Transcept Pharmaceuticals Management Discusses Q2 2012 Results - Earnings Call Transcript

Transcept Pharmaceuticals (TSPT) Q2 2012 Earnings Call August 13, 2012 4:30 PM ET

Executives

Thomas P. Soloway - Chief Operating Officer and Executive Vice President

Glenn A. Oclassen - Chief Executive Officer, President and Director

Leone D. Patterson - Chief Financial Officer and Vice President

Analysts

Charles C. Duncan - JMP Securities LLC, Research Division

William Tanner - Lazard Capital Markets LLC, Research Division

Jason M. Gerberry - Leerink Swann LLC, Research Division

Ed Arce - McNicoll, Lewis & Vlak LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to Transcept Pharmaceuticals Second Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to hand the conference over to Mr. Tom Soloway, Executive Vice President and Chief Operating Officer. Sir, you may begin.

Thomas P. Soloway

Thank you, operator, and good afternoon, everyone. Thank you for joining us today to discuss the Transcept Pharmaceuticals' 2012 second quarter results. My name is Tom Soloway, Executive Vice President and Chief Operating Officer of Transcept. And joining me on the call today are Glenn Oclassen, President and Chief Executive Officer; and Leone Patterson, our newly appointed Vice President and Chief Financial Officer.

After market close this afternoon, we released financial results for the quarter ended June 30, 2012. A copy of this press release is available on our website and has been filed on Form 8-K with the SEC. In addition, we plan to file our Form 10-Q with the SEC this afternoon and encourage everyone to read these documents. We remind you that this conference call will contain forward-looking statements that are intended to be covered under the Safe Harbor provided by the Private Securities Litigation Reform Act. Examples of such statements include, but are not limited to: plans by Purdue Pharma to invest approximately $100 million in the commercialization of Intermezzo, including the timing and nature of the investment; the formation, size and utilization of an Intermezzo sales force and plans to conduct direct-to-consumer advertising, including the timing and feasibility of such plans; the capabilities of the Purdue managed care organization, including providing patient co-pay coupons and our expectations regarding Purdue's ability to successfully commercialize Intermezzo, including via physician and patient education; our expectations regarding future marketing efforts and effectiveness thereof; our expectations regarding the benefits of Purdue's marketing and other efforts on the commercialization of Intermezzo; our beliefs regarding the timing, size and nature of commercial opportunities for Intermezzo, including managed care placement, as well as physician and patient acceptance; our beliefs regarding the challenges facing the commercialization of Intermezzo and Purdue's ability to address such challenges; our expectation of Orange Book listing and receipt of the $10 million milestone payment from Purdue; our expectations regarding the trajectory of prescriptions for and revenue derived from Intermezzo and the timing of such projections; our beliefs regarding intellectual property and product exclusivity for Intermezzo and its importance and duration; our beliefs regarding the accounting treatment and adjustment of royalties on net sales of Intermezzo generated by Purdue; our beliefs regarding the importance of Intermezzo prescription growth as an indicator of success; our beliefs regarding the potential benefits of TO-2061 and our plans to develop TO-2061, our investigational product for the treatment of obsessive compulsive disorder, and expectations for enrollment, completion, top line data availability and the timing of our end of Phase II meeting it with the FDA. These statements are based on information that is available to us today. We may not actually achieve our goals, carry out our plans or intentions, or meet the expectations or projections disclosed in our forward-looking statements. And you should not place undue reliance on these statements.

Our forward-looking statements do not reflect the potential impact of any in-licensing agreements, acquisitions, mergers, dispositions, joint ventures or investments that we may enter into or terminate. Actual results or events could differ materially, and we assume no obligation to update these statements as circumstances change, except as required by law.

For additional information concerning the factors that could cause actual results to differ materially, please see the Forward-looking Statements section in today's press release and the Risk Factors section of our quarterly report on Form 10-Q for the quarter ended March 31, 2012, which was filed with the SEC this afternoon.

And with that, I will now turn the call over to Glenn Oclassen.

Glenn A. Oclassen

Thanks, Tom, and good afternoon, everyone, and thank you for joining the call today. Intermezzo, our lead product, was launched on April 4, 2012, by our marketing partner, Purdue Pharma.

As we've discussed in the past, Purdue is investing as much as $100 million in the first 12 months of the Intermezzo launch, and has created a new sales force of 275 representatives devoted exclusively to the promotion of Intermezzo. Intermezzo was approved by the FDA in November of 2011 as the first and only prescription sleep aid indicated for use as needed for the treatment of insomnia at the time that a middle-of-the-night awakening is followed by difficulty returning to sleep. We are still in the early stages of the Intermezzo launch. Both we and Purdue continue to receive positive feedback regarding patient experience with the product.

Prescriptions are growing at a compounded rate of approximately 4% each week since the beginning of May. But at a weekly total of approximately 1,000 prescriptions, it is clear that significant work remains to establish Intermezzo as an important insomnia product. The job that still remains for us and for Purdue is reflected in the royalty revenue numbers we'll discuss shortly.

We share a common view with Purdue of the challenges faced in the field. There are -- these are challenges that we think will take time to overcome and we believe can be addressed constructively as the launch progresses. We see 3 key marketing and selling challenges. These include: achieving broad managed care access for Intermezzo; motivating physicians to identify middle-of-the-night awakenings as an important form of insomnia; and strengthening the relationships between the new Intermezzo sales force and the high prescribers of insomnia products in their territories.

Purdue is making progress with insurers and managed care organizations. And as they continue their effort, we expect that managed care restrictions will become less of an obstacle to adoption. In addition, for patients enrolled in those managed care plans that do cover Intermezzo, Purdue is offering a patient savings card that can reduce the co-pay to as little as $15.

Next, the unique Intermezzo indication requires that we change the way in which physicians interact with their patients with regard to sleep problems. Intermezzo is specifically indicated for the treatment of middle-of-the-night awakenings when they occur. But for the past several decades, as physicians wrote prescriptions for sleep aids, they would routinely write for use as needed at bedtime, no matter what time of the night the patient was having trouble sleeping. Until the introduction of Intermezzo, physicians have not had a compelling reason to differentiate between patients with sleep onset problems and those with middle-of-the-night awakening problems. The medications for treating both conditions were largely the same, and all available prescription sleep aids were indicated for bedtime administration only.

Intermezzo does not fit this pattern. With Intermezzo, we are not just asking the physician to consider a switch from prescription A to prescription B, rather, the sales rep needs to ask the physician to interact differently with their -- with patients, and to introduce a new question as part of the medical encounter, namely, "Okay, you've told me you're having sleep problems, do you have trouble falling asleep at bedtime or do you wake up in the middle of the night and have difficulty returning to sleep?" The efforts of the sales force have been refocused on first helping the doctor identify the middle-of-the-night insomnia patient, and then presenting him the particular benefits of an as-needed treatment with Intermezzo.

As I mentioned earlier, Purdue has created a national sales force of 275 representatives, who are presenting Intermezzo as their primary and only product detail to top prescribers of insomnia medications. This is clearly a substantial financial investment on their part, and we believe that Intermezzo will eventually benefit from the focused sales rep attention it is receiving.

However, in many instances, experienced sales reps are working in new territories or building new relationships with physicians they had not previously called on. And as these reps become more acquainted with their new call points, we expect to see their effectiveness improve.

With regard to our patent protection, in July of 2012, the U.S. Patent Office delivered notices of allowance for 2 additional patent applications covering Intermezzo. The first of these allowances includes claims related to methods of treating middle-of-the-night insomnia with low doses of zolpidem. We believe that this patent, which is scheduled for issuance tomorrow, August 14, is an important part of the Intermezzo patent strategy and when issued, will expire not sooner than 2026.

The second patent allowance includes claims related to the pharmacokinetic profile of Intermezzo. And when issued, this patent will expire not sooner than 2025. Once either of these patents is issued and listed in the FDA Orange Book, Transcept will be eligible for a $10 million milestone payment under the terms of our agreement with Purdue.

We have recently received generic challenges in the form of Paragraph IV certification letters from Activis, Novel Laboratories and Watson Pharmaceuticals. These certification letters dispute the 2 patents currently listed for Intermezzo in the FDA Orange Book. These patents pertain to the Intermezzo formulation that facilitates absorption of zolpidem across the tissues of the mouth. Transcept and Purdue patent counsel are reviewing these challenges and considering potential responses.

Finally, I want to comment briefly on the progress of our TO-2061 program in the treatment of obsessive compulsive disorder. As you probably know, it is estimated that OCD affects up to 2% of the U.S. population, and this is believed to be a disorder as disabling as schizophrenia.

The only medications currently approved for the treatment of OCD include 4 of the SSRI's and clomipramine, and the literature suggests that more than 50% of patients fail on these primary therapies.

TO-2061 is an augmentation therapy that is being evaluated in the treatment of patients with obsessive compulsive disorder, who have not adequately responded to an approved medication for OCD. We believe that the potential benefits of TO-2061 may be related to the ability of the drug to down-regulate dopamine even at very low doses. Our investment in the program is based on the results of 2 pilot studies, in which the majority of treatment-resistant OCD patients showed substantial improvement when low dose ondansetron was added to their treatment regimen.

We are moving forward toward the completion of a double-blind placebo-controlled Phase II study that is designed to enroll approximately 150 treatment-resistant OCD patients to evaluate the safety and efficacy of adjunctive therapy with TO-2061 as compared to placebo. We expect that all patients will have completed the study before the end of the year, and that we will be able to announce the results of this trial in the first quarter of 2013. Depending on these results, we plan to schedule an end of Phase II meeting soon thereafter with FDA to discuss NDA filing requirements.

I will now turn the call over to Leone Patterson to review our second quarter financial performance, and then open the call to questions. Leone joined our management team as Chief Financial Officer in June. She brings to Transcept a solid background in corporate finance that includes leadership positions at Chiron, Novartis and Exelixis, and we are delighted to have her aboard, and welcome, Leone.

Leone D. Patterson

Thanks, Glenn. On June 30, 2012, Transcept had approximately $92.2 million of cash, cash equivalents and marketable securities. This balance reflects the net proceeds of approximately $37.7 million from a public offering of 4.5 million shares of common stock that closed on May 1, 2012. During the quarter ended June 30, 2012, Transcept spent on average approximately $1.6 million per month, which does not include cash inflows from stock option exercises, revenue received from Purdue or the public offering in April 2012.

Revenue for the quarter was approximately $493,000, which represents royalties related to Purdue sales of Intermezzo to wholesalers. Purdue pays royalties to us by some [ph] sales to wholesalers, less certain sales adjustment, including estimates for returns, rebates and sales incentives.

For several quarters, these adjustments can be expected to reflect the uncertainty inherent in the early stages of launching a new product. While royalty revenue is likely to vary accordingly, the better measure of Intermezzo's success will be more directly indicated by future prescription growth.

Research and development expense for the quarter ended June 30, 2012, was approximately $2.9 million, compared to approximately $2.8 million for the same period in 2011. Research and development expense in both periods was primarily related to expense associated with our Phase II study for the TO-2061 program. General and administrative expense for the quarter ended June 30, 2012, was approximately $2.7 million, compared to approximately $2.6 million for the same period in 2011.

Net loss for the quarter ended June 30, 2012, was approximately $5.1 million, or $0.30 per basic and diluted share, compared to a net loss of approximately $2.2 million, or $0.17 per basic and diluted share for the same period in 2011.

This increase in net loss was primarily due to the fact that in 2011, we completed the revenue recognition associated with the $25 million license fee related to the Purdue collaboration agreement.

At June 30, 2012, there were approximately 18.6 million shares of common stock outstanding and approximately 3.5 million shares of common stock related to the outstanding options and warrants, resulting in a total of approximately 22.1 million shares outstanding on a fully diluted basis.

That concludes our prepared remarks for this afternoon. We would now open the call to your questions. Operator, you may now review the instructions for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Charles Duncan from JMP Securities.

Charles C. Duncan - JMP Securities LLC, Research Division

My question is regarding that feedback or perhaps challenges or roadblocks to wider adoption for Intermezzo. You listed out 3, Glenn, and I appreciate that. But which one of those do you think is the most impactful? And do you think that Purdue is making progress, at least with the second one in terms of motivating physicians to identify middle-of-the-night awakenings?

Glenn A. Oclassen

Thanks, Charles. Yes, I think you've zeroed in on the key issue. Physicians have been in strong habit patterns over many, many years of prescribing drugs for -- to aid in sleep that aren't differentiated between what kind of sleep problem the patient is having, whether it's bedtime or middle-of-the-night, because there has never been a reason to differentiate. And the challenge here is to provide the physicians sufficient incentive in terms of the performance of the product to actually make a small change in the interaction with the patient to not simply hear that there's a sleeping problem and therefore write a prescription, but rather, to ask a few questions. Purdue is, we believe, fully aware of this issue. I think they began to sense it as a key issue early in the game. And they are making adjustments accordingly, and we're pleased to see it moving in that direction. But that's one that is, as I've said in the prepared presentation, it's not simply from going from prescription A to prescription B, you're actually having to change the physician's behavior in the office, and that takes some time.

Charles C. Duncan - JMP Securities LLC, Research Division

And I assume that applies for newly diagnosed patients with insomnia. But what are they doing about the insomniacs who are chronically taking the drugs that are meant for induction, but are -- and maybe they're taking them prophylactically to treat middle-of-the-nights?

Glenn A. Oclassen

The -- insomnia almost never presents in the general practice office or most other offices as a primary complaint. It's really a secondary issue. And so the most likely encounter for a patient who has an existing prescription and an existing usage pattern, the most likely encounter will be when that patient shows up in the office for some other reason, and one would hope that the same product advantages that motivate the physician to ask these questions of a new patient would motivate them to go back and talk a bit to a patient with a previously existing and previously diagnosed condition. The advantages here are the potential for a significant reduction in total exposure to hypnotic drugs as compared to prophylactic use. And the fact that Intermezzo is rapidly absorbed and produces rapid sleep onset, which is so important in the middle of the night. But here again, we need to motivate the physician to make a routine, a change in their routine, a change in their behavior, a change in their interaction with the patient, and that will require a persistent effort.

Charles C. Duncan - JMP Securities LLC, Research Division

Let me ask you if there are any other metrics besides scripts, prescriptions that you can track or maybe initiatives that are being undertaken by Purdue to make that change in the physicians' behavior, perhaps, a patient registry or anything like that? And if you think that you'll have results of that before, call it, the end of the first quarter next year?

Glenn A. Oclassen

There are a variety of different kinds of efforts going on, but I will say that our primary measure of success with the product still remains weekly prescriptions. No matter how irrational it may be to track prescriptions on a weekly basis, obviously, we all do it. And the long-term trends, you can pick up over time. I think in addition to that, there is a fairly continuous process of market research that goes on. And in the final analysis, you never know what kind of a product you have until you actually launch it. And Purdue is going through exactly that process now of listening to the marketplace and understanding what the product is beyond what all of our sense was before the launch. And I expect that, that process will be a positive one and lead to greater success in the marketplace.

Charles C. Duncan - JMP Securities LLC, Research Division

And one last question along the lines of intellectual property. I'm wondering, you made a comment regarding evaluation of the formulation patents. Is it possible that you may switch up and not rely so much on those, and instead, rely on the other patents that could be, you said, issued soon, I believe? And when would your Orange Book list those?

Glenn A. Oclassen

Charles, Tom Soloway has been actively involved with the patents for the last year, and I've asked him to comment on that.

Thomas P. Soloway

Sure, Charles. Thanks, Glenn. As we've always said, Charles, the 2 patents that are currently listed in the Orange Book are formulation patents. They are a little bit narrower in scope than the method of use patent that Glenn discussed a little bit earlier today that we anticipate issuing tomorrow. We will submit that patent once it issues to the Orange Book quickly with Purdue, and would hope to have it listed in the Orange Book in the not-too-distant future. That patent is certainly a little bit broader in scope, and generally claims low doses of zolpidem for use in treating middle-of-the-night insomnia. However, in terms of how we would rely on what patents and in what order and how we go about that remains a, sort of, confidential information of Transcept and of Purdue. As you know, we have 3 end of filings now, and as we're looking potential litigation here in the eye over the next several months, probably I can't really comment on it publicly.

Charles C. Duncan - JMP Securities LLC, Research Division

Okay. That make sense. And just one clarification because I'm not sure I caught this right. Glenn, you were talking about evaluating the launch. Is it 4 quarters or by the end of this year in the fourth quarter that you think that you'll have a pretty good handle on how things are going?

Glenn A. Oclassen

We -- in terms of when to begin making judgments on the launch, clearly, that's a continuous process. But at the same time, we've been looking toward the fourth quarter and we're only 3.5 months, if I'm correct, into the launch at this point. So there's a great deal that remains to happen, and that's also driven by the nature of the task that we described that we have to perform here, that we described earlier. So over the next 6 months, we expect to gradually have an understanding of where this product can go in the future.

Operator

[Operator Instructions] Our next question comes from Bill Tanner from Lazard Capital.

William Tanner - Lazard Capital Markets LLC, Research Division

I've got a couple of different topics. Number one, Glenn, I guess, first on the patent litigation, can you remind us of how the costs are shared? And then it looks like around August 27 should be a date that a lawsuit could be filed against Activis. I don't know if you can comment on that.

Glenn A. Oclassen

Yes, I'll ask Tom to take that one, too.

Thomas P. Soloway

Thanks, Glenn. Hi, Bill. Yes, as it relates to the decision and when and how it would be made, that remains to play out over the next several weeks between us and Purdue. But in general, what the agreement calls for is for Transcept and Purdue to split patent defense costs, 60-40, 60% to Purdue, 40% to Transcept. And Transcept is capped on those cost at $1 million per calendar year and $4 million in aggregate.

William Tanner - Lazard Capital Markets LLC, Research Division

Okay. And then just back, Glenn, on your prepared comments, at the outset, on the challenges. Obviously, formulary adoption really isn't anything unique, I presume, to Intermezzo, and I think we've all assumed that the physician education would be an integral component of the drug being adopted. I'm just wondering if you could at least maybe semi-qualitatively speak to how the uptake is tracking to expectations? And then I just have one follow on.

Glenn A. Oclassen

I think, clearly, both we and Purdue expected more rapid uptake on launch. It's interesting because on a week-to-week basis, we're trending upward 4% to 5% a week on a compounded basis. Not unhappy with that, it's just the absolute level at this point is below where we thought we'd be. The key to that is in the office, obviously, in the physician's office. And we think the key to that part of it is in the physician interaction with the patient. And in my experience, that is always a great deal more substantial challenge, getting the doc to do something different. Getting he or she to come out of their normal habit pattern. Physicians are extremely conservative in terms of how they conduct their day. And here, we have to have them ask a different kind of question about sleep. We think we can offer eminently rational reasons to do so, in terms of the nature of Intermezzo and its advantages over bedtime sleep aids. But that's going to take some time.

William Tanner - Lazard Capital Markets LLC, Research Division

And when you mentioned that it's tracking on an absolute basis below, can you give us a, I mean, you may not want to give that fine of a level of detail, but just in terms if you present, just...

Glenn A. Oclassen

That sort of moves over into the same old problem that we've raised before and -- or complication, and that is that Purdue is a private company and, obviously, we are not. And as a result, they limit us on specifics where we can be forthcoming qualitatively, but when it comes to quantitative stuff, it's much more difficult. Suffice it to say, we both thought we would be at a higher absolute level, but we think the trend line is certainly in the right direction, and that over time we'll see this one come into line with expectations, particularly given the modifications in the promotional program that are currently underway.

William Tanner - Lazard Capital Markets LLC, Research Division

And just last question, as it relates to the marketing materials. Can you remind us when those were available, and I guess, in their fullest sense in terms of the DDMAC approved relative to the launch, relative to having an opportunity to have some good exposure at APSS in June?

Glenn A. Oclassen

Yes, that began in July. The final revised stuff didn't come back from DDMAC until July, and that was when it began to be used. So it's pretty recent.

Operator

Our next question comes from Jason Gerberry from Leerink Swann.

Jason M. Gerberry - Leerink Swann LLC, Research Division

Just a couple. Just maybe on the -- we've heard some of the docs talk about how patients with pain have a higher degree of comorbid insomnia. Just kind of wondering if you can comment at all, are the Purdue reps that are promoting OxyContin, are they also detailing Intermezzo at this point? Or is it solely the 275 reps that are exclusively promoting Intermezzo?

Glenn A. Oclassen

Jason, it is the latter. Purdue made the affirmative decision initially to just go with this sales force that is devoted entirely to the product. We do believe that over time, they may consider moving the Intermezzo into the larger sales force. But we don't have any specific information on that at this point. We think at this point, they're still committed to going with the specialty team.

Jason M. Gerberry - Leerink Swann LLC, Research Division

Got it. Got it. Okay. And then the other patent -- the other outstanding patent that is a little further out. Is there another milestone associated with issuance of that patent? So I know you'll -- you're planning the issuance tomorrow on the one method of use patent. But is there, with the other patent, another milestone we should be thinking about there?

Glenn A. Oclassen

No. There was originally a $10 million milestone against the patent that was issued, I guess, last year. And then there was only one other IP milestone, and that is the $10 million milestone that will be associated with one of these patents that is just -- have recently been allowed and about to be issued.

Jason M. Gerberry - Leerink Swann LLC, Research Division

Okay. And then just last question. What is your guys' confidence level that there are potentially other regulatory barriers around this formulation? Is this something where we could potentially see a Citizens Petition filed with respect to formulation challenges around this product? Or is that something that -- your expectations there is a little on that one?

Glenn A. Oclassen

Clearly, we are looking at every possible avenue to protect our investment and our shareholders' investment in the development and approval of Intermezzo. So we're looking to IP. We'll be looking to the regulatory path. We haven't made any final and affirmative decisions in that regard, but we're considering all the possibilities.

Operator

[Operator Instructions] The next question comes from Ed Arce from MLV Company.

Ed Arce - McNicoll, Lewis & Vlak LLC, Research Division

So I appreciate the commentary around the difficulties that you see around the uptake not being quite as what you had initially expected. And I can see how that you specifically isolated the physician interaction with the patient, and changing that behavioral pattern as being a difficult one to accomplish. Just wondering then, as the sales reps start to see all of the physicians, what could you say, at least qualitatively, about the success rate or traction that they see in explaining the benefits and getting the doctors that they've seen to agree to begin to ask patients about middle-of-the-night insomnia?

Glenn A. Oclassen

Well, it's an interesting situation because the physicians have a pattern of hearing secondary comment about, "Hey, doc, I'm having some trouble sleeping." And responding to that almost automatically without further questions, but with writing a prescription. That's not a considered mode of behavior. It's not as though physicians are sitting around saying, "How am I going to deal about questions with regard to insomnia?" It's just the path, by far, of least resistance, given that they only had one route and strategy for administration available to them in the past. And that was to treat these problems with a bedtime drug. So we don't have to overcome some firmly held belief. We need to overcome habit. And we need to offer a sufficient rationale to overcome that habit. We believe that is eminently available in the Intermezzo story with the unique dosage form and the unique dose and the way in which it performs. But it's going to take some time. In our industry, changing minds is seen to be something that only occurs with multiple calls. And changing behavior, versus changing mind, takes even longer. So this is one that is going to play out as we move forward over the next months and quarters.

Ed Arce - McNicoll, Lewis & Vlak LLC, Research Division

But just generally qualitatively, would you say that a good number of the sales reps have come back with positive feedback in their interactions with doctors?

Glenn A. Oclassen

Too soon to tell. This is really something we just began working with, Purdue just began working with, within the last, literally, month. So it is too early.

Ed Arce - McNicoll, Lewis & Vlak LLC, Research Division

Okay. Do you -- could you tell us the percentage of targeted physician nationwide that reps have seen so far?

Glenn A. Oclassen

I actually do not have a number on that. But I would say that the overwhelming majority of targeted physicians would have been called on at least once, if not multiple times, by this point.

Ed Arce - McNicoll, Lewis & Vlak LLC, Research Division

Okay. And then I guess just a follow-on, on that sense. These -- do these early results, perhaps -- this is a loaded question, but does this affect your thinking and Purdue's thinking about how you might ultimately think about engaging direct-to-consumer advertising?

Glenn A. Oclassen

Well, certainly, all of the issues that surround the product, our and Purdue's basic belief in the performance and positioning of the drug, as well as what we see happening in the field, all those things affect future marketing decisions. And the decision to begin DTC promotion is one that is in the future, given the limitations that PhRMA puts on when you can begin that sort of thing. But I -- it's clear that Purdue has, from the beginning, shared with us the thought that Intermezzo might be a particularly appropriate pharmaceutical product for direct-to-consumer marketing. But beyond that, any comment I might make on that would move in the area of providing information to competitors. So I can't comment further. The -- I think the key issue is that we and they remain interested in the concept, and we'll be looking to that in the future.

Ed Arce - McNicoll, Lewis & Vlak LLC, Research Division

Okay. And then one last one, if I may. Just in general, I guess, even -- because it's still rather early in the launch despite this -- the less-than-expected uptake, at this point, Purdue does not really plan any sort of substantive changes from where you've been -- what you've been doing yet. Is that right?

Glenn A. Oclassen

Well, I would say that they're going to be making midcourse corrections on a continuing basis. That's kind of the way this process works with the product launches. You put it out there, you tell the story, you listen to what the field is telling you, what the reps are having to say about the effectiveness of that story, as well as, obviously, watching the prescription line to see what that might yield. But I -- it's -- this is an effort that -- and a journey that requires literally constant course correction. And certainly, that is even more pronounced during the first year after launch.

Operator

Our next question comes from Bill Tanner from Lazard Capital.

William Tanner - Lazard Capital Markets LLC, Research Division

For Glenn or Tom. Just on the royalties. I think, just confirm that the company does get paid royalties on sales of Intermezzo to the wholesalers. This is not sales that are from wholesale, a product is being shipped from the wholesalers to the pharmacies.

Thomas P. Soloway

Bill, this is Tom. Indeed, we get paid. We at Transcept get paid on, or get -- receive royalties on net wholesale sales or net sales to wholesalers, however you might want to say it. So that is indeed how we get paid.

William Tanner - Lazard Capital Markets LLC, Research Division

Okay. And is there any commentary as to the level of inventory that currently exists, and the adequacy of it?

Thomas P. Soloway

At this point, Bill, we're not really in a position to have that particular conversation. Obviously, the net sales number is net, and that is adjusted for rebates, sales incentives and returns. We expect that over time, that, certainly, in the early parts of launch that the royalty revenues received by Transcept for the first few quarters may be a little bumpy, but that over time, 3, 4 quarters, we would expect that the patient pull-through revenue and the wholesale revenue lines would begin to merge. And that the real focus for The Street gauge, the success of Intermezzo, should continue to be and remain focused upon patient pull-through scripts as reported by Wolters Kluwer or IMS.

William Tanner - Lazard Capital Markets LLC, Research Division

Okay. And then is it -- I mean, since the drug has not been out that long, I would suppose that there hasn't been much in the way of returns. So is it -- and again, this is just a gross approximation or just tell me if we're thinking about it the right way that the rebating or the discounting to the wholesalers early on to the launch to, I guess, accommodate them for the risk of not knowing how well the drug is going to go out the other end of the channel. Is that -- is it fair to say that perhaps the discount is greater, the rebate is greater at the outset than it might be at a steady state when the demand is better known?

Thomas P. Soloway

Yes. I'm not sure that we can comment on that level of detail, Bill. But I would -- you can assume that Purdue is pursuing a standard launch approach in that regard. But with regard to specifics, we can't really get into details.

Glenn A. Oclassen

Yes, Bill, in general, though, I think your comment is correct, that all of these kinds of adjustments tend to be bigger early on, because there's an attempt to get a number to generate a number that reasonably reflects what is actual demand in the world. And that over time, the quarterly numbers on which we are paid royalty will gradually move toward representing what is happening on the prescription line. And so it's a process that takes some time to true up all of these different numbers.

Operator

I'm showing no further questions at this time. I would like to hand the conference back over for any closing remarks.

Glenn A. Oclassen

Thanks. To reiterate, the Intermezzo launch is fully underway, but we believe that more time will be needed for the impact of the very substantial Purdue sales and marketing effort to be reflected in the Intermezzo prescription numbers. Purdue is actively implementing several strategies that are designed to increase Intermezzo adoption. And we believe that the recent notices of allowance from the U.S. PTO have significantly strengthened the Intermezzo IP position out to 2026. And finally, we look forward to announcing results from our Phase II study of TO-2061 in the treatment of obsessive compulsive disorder in the first quarter of 2013. And thereafter, updating you on our progress during our next quarterly call. Thanks for participating. And operator, that concludes our call today.

Operator

Thank you, sir. And, ladies and gentlemen, thank you for participating in today's conference. This concludes our program. You may all disconnect and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!