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Depomed, Inc. (NASDAQ:DEPO)

Q2 2008 Earnings Call Transcript

July 31, 2008 5:00 pm ET

Executives

Ina Cu – IR

Carl Pelzel – President and CEO

Tammy Cameron – Controller and Interim Principal Accounting and Financial Officer

Mike Sweeney – VP, Product Development

Analysts

Andy Schopick – Nutmeg Securities

Scott Henry – Roth Capital

Operator

Good day, everyone, and welcome to the Depomed second quarter 2008 conference call. Today's conference is being recorded. At this time, I would like to introduce Ms. Ina Cu. Please go ahead.

Ina Cu

Thank you. Good afternoon. This is Ina Cu, and with me today are Carl Pelzel, President and Chief Executive Officer; Tammy Cameron, Controller and Interim Principal Accounting and Financial Officer; and Dr. Mike Sweeney, Vice President of Product Development. At the close of market today, we issued our financial results for the second quarter ended June 30, 2008. The purpose of this call is to expand on the contents of our press release, provide an update on our business, and to provide financial guidance for the remainder of 2008.

Before we begin, I’d like to remind you that during this call we will be making forward-looking statements related to various aspects of our business, including statements related to clinical development, financial matters, and commercialization of our marketed products. Actual results may differ materially from the results described. We encourage you to review the risk factors in our most recent quarterly report on Form 10-Q.

I will turn the call over to Carl Pelzel.

Carl Pelzel

Thank you very much, Ina. Good afternoon and thank you for joining us for our second quarter 2008 conference call. I would like to start with a few comments regarding the state of the pharmaceutical industry, which I believe is continuing to evolve in a manner that strongly validates our business model. Now, more than ever, new chemical entities are not an automatic route to success as managed care, physicians, and patients insist on meaningful product differentiation.

A good example of this is GSK's initial withdraw of their application for an extended release version of Requip after the FDA questioned its clinical benefits compared to immediate release Requip. As line extensions with little differentiation are called into question, big pharma's enormous investments in new chemical entity development programs are becoming more risky. As you know, there are numerous examples of the many pre-approval and post approval risks in the NCE model.

In contrast, our model of developing known chemical entities has proven to be far less costly and less risky since we identify a target profile in advance, using a compound with a long established safety record, and then move our programs forward with a higher degree of confidence in our ability to meet that profile. While big pharma's response to the new challenges in our industry is somewhat fragmented, I think that the industry's recognition of the need for meaningful differentiation is reflected in GSK's recent request that several European health agencies rank GSK's early stage product pipeline to get a sense if the products would be reimbursed and to understand what data would be needed for reimbursement.

Another good example is Pfizer's recent announcement at a health care conference of its intention to become a world leader in product enhancements and reformulations. Now, I don't mean to suggest that we won't ever consider developing or acquiring NCEs under the right circumstances, but I am pleased to see the industry paying more attention to the need for therapies that benefit patients and payers alike regardless of whether they happen to be NCEs or not.

Let me now move to our business review. We are pleased with our financial performance this quarter, which is the result of our prudent control of our expenses, non-dilutive access to capital, and the execution of cash-generating milestones. Our current financial profile enables us to negotiate from a position of strength with potential partners, increase the value of our key company assets, and avoid dilutive financings in an environment where access to capital is restricted.

We strengthened our cash position in the first half of 2008 with a $10 million cash and royalty settlement of our patent litigation lawsuit against IVAX, a credit facility of $15 million from Oxford Finance and GE Capital, and the $12 million upfront fee from the Glumetza promotion agreement with Santarus that we received in July.

With the Glumetza deal behind us, we focused our business development team on partnering our Gabapentin programs and our development group on the execution of our three value-creating Phase 3 registration trials for Gabapentin GR. The first trial is the PHN trial we started in March of this year. The other two trials support our hot flash program and were discussed with the FDA during our end of Phase 2 meeting in June. We anticipate starting the first Phase 3 trial in menopausal hot flashes in the third quarter with the second trial beginning early in the fourth quarter.

As we described in our last quarterly conference call, the company is focused on five key objectives this year. Two of those objectives have already been achieved. We’ve partnered Glumetza and we’ve settled our patent litigation lawsuit against IVAX. The three remaining objectives are to rigorously manage our cash position, to partner and develop our two Gabapentin registration programs in PHN and hot flashes, and lastly, to advance our early stage pipeline.

Our current cash position is strong, and we plan to keep it that way by controlling our expenses and executing on additional cash generating milestone events. We ended 2007 with $69.5 million in cash and ended the first half of 2008 with $71.2 million in cash. In this quarter, we have already brought in an additional $12 million from our Glumetza deal with Santarus and we drew $5.6 million under our credit facility just today. So we have more than doubled our cash over the last four quarters without diluting our shareholders or compromising our late-stage Gabapentin GR development programs, which we see as near-term value drivers. It is important to note that we evaluate our use of cash and our need for cash not on a six-month horizon, but strategically on a three-year forward-looking window.

Now let me review our progress to date on our Gabapentin GR programs in PHN and in hot flashes. In June, we had a successful end of Phase 2 meeting with the FDA, in which we achieved agreement on the design of our Phase 3 registration program for Gabapentin GR in menopausal hot flashes and the doses to be tested. Based on these discussions and the resulting program design, we are able to revise downward our projections for the cost of these trials, which I will address at the end of the call.

The program, which we anticipate will begin in the third quarter, will include two randomized, double-blind, placebo-controlled studies of approximately 540 patients per study. The design of a program is consistent with the FDA's guidance on vasomotor symptom studies, which includes recommendations as to the study duration, primary efficacy end points, and inclusion and exclusion criteria.

In each study, patients will be evenly randomized into three treatment arms. The first group receives placebo; the second group, 1200 milligrams of Gabapentin GR dosed once daily at night with the evening meal; and the third group, a total dose of 1800 milligrams of Gabapentin GR dosed 600 milligrams in the morning and 1200 milligrams in the evening.

The treatment duration in the first study, let's call it study A, will be three months in order to assess the frequency and severity of hot flashes after four weeks of stable treatment and then again after 12 weeks of therapy. The second study, study B, will be the same as the first with efficacy measured at four weeks and 12 weeks. But in addition, this trial will be extended by a second three-month period in order to assess the persistence of efficacy at six months and to collect additional safety data.

As I just mentioned, the primary efficacy end points in both studies will be reductions in the mean frequency of moderate to severe hot flashes and the average severity of hot flashes in both cases after four weeks and 12 weeks of stable treatment. Various other secondary efficacy end points will be measured as well.

Regarding the active arms and the efficacy end points, the 800-milligram dose was the dose with the optimal balance of efficacy and side effects in the Phase 2 trial. And the 1200-milligram dose was the lowest dose showing a trend toward efficacy with low side effects in our small Phase 2 study. If the results of the Phase 2 trial are repeated in these two large studies, both doses will show statistical improvement over placebo.

Now, assuming a patient population similar to the patients in our Phase 2 trial, we estimate that the studies are powered to detect statistically significant differences relative to placebo in the frequency of approximately two moderate to severe hot flashes per day over placebo after both four weeks and 12 weeks of steady dose therapy.

Meanwhile, the Phase 3 registration trial in PHN that we started in March is progressing well. As a reminder, the PHN study is a 450-patient placebo-controlled double-blind trial with a ten-week stable treatment period. Now, as we have discussed, the new trial includes a number of important differences relative to the previous PHN trial. First, the new trial has a single 1800 milligram once daily active arm and will enroll 450 patients or about 50 more than the previous trial.

The additional patients and the single active arm mean that the new trial is statistically powered to achieve significance at a difference of 0.4 on the Likert 11-point pain scale rather than the 0.7 in the prior study. Also, patients are only eligible to participate in the trial if they recovered from shingles at least six months prior to enrollment rather than the three months as they were in the previous trial. The new eligibility criteria are designed to enroll a more stable patient population.

Furthermore, we are including clinical sites in Russia and Argentina in addition to the US sites to accelerate enrollment and also possibly to recruit a more symptomatic population of patients. We have just screened the first patient in Russia this week. So we will need some visibility into X US enrollment rates before we are in a position to provide meaningful guidance as to the completion of enrollment for this trial.

On the partnering front, discussions for our Gabapentin programs are ongoing and we are pleased with the parties at the table. Due to the sensitive nature of those discussions, we will not disclose timing or other details of any potential deal at this time.

Now let me walk you through our latest cash generating milestones. As you may recall, our promotion agreement with King was terminated in the fourth quarter of 2007 when King lost IP protection on Altace a year before they anticipated it might occur. We were able to negotiate a termination fee with King that totaled almost $30 million. Our intention at that time was to implement our own sales and marketing activities sufficient to keep the product prescriptions stable while we look for a new partner. We accomplished this.

TRx’s for October of 2007 were 20,991 and TRx’s for June of 2008 were 20,148, while Glumetza's market share in the branded metformin market increased from 19.5% to 22.2%. We also kept for ourselves all the Glumetza revenue, which has contributed to the low burn rate we have seen beginning with the fourth quarter of 2007.

Now, we set out to find a new partner for Glumetza with some very clear objectives in mind. Early in the process, we characterized the type of deal and partner we were seeking to sign. We expected an upfront payment and we wanted a partner with a strong sales force committed to the success of the product. We also wanted to avoid just being one more product in the salesman's bag. We also wanted to continue our own increasingly ownership of this valuable asset by booking sales and managing contracting.

The Glumetza transaction we did earlier this month with Santarus meets those requirements. We received $12 million in upfront fees and may receive up to $16 million in additional sales milestones. While we continue to book revenues from Glumetza, we will pay Santarus a gross margin split of 75% to 80% of the margin beginning in the fourth quarter. Glumetza will be promoted by 300 highly motivated sales representatives who have been honing their skills in the highly competitive PPI market with Zegerid. This is the perfect time to bring on a motivated team of 300 sales representatives, now that we have launched the 1000-milligram tablet of Glumetza in June and have made significant progress on the managed care front, as previously reported.

With Santarus beginning promotion in the fourth quarter, we will end our agreement with Publicis regarding their 33 part-time sales representatives. The deal with Santarus makes sense for us because it maximizes our near-term cash flow from Glumetza and reduces our sales and marketing expense exposure. While we were fortunate enough to be able to maintain Glumetza's run rate, about $20 million in annualized sales during the first half of 2008 with only 33 part-time sales reps, new prescriptions have started to decline. We think that decline would have impacted Glumetza sales at some point without a real increase in the sales and marketing effort behind the product.

Launching our own sales force or expanding a contract sales organization while continuing to wholly fund the marketing efforts by ourselves would have been very expensive. Glumetza is an important part of our business, but our late-stage Gabapentin GR programs are much bigger drivers of near-term value for our shareholders. So we did not want to take on all the risk and distractions associated with the infrastructure and execution necessary to make Glumetza a bigger success without the help of a partner.

With the Santarus deal, Santarus is responsible for the cost of their sales force and all marketing expenses. This removes the sales and marketing expense risk we would have if we continued to sell Glumetza alone. As a result, we reduced our exposure to Glumetza sales performance with a $12 million upfront, but we keep all of the third quarter Glumetza revenue and a fair share of the ongoing gross margin stream. But we get immediate cash and participate in the future success of Glumetza.

In June, we secured a $15 million non-dilutive credit facility from Oxford Finance and GE Capital. We have borrowed $9.4 million under the facility and we expect to draw down the last tranche of $5.6 million by September 30. We borrowed this money after setting out last fall to secure non-dilutive financing during a period of restricted access to capital and important partnering discussions. We wanted to make sure that we had the cash to focus on and advance our hot flash program without eroding our negotiating position with potential partners.

The credit facility accomplishes all of that and more. It serves as an insurance policy to protect us against downside risks, such as further tightening of the capital markets, and also provides us with operational flexibility. We plan to draw the full amount for all of those reasons and because we think the terms are very favorable. It would be unlikely for us to get similar terms in today's worsening credit markets.

In April, we settled our patent litigation lawsuit against IVAX. In that settlement, we received $7.5 million one-time payment and will receive up to $2.5 million in royalty payments from IVAX's parent company, Teva, on future sales of generic Glucophage XR by both IVAX and Teva.

Other positive developments on the IP front include the recent allowance of a Gabapentin GR patent application in the US, which marks our third patent allowance of the year and extends the protection for Gabapentin GR out to 2024. As to our early stage pipeline, our goal is to move one preclinical program into Phase 1 this year and another early next year. These new programs promise to have a high degree of product differentiation that will be meaningful to patients, physicians, and managed care, just like our Gabapentin GR programs.

One of the programs is our preclinical Levodopa/Carbidopa program, which we recently disclosed after the award of a grant from the Michael J. Fox Foundation. We are very enthusiastic that our technology might hold the potential to improve the lives of Parkinson's patients and appreciate the recognition we received from the Michael J. Fox Foundation.

Levodopa/Carbidopa is a gold standard therapy for Parkinson's disease. However, due to the preferential absorption in the upper GI tract at the duodenal cap, current formulations fail to optimize absorption, which potentially leads to blood level fluctuations, which in turn may be responsible for debilitating side effects and very inconsistent efficacy. We started the program under the hypothesis that the delivery of levodopa could be significantly improved with our AcuForm technology, which could optimize levodopa's absorption at the duodenal cap and smooth out blood fluctuation levels.

Currently, patients whose drug levels fall during the night can wake up in a frozen state where it’s hard for them to move. Our belief in this program is based on part on dissolution testing conducted with our formulation compared to the market leader formulation Sinemet extended release, wherein our formulation demonstrated a much smoother release profile over a four to six-hour period while Sinemet CR was rapidly released within about an hour.

Regarding ProQuin XR, we are pleased that our partner Rottapharm/Madaus has received marketing approval in Sweden, which serves as a reference member state for further regulatory approvals in Europe through the mutual recognition procedure. Our European partner, Rottapharm/Madaus, expects to launch ProQuin under local trade names in various European countries throughout 2009. This concludes our business review.

And I’ll now turn to financial matters. Our cash position increased in the second quarter by $7.5 million. Our cash burn for the second quarter, excluding the $7.5 million from IVAX in April and excluding the $3.8 million we drew down in June from our $15 million credit facility, was only $3.5 million compared to $10.4 million in the second quarter in 2007 or $5.8 million in the first quarter of this year. We do anticipate our burn to increase in the third and fourth quarters of 2008 in conjunction with enrollment of the PHN and hot flash trials.

For the second quarter of 2008, we’ve recognized $5.5 million in product sales, most of which as you might imagine were Glumetza, compared to $5.2 million for the prior quarter ended March 31, 2008 and $2.5 million for the second quarter of 2007. Operating expenses for the quarter ended June 30, 2008 were $2.4 million, including the offset from the one-time gain on the settlement of the IVAX lawsuit of $7.5 million. This is compared to $12.6 million for the prior quarter ended March 31, 2008 and $12.5 million for the same quarter in 2007. The decrease in operating expenses in the quarter ended June 30, 2008 compared to the same quarter in 2007 was primarily due to lower costs associated with clinical programs, lower headcount cost associated with the reduction in workforce in the third quarter of 2007, and lower litigation costs related to the IVAX lawsuit.

For the second quarter of 2008, we reported net income of $3.5 million or $0.07 per share compared to a net loss of $9 million in the second quarter of 2007 or $0.20 per share. The net income in the second quarter is primarily due to a decrease in operating expenses driven by a one-time gain of the $7.5 million from the IVAX lawsuit. Cash, cash equivalents, and marketable securities as of June 30, 2008 were $71.2 million compared to $69.5 million as of December 31, 2007. Cash, cash equivalents, and marketable securities as of June 30, 2008 do not include the additional $12 million we received in July from Santarus or the $5.6 million second tranche of our credit facility.

As I mentioned earlier, we are revising our expense guidance downward for the full year. On our last earnings call in May, we indicated that we expected our SG&A expenses, excluding any profit share fees related to our promotion arrangements, to be in the range of $24 million to $28 million and our R&D expenses to be in the range of $35 million to $40 million. The new SG&A guidance is now in the range of $22 million to $25 million, excluding any profit share fees due to Santarus or Watson under our current promotion agreements. This is lower due to our expense reduction efforts, settlement of the IVAX case, and with the Santarus deal in place, we will no longer have marketing expenses starting in the fourth quarter.

The new R&D expense guidance is now in the range of $28 million to $33 million, just to remind you, down from $35 million to $40 million. Approximately $10 million is expected for the Gabapentin GR Phase 3 trial in PHN and approximately $5 million is expected for the Phase 3 program in hot flashes, and those figures are for 2008. Our R&D expense guidance is lower due to our expense reduction efforts and lower projected costs for the hot flash Phase 3 trials due to the clarity around those trials that came out of our end of Phase 2 meeting in June.

And with that, operator, we’d like you to please open up the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) We’ll take our first question from Andy Schopick with Nutmeg Securities.

Andy Schopick – Nutmeg Securities

(inaudible) over Depomed. I do want to ask you a question about this credit facility. And although you have characterized it as non-dilutive and I guess in the sense that it doesn't involve any additional share issuances, it's at a very high interest cost, higher than I would have guessed would have been necessary in the environment. This facility is going to cost you about plus $1.7 million a year once it's fully utilized. What are the terms for prepaying any or all of this? And what are your intentions really with respect to trying to reduce the interest rate component associated with this financing?

Carl Pelzel

Yes. Thanks for the question, Andy. We didn't hear the first part of your comment, but I didn't think it was relevant to the question, so I won't ask you to repeat it. Let me first address what we are going to use this for. Looking ahead three years, we see that there is a major series of events when we receive approval of both the hot flash product as well as the PHN product. And with our stock where it is and with the current capital markets where they are, we felt it prudent to gain access to additional cash. As far as what we intend to do to reduce the interest rate as we go forward, we intend to draw down the last tranche before September. And so, our ability to reduce the interest would be based on whether we want to pay the loan off early, and we're going to have to see how our cash position progresses and how our need for cash changes over time. Let me ask Tammy Cameron to address the prepayment penalties.

Tammy Cameron

Yes. Andy, there is – on this debt facility, there is a 3% to 5% prepayment penalty depending on the timing and there is a 2% unused line fee.

Andy Schopick – Nutmeg Securities

Okay. You are going to utilize a lot so that won't come into play here at all.

Carl Pelzel

Right.

Andy Schopick – Nutmeg Securities

Okay. Secondly, with respect to the Santarus deal, I was on the Santarus conference call when this was announced and they revealed that the gross profit margin on Glumetza is a very attractive 83%. And obviously under the terms of this arrangement, they are going to capture 70% to 75% of all gross margin dollars associated with Glumetza sales. I just, again, would like to question why management felt it necessary to give away as much of the profit potential associated with any future Glumetza sales because certainly you are a lot further along with that than you are with the Gabapentin situation right now.

Carl Pelzel

Yes. We see that Glumetza has tremendous potential in the diabetes market. When you compare the product profile of Glumetza against Fortamet and you compare it to other products that are available for patients, we think the potential is great. And simply milking the product, letting it sit there and keeping all those revenues to ourselves, we feel would not enable us to maximize the opportunity Glumetza has. We see very significant sales potential. However, that can only be realized with the large sales force, 200 to 300 people that are highly motivated, very aggressive, and significant marketing budget. So, we don't see the $20 million run rate as representative of Glumetza's potential. We see that as the starting point. And the value we see in the product is in the sales increases we expect to see going forward.

Andy Schopick – Nutmeg Securities

Once again, my point being that a lot of the gross margin dollars are going to Santarus.

Carl Pelzel

As it has to. If you expect a company to bring forward and focus a 300-man sales force against a product, they have to be reimbursed for that.

Andy Schopick – Nutmeg Securities

They are going to be. My only other question here is really getting a sense of what – how one would model this company's revenue potential over the next three to five years because it's still a lot of things have been juggled and changed over the last two years; agreements that were put in place, that were terminated, and so on and so forth. So it’s kind of a work in process and it’s just real hard to get your hands around what the opportunity is going to be here.

Carl Pelzel

I guess a couple of components. Number one, we have plenty of cash. One, I do not see any kind of dilutive financing out beyond 2009 certainly. Secondly, most of the value in the company I feel is focused on Gabapentin, the PHN program and the hot flash program. And I think modeling significant amount of our value around those near-term events makes a lot of sense. I think it's looking to our pipeline products, the omeprazole program certainly has the potential to bring significant product differentiation into a highly competitive market and it has a clinical difference. It's just not a once-a-day product. And now the Levodopa/Carbidopa opportunity has the potential to increase clinical efficacy in an area of high unmet needs. So I would put most of our value on those near-term events.

Andy Schopick – Nutmeg Securities

Okay. Thank you.

Carl Pelzel

Thank you, Andy.

Operator

And we will move next to Scott Henry with Roth Capital.

Scott Henry – Roth Capital

Thank you, and good afternoon. I guess just starting – first, the decision to start the hot flash trial in Q3 versus waiting for a partnership agreement, at least on one of the indications, any thoughts on that? I mean, in theory you could start moving in both trials and a partnership could get delayed and it becomes a heavy investment. Just any thoughts on that process?

Carl Pelzel

Yes. Back in September of last year, we knew that the hot flash opportunity was going to be significant in and of itself, but very specifically for us because, as we’ve indicated previously, we intend to participate to a very large extent in that commercial opportunity with a small sales force in the 2010, 2011 time frame. So, timing was very important. In addition, recently we have seen that Lyrica's hot flash program, or Pfizer's program with Lyrica, has been terminated and Pristiq is running into trouble. So, timing is absolutely critical if we want to capitalize on the value associated with this opportunity. I will ask Mike Sweeney to talk about the strategy behind spacing [ph] the two trials slightly and not starting them at the same moment.

Mike Sweeney

Again, one of the reasons we chose to move ahead was that we had a very positive meeting with the FDA, and the FDA are obviously following the women's health initiative looking for to approve medications for the non-hormonal treatment of hot flash. These are two very large studies. And what you need to do is start one, have all of your investigators lined up, everything moving, all the systems tested, and then start a second a month later. And that will allow you an overall quicker update and movement on your studies. If you try to start them both at the same time, you risk even more delays. So we think that the optimum way is to start one in the third quarter and start the second about a month or so later.

Scott Henry – Roth Capital

Okay. Thank you. And perhaps a more specific question. You really divulged a lot about the trial design. If I heard correct, there would be a 1200-milligram once-a-day arm and an 1800-milligram that was split 600, 1200 morning, evening.

Carl Pelzel

That’s Correct.

Scott Henry – Roth Capital

And will there be any escalation in those arms?

Carl Pelzel

No, there won't be.

Scott Henry – Roth Capital

Now, if I recall correctly, the Phase 2 trial did have escalation as high as 3000 milligrams. Do you have any concerns that you might have under-dosed this trial? And particularly if you have to – let's say, the 1800 milligrams is a successful arm, is the product less appealing as a twice-a-day product?

Mike Sweeney

No, just to – I’ll take [ph] this question. Just to refer you back to our press release when we announced the results of the Phase 2 study that we did not see evidence of greater efficacy above 1800 milligrams. I would mention to anybody that we will be presenting the data more fully at the North American Association of Menopause in Orlando in September. So, the post will be available on our website immediately after that meeting.

Scott Henry – Roth Capital

Okay, that should be helpful. And could you talk a little bit about how the 1200-milligram – I'm just looking at – I believe there was a 1200-milligram once-a-day arm in the Phase 2, obviously less number of patients, but how was the trend in that arm?

Mike Sweeney

That was a positive. The study was a titration study. The 1200-milligram once-daily was only in the first six weeks. So we have to project out the results based on the first six weeks of the study. And they indicate, as Carl mentioned in the briefing, that we should see with these patient numbers not trend statistically and clinically significant efficacy. In addition, this was also associated with very low instance of side effects.

Carl Pelzel

So, Scott, we are really hedging our bets. In other words, we know in the study that the 1800 milligrams b.i.d. works, worked exceedingly well and seem to represent the top of the dose response curve. So that's – I can't say a given, but we feel very strongly about that, as did the FDA. But certainly we would expect once-a-day dosing with the 1200 milligrams to have fewer side effects, and based on what we saw in the Phase 2, to Mike's point, should work based on the larger number of patients in these two trials. As you may recall in the literature, 900 milligrams has worked in a number of trials. So we feel really good about the 1200, but wanted to hedge our bets with the 1800.

Scott Henry – Roth Capital

Any reason why you wouldn't hedge with an 1800-milligram once-a-day, given what you have seen in the other trials?

Carl Pelzel

Cost and timing. And frankly, we feel really good about the 1200-milligram dose.

Scott Henry – Roth Capital

Okay. Fair enough. I look forward to seeing those abstracts as well. Just on a housekeeping question, the royalties in the quarter, 433,000 was a pretty strong number. Should we expect that to continue forward?

Tammy Cameron

Yes. That was driven primarily by the IVAX settlement. So there is royalty coming through just above 300,000 this quarter related to that settlement.

Scott Henry – Roth Capital

Okay. And those should continue on?

Carl Pelzel

They will continue on until we hit the $2.5 million cap. It will vary slightly because it's an effective 9% royalty on the sales of Teva’s and IVAX's Glucophage XR. So, it's pretty stable at the moment, but you might see it go up or down over time.

Scott Henry – Roth Capital

Great. Thank you for taking the questions.

Carl Pelzel

Thank you, Scott.

Operator

That does conclude our question-and-answer session. At this time, I’ll turn the call back over to Carl for any concluding or additional remarks.

Carl Pelzel

Thank you very much for joining us on this call, and I look forward to keeping you apprised of our progress in the coming months. Good afternoon.

Operator

This does conclude our conference call for today. We thank everyone for your participation.

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