary driver for the decrease is decline of branded Vancocin revenues. We had GAAP net loss of $4 million for the second quarter, compared to net income of $23 million in 2011, and for the six months period, we had a GAAP net income of $16 million compared to $59 million in 2011.

The $5 million other operating expense is primarily due to the strengthening of the dollar versus euro and its impact on the value of inter-company loans. The effective tax rate of 52% for the six months is reflective of the lower Vancocin revenues and its impact on U.S. taxable income.

From there, we arrive at diluted EPS loss of $0.06 for the second quarter, compared to a diluted EPS of $0.28 for the same period in 2011. For the six months period, we had a diluted EPS of $0.22, compared to $0.70 in the prior year. Our non-GAAP or adjusted measures exclude non-cash and/or non-recurring items and adjusted net income was $7 million in the second quarter, compared to $37 million in the second quarter of 2011; this represents adjusted diluted EPS of $0.09 for the second quarter, compared to $0.43 for the prior-year period.

Regarding our capital structure, we generated $22 million of operating cash flows in the quarter. We ended the quarter with $472 million of cash, cash equivalents and short-term investments. As a reminder, we are paying out the final $92 million related to the Lev acquisition during the third quarter. We continue to execute under our stock repurchase program and acquired approximately 1.1 million of outstanding shares at a cost of $22 million or $19.90 per share. At this point, we still have $109 million remaining from our board authorization.

And finally, on our annual guidance; as a result of the items discussed earlier on the call, our U.S. Cinryze net sales guidance has increased with a new range of $320 million to $335 million in net sales. For the total net product sales, we are adjusting the upper end of the range is down to $475 million so our total net sales guidance range is now $450 million to $475 million, reflective of our vancomycin franchise run rate over future periods.

And we are reducing our R&D and SG&A guidance to between $215 million to $235 million; this reduction is reflective of lower R&D expense in European sales and marketing costs.

To wrap up, we continue to be cash flow positive. Cinryze continues to drive our U.S. growth. Cinryze, Buccolam and soon-to-launch Plenadren are driving our European operations to our profitability, and our pipeline continues to advance.

So with that, I will turn the call back over to Vin for some closing comments. Vin?

Vincent J. Milano

Thanks, Charlie. The expansion of our Cinryze manufacturing capacity is obviously a significant milestone. I would like to thank my colleagues who helped us achieve this important milestone and also all of my colleagues who kept their focus on our patients as we progressed through this expansion.

We continue to evolve as a multinational organization with multiple growth products on the market and maturing pipeline of potential solutions for serious unmet needs that also represent significant growth opportunities and a very solid balance sheet.

ViroPharma is very well-positioned to provide growth and significant shareholder value for many years to come. We look forward to seeing you all in New York in September as we have a packed agenda of information and data to share to hopefully help you further understand these potential growth opportunities the same way that we do.

This concludes today’s prepared comments. Now let’s open it up for your questions. Operator, are there any questions for us.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Brian Abrahams with Wells Fargo Securities. Please proceed with your question.

Brian Abrahams – Wells Fargo Securities

All right, thanks for taking my questions, and congratulations on getting industrial scale over the line. Two quick questions, I guess, first of on industrial scale, just wondering are there any conditions relative to that approval as it might relate to future inspections or might happen if you were to slip out of compliance in one of the two facilities and when do you expect the FDA to return for reinspection? And then I have a follow-up.

Vincent J. Milano

Right, thanks for your question. The answer to your first question is no, there are no conditions in the approval and with regards to the inspections, we expect them to show up again in 2013, which will be their bi-annual routine inspection at both facilities, the one in Brussels and then one in Amsterdam.

Brian Abrahams – Wells Fargo Securities

Got it, that’s very helpful. And then I am wondering, how aware were our physicians and patients of the supply constraints throughout the year? I am trying to get a sense of whether there might have been any pent-up demand among patients who might have gotten Cinryze prophylaxis, but maybe were less apt to start due to some other concerns about supply, and if it so, how do you go about capturing these patients and how quickly can you get them on to Cinryze? Thanks

Vincent J. Milano

So we are very transparent with the patients and the physicians, and we’ve been that way since we launched the product, because as you know we've always been in a tight supply situation. So they've been kept abreast of the situation regularly by the team here at ViroPharma and also through our partners at the SPs/SDs, and also through our relationship with the HAEA who helps answers questions, if you will, from patients, so very actively and proactively being transparent with patients. As far as pent up demand, we'll see. We are optimistic as you can tell by the call today that the demand continues to be very strong, very, very strong. And to the extent, that there are folks who were on the sidelines because they were concerned about the ability to continue on an uninterrupted supply basis. Hopefully, they feel more confident in our ability to deliver that to them, and we'll more than happy to put them on therapy.

Brian Abrahams – Wells Fargo Securities

Got it, thanks very much.

Vincent J. Milano

Thanks, Brian.

Operator

Our next question comes from Geoff Meacham with JPMorgan. Please proceed with your question.

Geoff Meacham – JPMorgan

Hey, good morning, guys and thanks for taking my question.

Vincent J. Milano

Hi, Geoff.

Geoff Meacham – JPMorgan

I want to get some feedback from you on Subcu Cinryze. So, what specifically are the next steps for your own subcu strategy? And then the second part is, are there any other technologies that you have looked at beyond Halozyme, that you think could help extend the duration of the franchise? I have one follow-up.

Vincent J. Milano

Sure, Colin, you want to answer the first part of the question, on the…

Colin Broom

Yes, the next steps are to understand and engage in dialogue with the division within CBER to understand what their concerns are. Remember they said we were on temporary clinical halt, so we’re looking forward to constructive dialogue with them, to with a view to moving forward with PA-20. However, as you know we do have already an open IND for Cinryze alone and we are making plans to advance that program as soon as we can after discussing with the agency.

Vincent J. Milano

With regards to your second question, Geoff, I think we would say that we evaluated a number of different technologies before we committed to the Halozyme technology, and at this point, we certainly aren't abandoning the Halozyme PH-20 technology at all. We simply don't have enough information that we can adequately assess with regards to our own program or how the agency might view it relative to our program. So it's premature for us to comment. We are looking forward to working with both Halo and the FDA to make sure that any questions or issues that are raised can be addressed and then we'll come forward with the plan once we have that information in our hands.

Geoff Meacham – JPMorgan

Okay. And then just a follow-up, I mean this may be covered in your Analyst Day, but just to get a sense from you for the peak sales updates that you talked about today, maybe go over kind of what you learned about the HAE marketplace to justify higher number. Is it the opportunity in Europe? Is it the competition in the U.S. currently, is it patient numbers? Just kind of at a higher level, are you thinking about the new sort of peak estimate?

Vincent J. Milano

Yes, I think first of all, we will be covering more details on all of these topics at the Investor Day in September. But specifically, as it relates to your questions on Cinryze, the growth in the peak year sales projection is driven by our view on the U.S. market very, very scantily that’s where we see our growth in raising our numbers, and I think it's a convergence of a couple of things, we continue to see as again demonstrated by the new patients on therapy again. We also shared with you that July was the second highest month of prescriptions that we've had in the three years. There's just great – the number of patients continues to increase.

We are starting to make more and more progress in the steroid population, the open-label data that’s out there with regards to the real clinical effects as compared to what was done in the Phase III clinical trials. We just see the market as being bigger. And also to be candid, industrial scale, right I mean now that we have the capacity we feel more confident in our ability to deliver on bigger numbers and we're committed to do that.

Geoff Meacham – JPMorgan

Okay, thanks.

Vincent J. Milano

Thanks, Geoff.

Operator

Our next question comes from Thomas Wei with Jefferies. Please proceed with your question.

Thomas Wei – Jefferies & Company

Hi, thanks. Just to clarify, it sounds like your European Cinryze assumptions are unchanged, so the entirety of the European business increasing guidance is Plenadren. I think that’s a multi $100 million drug?

Vincent J. Milano

So it’s driven by Buccolam and Plenadren, but we, it is weighted more towards our view on the opportunity for Plenadren than Buccolam in terms of raising the guidance, peak year guidance

Thomas Wei – Jefferies & Company

And then just the housekeeping thing, the U.S. versus EU sales breakdown in Cinryze; did I hear you correctly? Is it $75 million and then little bit under $2 million?

Vincent J. Milano

Charlie?

Charles A. Rowland

Its roughly about, total Europe is $4 million, so yeah about $2 million of Cinryze.

Thomas Wei – Jefferies & Company

Okay. And then I wanted to ask a little bit about the math around the patient number if here, so you – it looks like you’d previously told us that there were 760 patients at the end of the year, 820 now, 120 gross patients, so it looks like you’re losing about 30 per quarter inline with your low single-digit attrition every quarter. Hopefully, I did that math correctly? But I really wanted to ask was that 30 patients that you’re losing every quarter is that consistent with what you’ve seen before in the past and fairer way for you to reduce that attrition rate? Why are patients leaving Cinryze at that rate?

Vincent J. Milano

Thomas, thanks for asking that question. Let us share with you some further analysis on the concept of discontinuation and what we’ve labeled more appropriately in active patients. So as we analyze all of the patients who have taken at least one dose of Cinryze since the launch and we put them into categories. One category is what we defined as truly prophylactic patients.

And if we go back and look at the data we see that about 60 patients since launch or what we would define as true prophylactic patients and we define that as any patient who has taken overtime at least 50 doses of Cinryze.

Further segmenting that 60, we divided between 50 to 100 and over 100 and it’s equally split 30 and 30. So when you look at that math we’ve only had 60 patients since launch who have chosen to start taking Cinryze therapy. The balance of the patients, who are in active, was previously referred to them as "discontinued" have taken less than 50 doses cumulatively. And we want to find them as truly prophylactic.

And as you know there was the period of time when we’re the only new therapy on the market and so it could be that many patients were anxious to try any therapy available and they found a way to get a prescription in, and they were using it either for two basis or pre-procedure prophylaxis.

So that’s really the analysis that we’ve done. So we’ve seen a very, very low number of patients since launch who represent our market prophylaxis and in terms of that our market prophylaxis and in terms of discontinuation, so we'll look at it going forward we work very closely on these things and will monitor closely but the rates have been low, they remain low going into the next quarter.

And I think another point to reference as we said before there’s the patient numbers but the math is also doses per week. And as we’ve stated on this call, the doses per week has actually increased at the end of the second quarter from 1.75 to 1.8, which is taking out inactive patients who have received no doses.

And importantly we still have over 75% of our patients who are self-administering the product, which really goes well to helping them with regards to their compliance and taking their doses and keeping those doses per week rate at the level that we’ve seen it.

Thomas Wei – Jefferies & Company

I guess so. Just to squeeze in one more. I thought, though, that you’d previously said that your prophylactic patients represented the overwhelming majority of usage of the drug, but it sounds like maybe the acute usage is higher. Do you have a breakdown of prophylactic versus acute, an updated estimate, if not?

Vincent J. Milano

Well on the active base, right, the vast majority of the 820 patients are truly prophylactic patients as we end the quarter. What we do is, we monitor the situation and as the quarters move forward, any patients who hasn’t received the shipment in nine months we take out of active and put them inactive and follow-up. The database cleanout is relatively new as you remember we started cleaning out looking closely at the database to understand the each of patients dynamic closely beginning last year.

Thomas Wei – Jefferies & Company

Would you expect that to actually, this attrition rate to drop dramatically in subsequent quarters? (inaudible) get back in the queue.

Vincent J. Milano

The attrition rate is very, very low. So I’m not sure how much lower percentage wise it can go. But again I think to the point of over time, people who should be on acute therapy are more likely to go to an acute therapy. And people who are prophylactic-minded are going to come to Cinryze.

And going back to what I think the substance of your question, I know it's a mathematical at to some level, that the substance of your question, are people who have chosen prophylaxis Cinryze changing their mind and leaving Cinryze? And that's simply not happening, if you look again over the course of 3.5 years, 60 patients were prophylactic patients who are no longer on Cinryze therapy; a very low number compared to the 800 plus that we have on therapy at the end of the quarter.

So, I don’t think it’s fair to say you can look at it as 30 per quarter, I don’t think that's reasonable, take a look at it.

Thomas Wei – Jefferies & Company

Okay, great. Thanks.

Vincent J. Milano

Thanks Thomas.

Operator

Our next question comes from Terence Flynn with Goldman Sachs. Please proceed with your question.

Unidentified Analyst

Hi, this Roger on for Terence. Thanks for taking the question.

Vincent J. Milano

Hi, Roger.

Unidentified Analyst

I was wondering if you guys have any updated thoughts on the buyback?

Charles A. Rowland

So Terence, as I said on the call, this is Charlie, we did buyback stock during the quarter, roughly 1 million shares. We still have $109 million left on our authorization. As we've said in the past that we always look at we’re positive cash flow, we have plenty of cash on the balance sheet. So we look at all our uses of cash and if in the future that looks like it’s a better return for our shareholders, then we would continue the program but that’s a decision we make as we go.

Unidentified Analyst

Great. Thank you.

Vincent J. Milano

Thanks, Roger.

Operator

Our next question comes from Rachel McMinn with Bank of America Merrill Lynch. Please proceed with your question.

Rachel McMinn – Bank of America Merrill Lynch

Yeah, I guess sort of related to Thomas' question. How much of the guidance this year is related to inventory sales? You mentioned in the press release that you do expect inventory to, I guess, go more towards the normal range or at least get filled up. And then I guess just going back to that whole math situation, I’m still struggling to understand the disconnect between the 760 patients and 820. So maybe you can help us understand is the 760 not really a good scrubbed prophylactic number or when you talk about 60 gross new patients being added, are not all of those really prophylactic patients? Thanks.

Vincent J. Milano

Thanks, Rachel, for your questions. Maybe Charlie, you can start on the inventory question and then I’ll try to provide more color on the other question.

Charles A. Rowland

Okay. So, Rachel, in terms of your first question on the inventory to our guidance that we just put out assumes between $10 million to $20 million of inventory build in the second half of the year as we start shipping patients a full month supply instead of the weekly and then the SPs/SDs go back to a more normal level. So that is reflected in our guidance and Vin will answer the second part of your question.

Vincent J. Milano

So, Rachel, with regards to the roll forward, I think that again going back to the business rule that we put in place. So our team and then I’m going to get to your question (Inaudible) new patients. If we put a patient to get the prescription, we put them on therapy, they go into the system and then they become what we believe to be true patients.

What we found overtime is that overtime we've added patients on the Cinryze therapy who frankly were not using the product on a prophylactic basis as evidenced by the number of doses that they had received during their time on therapy. So we further to your point about the 760, we continue to analyze the data and scrub the data regularly to learn more and more and again in this particular corner what we did is, we tried to really look at the data of the patients who had not, who are inactive on therapy or inactive on therapy and what we have learned is that there is about 60 of those patients overtime who we would define as being prophylactic-minded as evidenced by the number of doses that they have taken on therapy.

The balance are patients who might have taken a few doses for whatever reason and so we’ll continue to scrub that data. What we can say today is the 820 are active patients on therapy and there could be patients in the 60 for the quarter or the 120 for the first half of the year who ultimately also become inactive patients.

Rachel McMinn – Bank of America Merrill Lynch

So then when you give us, when you’re saying that the number of doses being used per patient, the 1.8, is there a consistent that specifically among the active patients, the scrubbed patients, you're not kind of weighting them down with these…?

Vincent J. Milano

I think that’s correct, right, so that’s why the doses per week goes up right, to the extent that you have a patient, it's math. Again, I hate to be so simplistic about it, but doses per week is number of patients versus number of doses that are out, that are shipped and so when you see patients that haven't received any doses, you take them out of the math, the doses per week goes up. So it continues to reflect more and more in our view true prophylactic patients, and as we continue to move through and keep analyzing the data, we'll continue to scrub this data. Right now where we are at 1.8 doses per week, 820 patients on therapy, we've had 120 patients in 2012, and see by the way of all these acute options, right, so in the phase of acute options 120 people have signed on and filled out prescriptions for Cinryze and received therapy. So I think that's pretty demonstrable of the demand for the product and the interest for patients to take prophylactic therapy.

Rachel McMinn – Bank of America Merrill Lynch

Okay, thanks, and then just a follow-up on the European peak sales numbers that you said. What is it that actually changed with Plenadren? Because that hasn't been marketed yet?

Vincent J. Milano

Dan?

Daniel B Soland

So I think it’s interest from the [Kalbitor] leaders about percentage of Adrenalin insufficiency patients that they want to get on the drug, and also our preliminary work on pricing, which is higher than what we had expected to be able to achieve.

Rachel McMinn – Bank of America Merrill Lynch

Great, thanks so much.

Vincent J. Milano

Thanks, Rachel.

Operator

Our next question comes from Lisa Bayko with JMP Securities. Please proceed with your questions.

Lisa Bayko – JMP Securities

Hi, good morning, thanks for taking my question.

Vincent J. Milano

Hi, Lisa.

Lisa Bayko – JMP Securities

Hi, can you give us a sense of the timing of the inventory build that you're going now put into the channel is that more weighted towards this quarter or the fourth quarter?

Vincent J. Milano

Rachel, as we’ve said, or excuse me, Lisa, as we said on the call, we're going build back to patient inventory probably during this quarter and then we’ll have the ability in the fourth quarter to have the SPs/SDs, refill their inventory. So I would sort of model it split half and half.

Lisa Bayko – JMP Securities

Okay, great. Thank you. And then for the European sales for this quarter, can you give us a breakdown of what that was I know it’s pretty minimal, but I’m trying to get a sense?

Vincent J. Milano

So it’s roughly $2 million on Cinryze and the remaining $2 million was made up of other products in Europe.

Lisa Bayko – JMP Securities

Okay.

Vincent J. Milano

So $4 million in total.

Lisa Bayko – JMP Securities

Okay, are you seeing the same sort of, I know it's early, but the same kind of usage in Europe, where the same average number of doses, that kind of thing?

Daniel B Soland

Yeah, it’s probably early days, but also remember, Lisa, in Europe, we are licensed for acute use, as well as prophylaxis, so it's a bit of a mix at this point.

Lisa Bayko – JMP Securities

All right, okay. And then in terms of your build to peak, how many years out do you see peak, roughly?

Vincent J. Milano

We’re not going to comment on that today.

Lisa Bayko – JMP Securities

Maybe in September?

Vincent J. Milano

Maybe.

Lisa Bayko – JMP Securities

All right, thanks a lot. I’ll see you then.

Vincent J. Milano

Thank you.

Operator

Our next question comes from Brian Skorney with Brean Murray, please proceed with your questions.

Brian Skorney – Brean Murray

Hey, good morning, guys. Thanks for taking the question. First one, on a kind of housekeeping item I don't know, if you mentioned it earlier, but was there any inventory effect on Cinryze sales in the U.S. this quarters or is this essentially all end user sales?

Vincent J. Milano

It was demand-based.

Brian Skorney – Brean Murray

Okay. And then just kind of going back to your estimates around peak year of IV Cinryze. I'm just wondering how you're thinking about, obviously, you're not ready to talk about timeline, but are you anticipating any competition from other plasma-purified C1 inhibitors, following the expiration of orphan exclusivity? Is this part of that model or your risk adjusted on it? Kind of how should you thinking about that?

Vincent J. Milano

We do, we have to assume some level of competition. We can't identify exactly who and when, but we do have some competitor, and the way we build our long-term model is the analog of the Alpha 1-antitrypsin market where a couple of plasma-derived products entered the market after the exclusivity of the innovator's product. That’s factored into our forecasting exercise.

Brian Skorney – Brean Murray

Gotcha, and then just one last question. When we think about what risks we might see around the development of subcu Cinryze just assuming that the hyaluronidase combo is on hold for the foreseeable future. When I look at the PK/PD study, when I look like the 2,000 unit subcu dose that you are using doesn’t quite meet with the same PK properties that the 1,000-unit IV dose does. So I was just wondering, if you can help us walk through the different strategies, you are thinking about right now to get effective levels, is exploring higher doses, more frequent dosing, and just how do we think of the kind of the Cmax versus the area under the curve as playing a role in efficacy for Cinryze? Thanks.

Vincent J. Milano

Colin?

Colin Broom

Brian, our hypothesis at the moment is based on clinical pharmacology data. So the urgency is to get into a clinical efficacy study, which we are planning to do, we can then correlate efficacy and the PK, working hypothesis is that it’s more essentially AUC-based, maintaining a minimum level of C1 inhibitor activity. And if you look at the hypothetical profile, that should favor subcutaneous over intravenous.

However the bar is set by the intravenous efficacy that we see which is impressive as previously referred to the open-label data in proof of practice, we see our approved dosing regimens are very effective. So there's work to be done here in particular on efficacy. And we have two pathways here that we are looking at. Cinryze alone, where it does look like the dose certainly 2,000 units do twice a week could be effective. And also following dialogue with the agency we hope to be able to give you more clarity on what's going to happen with PH20 and we’re hopeful we’ll be able to move ahead with that. The more options for patients the better.

Brian Skorney – Brean Murray

Gotcha thanks so much, guys.

Vincent J. Milano

Thanks, Brian.

Operator

Our next question comes from Mario Corso with Caris & Company. Please proceed with your question.

Mario Corso – Caris & Company

Yes, thanks for taking my question and congratulations on the industrial…

Vincent J. Milano

Thanks, Mario.

Mario Corso – Caris & Company

I am wondering in terms of Cinryze and market dynamics. With multiple acute therapies out there now over the last year or two and it seems like Firazyr is selling well and would equate to hundreds of patients being added there. I’m wondering what you are hearing from the field in terms of the acute treatments. Are they taking patients from steroids, are they newly diagnosed? Are they all being added on to your Cinryze patients? I'm wondering what you are hearing from the field on that issue. And then on gross margin, can you quantify the Genzyme piece there and remind us kind of when that ends. And I guess back to Cinryze. On the life of it, are you assuming exclusivity or market entrance in 2015? Or are you assuming that five-year data exclusivity beyond that hold? Thanks very much.

Vincent J. Milano

Okay, we’ll do our best Mario, to remember all those questions. Let me, Dan, why don't you start with sort of anecdotal. What are we hearing from the field in terms of the acute therapies and where their patients might be coming from?

Daniel B Soland

So it's great that Firazyr is out there for acute the patients, and they have that option. It's interesting, but I guess in the last year what we've heard more of is the acute therapies targeting prophylactic patients, and it’s targeting our patients on Cinryze for a breakthrough. And that seems to be where they've made a certain level of progress. Obviously, now with three acute players out there, they're raising the overall level of noise about the disease, so we also think that there's more patients being diagnosed, and with more patients diagnosed, we'll all take a piece of the pie.

Vincent J. Milano

Yeah, if you look back to, I think it was about 2006 or 2007, the HAEA had about 2,200 patients and their database and today it's doubled that number. So clearly the investments the companies and the HAEA are making in education and awareness and advocacy is really driving the market size in terms of diagnose patients, so that's a big driver for all of us, frankly, both the acute players as well as ours. So the next question…

Daniel B Soland

With the timing of when we thought there would be a competitor.

Vincent J. Milano

Yes, so the quite now, that exist under the Healthcare Reform Act, I think we have data exclusivity.

Mario Corso – Caris & Company

Up to 2021?

Daniel B. Soland

We need to conduct our own studies with our own products until 2020.

Mario Corso – Caris & Company

Fine, fine.

Daniel B. Soland

That’s the current state of the state with the Healthcare Reform Act. And then your last question Mario I think which was your second question was around the Genzyme royalties, as it relates to cost of goods, so we have a commitment for three years on that.

Charles A. Rowland

And that’s reflective in our gross to net adjustments, and so the price that we have realized before is significantly less than what we had realized in the past so I wouldn’t use the old margins on Vancocin as we go forward

Daniel B. Soland

Yes, so the royalties, just to be clear 10% for the first year, 10% for the second year, and 16% for the third year.

Mario Corso – Caris & Company

Okay.

Operator

Our next question comes from Phil Nadeau with Cowen & Company. Please proceed with your question.

Philip Nadeau – Cowen & Company

Good morning, thanks for taking my questions. First, Charlie on your guidance for inventory stocking in the back half of the year, you said $10 million to $20 million I think in answer to Rachel’s question. But if we assume that the current end-user demand is about $75 million a quarter and you’re going to add three weeks of inventory to the patients and two weeks into the channel, by my math that works out more to about $30 million in increased inventory in the second half of the year. So where is my math wrong?

Charles A. Rowland

Well I guess if you take the $75 million in patient demand and then you factoring with the normal growth is per quarter that gets you a pretty healthy number for the total year without the inventory. So I’m not sure maybe you have too low of a growth in terms of demand

Philip Nadeau – Cowen & Company

No, I guess what I am asking is, you're adding five weeks of inventory into the channel and adding end-user demand rate of $75 million five weeks equates to $30 million in additional stocking, so (Inaudible) why is it not 30?

Daniel B. Soland

So I think you have too big of a number in terms of what the value of the inventory is back at the patient level.

Charles A. Rowland

And by the way, five weeks is an estimate?

Philip Nadeau – Cowen & Company

Right.

Charles A. Rowland

There is no guarantee that the numbers are too high, we’ve just given you range.

Philip Nadeau – Cowen & Company

Okay. That makes sense and my second question is on the reorder process. You said patients have been ordering it weekly through the capacity constraint, that’s going to go back to monthly. On a practical level what is that mean for the patient? How do they reorder it? Do they have to call you guys every week a day, and every month in the future? Or do they sign up for a longer period of time and they only have to re-subscribe kind of periodically?

Charles A. Rowland

Dan?

Daniel B. Soland

But we call them weekly. We track all of these very conservative.

Philip Nadeau – Cowen & Company

So you are currently calling them weekly in order to, if they need more drug? Is that right?

Daniel B. Soland

Between our own customer service organization and the specialty pharmacies, it could be a call at least on a weekly basis, it also can be an e-mail, all sorts of ways of tracking how our patients recover.

Philip Nadeau – Cowen & Company

Okay, great. Thanks for taking my questions.

Daniel B. Soland

Thanks, Phil.

Operator

Our next question comes from Stephen Willey with Stifel Nicolaus. Please proceed with your question.

Stephen Willey – Stifel Nicolaus & Company, Inc.

Yeah, good morning and appreciate the granularity around the patient numbers and everything else. A couple of Buccolam questions actually, Plenadren. I know you had, previously had a name patient program in place for Buccolam. Do you have anything in place like that currently for Plenadren? And can you provide a little bit of color as to where you guys are in terms of securing pricing and reimbursement across Europe?

Vincent J. Milano

Steve, just to be clear, you want to talk about Plenadren, right?

Stephen Willey – Stifel Nicolaus & Company, Inc.

Yeah, Plenadren.

Vincent J. Milano

Okay. Dan?

Daniel B. Soland

So, Steve, great question. This is public knowledge. In Italy they have a special name patient program and it’s called 648 Program and that program will be kicking out in September and pricing per 20 milligram is about €9 for 20 milligrams dose and if you figure about half of the patients are probably going to be on a 20 milligram dose, the other half are going to be on something higher.

And pricing drop, Europe, I don’t think we’ve made it all of these things public, but we need to save some of the excitement here for our September 21 meeting, where you’ll here from Terry Darcy and the team in Europe about what's going on more with Plenadren and the launches throughout Europe.

Stephen Willey – Stifel Nicolaus & Company, Inc.

And then, this also may be a wait and see until September question. But in terms of what might be included in terms of some of the interim CDI data that we could see this data towards the end of the year?

Vincent J. Milano

It’s possible, yeah. If we’re in a position to have the data for Analyst Day, we'll certainly bring it with us.

Stephen Willey – Stifel Nicolaus & Company, Inc.

All right. Thanks.

Vincent J. Milano

Thanks, Steve.

Operator

Our next question comes from Thomas Wei with Jefferies. Please proceed with you question.

Thomas Wei – Jefferies & Company

Thanks for taking the follow up. I guess this is going to expose the fact that maybe I don’t understand the answer that you gave to my original question, sorry to be obtuse about this. But I'm still little bit confused on discontinuations and trying to get out whether or not you really are seeing a true quarterly discontinuation rate of 30 patients or is it just like you’re going back to the database and scrubbing it and taking out patients that you maybe had included previously as active, but they're really inactive, i.e., is the 760 at the beginning of the year right number or would you actually now go back and say, oh well, now that we have readjusted the database, we would actually restate that number lower?

Vincent J. Milano

That would be true and with that would also come an increase doses per week number. So yes, the second choice you gave us Thomas is the more accurate way to think about it, but you also have to consider to the extent that the patient numbers are lower because of the inactive patients coming out, but the doses per week goes up.

Thomas Wei – Jefferies & Company

I see, okay. So on a go forward basis and you’re done with the scrubbing process. So, on a go-forward basis, we should think of, it’s not that you’re adding 30 net patients a quarter, you’re actually adding something higher than that?

Vincent J. Milano

Yeah, I think again if you look at the average, it’s much higher than 30 per quarter. There were a couple of quarters over the course of the last two years, when we cleaned up data base if you will that we probably had more patients coming into the inactive category, but again to your point there, they’ve been inactive, so they’re not really discontinuing during the quarter. It's just the timeframe we take them out of the active category and put them in the inactive category.

Thomas Wei – Jefferies & Company

Okay, thanks. I’m very clear now. Sorry about that.

Vincent J. Milano

No worries. Thank you.

Operator

Our next question comes from Stephen Willey with Stifel Nicolaus. Please proceed with your question.

Stephen Willey – Stifel Nicolaus & Company Inc.

Yeah, just a quick follow-up question along those lines, I think you said before that the period of time by which it takes you to realize that a patient goes from active to inactive was nine months. Is that correct? And is that a function of just data that’s coming in the real time to you guys or is that just some kind of threshold number that you guys have set it currently?

Vincent J. Milano

It's a threshold number that we have set internally.

Stephen Willey – Stifel Nicolaus & Company Inc.

And so I guess is there a reason why a patient not ordering a script for say seven months would be deemed to be inactive patients?

Vincent J. Milano

I think the team would say, Steve, on that question, that there's a lot follow-up and diligence that goes into working with these patients to understand what their situation is and I think their view would be that it takes nine months before they think that they've exhausted all avenues to understand their situation and classify them as being not active and not interested in being on therapy.

Stephen Willey – Stifel Nicolaus & Company Inc.

Okay, thanks.

Vincent J. Milano

Other work that goes on in that time period that understand the particular situation. Thanks, Steve.

Operator

Our next question comes from Joseph Schwartz with Leerink Swann. Please proceed with your question.

Joseph Schwartz – Leerink Swann Llc

Hi, thank you. I was wondering if you can talk about operational and what kinds of things you’re able to do in order to keep patients active and what sort of avenues you typically exhaust. Are there any ways you can explore some more home visits from nurses and things like that other HAE companies are trying out now with some success?

Vincent J. Milano

I'll say that we've been doing that for years, but maybe Dan, you want to put some color on what we do?

Daniel B. Soland

I think its anything from they’re contacting the patient directly, getting a nurse into their home, talking to their physician, getting into other patient. A whole host of ways of what we try to do to keep these patients active.

Joseph Schwartz – Leerink Swann Llc

Okay, thanks and then can you talk about what industrial skill does for you in your overall supply chain? At what point will you become less dependent on some of the upstream functions which I think you haven’t yet heard back from the FDA and closeout some and have them closeout some of their observations in Brussels, for example?

Vincent J. Milano

So Dan you want to take that question?

Daniel B. Soland

Yeah, so with the approval of the industrial scale, we don't anticipate any other interactions with the FDA until our biannual inspection, which should probably be towards the middle of next year in both Brussels and Amsterdam. You may want to talk to your own expert on that.

Joseph Schwartz – Leerink Swann Llc

Okay thank you.

Vincent J. Milano

Thanks.

Operator

There are no further questions in queue at this time.

Vincent J. Milano

Ladies and gentlemen, thank you very much for your time and attention today. We are very excited about getting industrial scale approved, the results for the quarter and we really look forward to seeing you in New York in September to share more details with you about the growth prospects we talked about here this morning. Thanks everyone.

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