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Optimer Pharmaceuticals (NASDAQ:OPTR)

Q3 2012 Earnings Call

November 01, 2012 5:00 pm ET

Executives

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

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

Stephen W. Webster - Chief Financial Officer

Analysts

Ritu Baral - Canaccord Genuity, Research Division

Marko K. Kozul - Leerink Swann LLC, Research Division

Steve Byrne - BofA Merrill Lynch, Research Division

Alan Carr - Needham & Company, LLC, Research Division

Heather Behanna - JMP Securities LLC, Research Division

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

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

Sara Slifka - Morgan Stanley, Research Division

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

Operator

Good day, ladies and gentlemen, and welcome to the Optimer Pharmaceuticals Third Quarter Financial Results Conference Call. [Operator Instructions] As a reminder, this call may be recorded.

I would now like to introduce your host for today's conference, David Walsey, Vice President of Investor Relations and Corporate Communications. Sir, you may begin.

David A. Walsey

Thank you, and welcome to the Optimer Pharmaceuticals third quarter 2012 conference call. With me today from the company is our Chief Executive Officer, Pedro Lichtinger; and our Chief Financial Officer, Stephen Webster.

Please note that this conference call will include forward-looking statements regarding future events and the future financial and operating performance of Optimer, future sales and adoption of DIFICID, including plans and initiatives to facilitate patient access, life cycle management initiatives and commercial efforts, commercialization of DIFICLIR in Europe, Optimer's plans for additional international commercialization of DIFICID, potential hospital formulary decisions and Optimer's plans and expectations regarding the DEFLECT-1 clinical trial. Because such statements deal with future events and are subject to many risks and uncertainties, actual results may differ materially from those projected in the forward-looking statements. Examples of such risks and uncertainties include whether Optimer and its partners will be able to drive further adoption and sales of DIFICID, including in new markets and territories; whether Optimer's patient access initiatives will be successful; whether and when hospitals reconsider formulary decisions and whether those decisions will result in greater access to DIFICID; whether Optimer's life cycle management initiatives will ultimately result in label expansion or greater market opportunities and risks involved in the regulatory approval process and the uncertainty in forecasting future financial results.

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

Furthermore, this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, November 1, 2012. Optimer undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call. This conference call is being webcast and will be archived in our website for 30 days after today.

Earlier today, we released financial results for the third quarter ended September 30, 2012. If you have not received this news release or if you'd like to be added to the company's distribution list, please visit the investors section of our website at www.optimerpharma.com. I would now like to turn the call over to Pedro Lichtinger, Optimer's President and CEO.

Pedro Lichtinger

Thank you, David. The third quarter of 2012 marks the beginning of the second year of commercial sales of DIFICID. Third [ph] year net sales of $51.1 million exceeded most expectations and international interest in licensing fidaxomicin was robust. We have collaborations with Astellas Pharma Europe in Europe, Astellas Pharma in Japan and Specialized Therapeutics in Australia. As you know, we exceeded our internal sales goals within our co-promotion agreement with Cubist under which they earn $5 million bonds and $3.5 million in profit share. We did see a slowdown in the growth rate of DIFICID sales late in the second quarter, which continued into the third quarter. While there is, indeed, seasonality in antibiotic sales to treat CDAD, we believe that the combined impact of the DIFICID hospital acquisition costs, a lack of awareness by hospitals of the burden of CDI on both patients and healthcare costs and continuity of care issues among other factors, impacted prescription drugs. Optimer has recognized these barriers to adoption and has launched new initiatives designed to regain momentum and make DIFICID the standard of care for appropriate patients.

We have learned a lot about the market for DIFICID over this past year. It is a substantial and growing market but prior to DIFICID's approval, have not seen a drug approved for CDAD in more than 25 years. And while we believe DIFICID superior to sustain response through 25 days versus vancomycin, it's highly relevant and critical to the treatment decision, other factors are also important to our customers in making treatment decisions such as price and continuity of care upon hospital discharge.

As we address the needs of our customers, we see little doubt that DIFICID's efficacy profile presents an opportunity for our customers to reconsider the standard of care for treating many CDAD patients. We believe that enabling greater patient access to DIFICID will challenge physicians and other decision-makers to reconsider the current treatment paradigm and the use of DIFICID.

As announced early last month, Optimer has launched the initiative designed to accelerate and expand patient access to DIFICID in the hospital setting. Hospitals are the gatekeepers to antibiotic prescriptions both for inpatients and, importantly, upon discharge of patients to the retail and long-term care setting. As a result, a significant number of outpatient prescriptions are generated in the hospitals. We believe that by increasing our share in the hospital, we can further accelerate outpatient prescription growth. To this end, last month we introduced a 25% discount for hospitals using DIFICID in an effort to reduce the hospitals' acquisition cost of the drug and to support the infectious disease community. We believe the superior product attributes, combined with the new lower cost to hospitals, provides a compelling case for physicians to consider increasing DIFICID adoption in appropriate patients.

If we estimate that the hospital setting ultimately represents about 30% of the total CDAD market, expressed in terms of treatment days, the 25% hospital discount translates into an overall discount of about 7% to 8% of our total business. The initial feedback after 1 month is positive. Based on the survey of hospitals covered by our field force, 48% of the 200 hospitals, representing approximately 40% of prescriptions in the hospital segment, have indicated an intent to review the formulary status of DIFICID. And 35% of the next 800 key hospitals have indicated their intent to review the formulary status of DIFICID. While the formulary review process can take up to approximately 6 months and we cannot predict the outcome of these reviews, we are highly encouraged by this information. And it is what we are hoping would happen. As we continue to deploy our resources to execute on our strategies to support the commercialization of DIFICID.

Continuity of care from the hospital inpatient setting through the post-discharge setting also is important. Optimer's DIFICID Rx Assist Program provides resources to facilitate continuity of care, including information regarding coverage determination and benefits, prior authorization, coverage appeal and research and out of pocket cost per system. Optimer had seen...

[Technical Difficulty]

Pedro Lichtinger

Optimer has seen the utilization of DIFICID Rx Assist steadily increase since its launch in August. Based on very encouraging initial results with the program, we believe we can positively impact the current 40% abandonment rate of prescriptions of DIFICID at the retail level. Separately, we are now 1 month into the availability of the NTAP program to hospitals. This is a CMS program that provides an add-on reimbursement payment of up to $868 for eligible Medicare inpatient cases where DIFICID is administered in hospitals. As you may recall, to be eligible for NTAP, the technology must be new, be inadequately paid under the existing MRDRG (sic) MS-DRG system and it must offer significant clinical improvement over existing therapy. All 3 criteria must be met and we believe that physicians recognize the significance of an applicant meeting this overall criteria.

Our business is the first oral pharmaceutical to qualify for an NTAP and payment became available on October 1. We have dedicated resources to educate hospitals on utilization of the NTAP program. Early feedback from the field on the availability of NTAP to hospitals treating CDAD patients on Medicare is also positive.

Separate from the strategic initiatives I outlined, I'd also like to remind you of the new data we have acquired that addresses the burden of CDI in the hospital setting. Consistent with the goal of increasing disease state awareness, Optimer commissioned an analysis of Medicare data intended for publication, which provides evidence of the incidence of readmissions for Medicare CDI patients and suggest the link between CDI, hospital readmissions and increased hospital costs. This data helped address gaps in evidence regarding the actual burden of CDI in hospitals. We have this data not only on the national level but for key individual hospitals as well. We believe this could be a very useful tool for hospitals to better understand the CDI burden in their respective institutions.

In addition to our efforts in the United States, we expect international markets to provide growth. Astellas Pharmaceuticals Europe is now selling DIFICLIR in 8 countries in the European Union: The U.K., Austria, Sweden, Denmark, Finland, Norway, the Netherlands and Portugal. Astellas anticipates that DIFICLIR will be launched in additional European countries over the next 12 months, including key markets like France, Spain and Germany. Prices have been approved in the range of EUR 1,500 to EUR 1,932 per course of treatment. We continue collaboration efforts to make fidaxomicin available globally and we anticipate that our next collaboration agreement will cover territories in Latin America.

I would like to shift gears a little bit and spend some time talking about our life cycle management initiatives that have the potential to significantly increase the market for the product, including the prophylaxis clinical trial that is now underway.

But first, I'll turn the call to our Chief Financial Officer, Stephen Webster, to review our financial results.

Stephen W. Webster

Thank you, Pedro. For the third quarter of 2012, total revenues were $17.9 million, an increase of $6.8 million over the 3-month period ended September 30, 2011. DIFICID gross sales to U.S. and Canadian wholesalers and specialty pharmacies were $18.7 million in the third quarter of 2012, representing 6,692 treatments shipped and a 3.9% increase over the $18 million in gross sales for the second quarter, and a 53.7% increase from the prior-year period. Net product sales for the quarter were $16 million, a 4.9% increase over the second quarter, and a 51.5% increase over the prior-year period.

Approximately 6,600 DIFICID treatments were shipped in the third quarter from wholesalers and specialty pharmacies to U.S. and Canadian purchasing customers, including hospitals, retail pharmacies and long-term care facilities. This is a 7.2% increase over the prior quarter and an increase of 131.7% over the prior-year period.

Contract revenues from collaborations, which include royalties in bulk pharmaceutical sales to our collaboration partners, were $1.9 million in the third quarter of 2012.

Research and development expense for the 3 months ended September 30, 2012 and 2011 was $10.7 million and $10.4 million, respectively, an increase of $0.3 million.

Selling, general and administrative expense for the 3 months ended September 30, 2012 and 2011 was $26.4 million and $24.0 million, respectively, an increase of $2.4 million. The increase was due to higher salary expense and increased legal and other consulting services.

Co-promotion expenses with Cubist for the 3 months ended September 30, 2012 and 2011, were $4.4 million and $2.9 million, respectively, an increase of $1.4 million. The increase represented certain profit sharing expenses earned by Cubist under our April 2011 DIFICID co-promotion agreement.

We reported a net loss for the third quarter 2012 of $26.8 million or $0.56 per share on both the basic and diluted basis as compared to a net loss for the third quarter 2011 of $26.4 million or $0.57 per share on both the basic and diluted basis.

As of September 30, 2012, we had cash, cash equivalents and short-term investments of $98.2 million. This does not include the proceeds from an agreement announced on October 8 to sell our stake in Optimer Biotechnology Inc. or OBI. The sale is expected to result in net proceeds of an additional $59.8 million and was structured to close in 2 tranches. The first closing took place on October 19 and the second closing is expected to take place in the first quarter of 2013. We had 47.6 million shares outstanding on September 30, 2012.

I'll now turn the call back over to Pedro.

Pedro Lichtinger

Thank you, Stephen. Life cycle management for DIFICID is an important part of our mid- to long-term business strategy. Earlier today, we announced that the first patient has been dosed in our DEFLECT-1 study. This is a Phase IIIb clinical trial evaluating DIFICID for the prevention of -- of prophylaxis of CDAD in patients undergoing hematopoietic stem cell transplant, often referred to as bone marrow transplantation or BMT. Patients in the trial will be randomized to receive their 200 milligrams of DIFICID or a placebo once daily for up to 40 days during the engraftment period. The trial is designed to enroll 340 adult patients.

After the first 170 patients are enrolled, a blinded interim analysis will be conducted to reevaluate the sample size. The objective is to achieve a 60% improvement in the CDAD incident rate in the DIFICID group over the placebo group. If the trial is successful, we expect that we will take inclusion of a prophylaxis claim in our label for this patient population.

We estimate that there are about 20,000 bone marrow transplant cases in the United States each year. In these patients, CDAD results in a significant increased length of hospital stay and increases hospital cost by about $130,000 or almost 100% compared to non-CDAD cases. Up to 30% of bone marrow transplant patients are affected by CDAD. With no other treatment for the prevention of CDAD in this population, there is clearly an important need.

Physicians performing bone marrow transplantation commonly prescribe drugs like antifungals prophylactically to their patients and appreciate the increased cost in complications and inadvertence the infection can cause. We believe DIFICID has a profile that makes it appropriate for prophylactic use. There is no likelihood of DIFICID inducing resistance to Clostridium difficile and there was no in vivo counter activity with other antibiotics in our preclinical studies. It is generally acknowledged that DIFICID has minimal systemic absorption and minimal disruptions of the normal gut flora.

BMT is one of the several top populations that could benefit from CDAD prophylaxis. ICU patients on ventilator support; dialysis patients; liver, kidney and heart transplant patients; and oncology patients with febrile leukopenia are significantly affected by CDAD. In many of these populations, the mean length of stay and mean cost nearly doubles in patients that acquire CDAD.

In addition to DEFLECT-1, we plan to pursue development and get FDA approval for an expanded prophylaxis indication that we expect would provide DIFICID with a broad prophylaxis label claim for immune suppressed patients. The number of cases of immune suppressed patients combined with the once daily treatment of for up to 40 days has the potential to significantly increase the current market potential for DIFICID. As part of our life cycle management strategy, we are also evaluating additional post marketing studies, that if successful could also expand DIFICID's label. We look forward to keeping you up-to-date on our life cycle management plans for DIFICID.

That concludes my formal remarks and I will now turn the call over to the operator to lead the question-and-answer portion of this call.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Ritu Baral from Cannacord.

Ritu Baral - Canaccord Genuity, Research Division

I wanted to follow up on Rx Assist as well. What sort of trends have you seen in utilization of the different parts of the Rx Assist program and their impact on abandonment rates, and I have a follow-up after that as well.

Pedro Lichtinger

Well first of all, we are very excited with the impact that Rx Assist is having in the market. It has successfully impacted a significant number of patients, both in terms of the management of the prior authorization process and, in particular, in those patients that were having difficulty in coping with the coinsurance levels that their insurance programs require. As I had already mentioned, we saw an increase in fill rates from 25% to 75%, and of course this is continuing. We are not, at this stage, releasing more information but do expect for this trend to continue and to reduce significantly the estimated 40% abandonment rate. I also want to take the opportunity to say that, in addition to the impact of the prescription losses at retail, it has a -- it's secondary but, as important, impact on the prescribing practices of those physicians, both for inpatient and for other outpatients. And the reason for that is it avoids the lack of assurance for the physicians that the prescription will be filled and it avoids the concern of being bothered or having to change a prescription.

Ritu Baral - Canaccord Genuity, Research Division

And my follow-up has to do with the slight improvement in the gross to net that we have seen this quarter. Does that have any readthrough into how your long-term care initiative is going?

Pedro Lichtinger

No, it has nothing to do with the long-term care initiative at this stage. There are no incremental discounts in long-term care when compared to other segments. So you would not be able to see a difference as a result of that. No, it is -- I mean, simply stated, we saw a different pattern in the impact of the donut hole patients on the level of discount. And we'll go up -- I mean, obviously, it will go up with the newly announced discounts.

Ritu Baral - Canaccord Genuity, Research Division

And last question, I'll hop back into queue. How did you pick the dose for the prophylaxis study? It's I guess, 1/2 the dose -- 1/2 the daily dose of the normal CDAD treatment. Is that backed up by additional preclinical or PK studies that you've done?

Pedro Lichtinger

Well, it reflects 2 things. One is a strong belief that when the patient has the disease, he's having a series of bowel movements that afford the evacuation of the medicine factor, combined with the understanding of how long the drug stays in the colon and its excretion patterns. And we very strongly believe, that with a patient that is not experiencing the disease, a 1 pill a day should suffice to achieve the prophylaxis endpoint.

Operator

Our next question comes from Marko Kozul of Leerink Swann.

Marko K. Kozul - Leerink Swann LLC, Research Division

The question, Pedro, regarding your survey, I wanted to ask if you could maybe list for us, in terms of importance, the drivers leading to some of the formulary reevaluations?

Pedro Lichtinger

Well, I mean, as I said from the beginning, that every hospital is an individual hospital. And as we have mentioned, we have several new components of our strategy, including the CMS announced decision for NTAP, the inclusion of the Rx Assist Program, as well as our 25% discount and the new data that we have released on readmissions and cost of readmissions in hospitals. So, I mean, I have to say it is very difficult, if not impossible, to say this is driven primarily by 1 or the other. Anecdotally, we have examples of every single one of these elements or components of our new strategy having had an impact and, in many cases, 2, 3 and even all 4, having an impact. So the answer is we cannot identify which of the 4 is the most impactful. We have examples where what motivates a hospital is one or the other, or all of them combined.

Marko K. Kozul - Leerink Swann LLC, Research Division

As a follow-up, can you talk a little bit about awareness of the NTAP program?

Pedro Lichtinger

The awareness of the NTAP program, let me separate it by the pharmacy. At pharmacy level, there is a relatively wide awareness. But at the general physician awareness, infectious disease awareness at this stage, is very low. There is about a 40% awareness and when you exit [ph] infectious disease into the other sectors of the hospital, it rapidly goes down. It is a totally new program. We are the first oral product to ever go through the program, and physicians and hospitals are not accustomed to deal with medicines in the NTAP setting. So the answer is, there is relatively low awareness and this is one of the reasons that we have a very strong educational focus in this first 3 months of the program.

Marko K. Kozul - Leerink Swann LLC, Research Division

Just one more quick one, and I'll jump back in queue. I wanted to ask if you've come across any hospitals experimenting with across the board, early line use of DIFICID in order to generate their own pharmacoeconomic data?

Pedro Lichtinger

Well, I don't know what you mean with across the board. We do have quite a few hospitals that are using DIFICID. Again, please allow me to exclude the word experimenting. Most hospitals, when they are taking the decision, it is not an experiment, it is a decision. And most hospitals will not do it with the purpose of publishing, but they will do it to the benefit of patients. So I believe that we do have quite a few hospitals that have implemented algorithms of use that include third line use and that this will be spreading in the appropriate patients. Just as a reminder, the risk drivers of recurrence are age, concomitant antibiotic use, immunosuppression, renal impairment and a prior CDI event.

Operator

Our next question comes from Steve Byrne with Bank of America.

Steve Byrne - BofA Merrill Lynch, Research Division

I have a couple of financial questions. Do you sell the fidaxomicin to your ex-U.S. partners at cost, and is that what that $1.2 million cost for servicing these contracts from?

Stephen W. Webster

That's correct, Steve. We sell to Astellas Europe and STA and Astellas Japan at a cost plus a small markup. If you look at the COGS there, that's sort of indicative of the bulk product sales, a component piece of the $1.9 million in contract revenue was also royalties out of Europe, and there are -- we pay Par royalties on that. So there's a little bit of a COGS to Par on the royalties that come in and there is a cost plus markup on the bulk sales for the collaboration partners.

Steve Byrne - BofA Merrill Lynch, Research Division

So your royalties to Par are in that $1.2 million?

Stephen W. Webster

The royalties to Par that are germane to the royalties and the profit on the bulk sales to our partners are in that line. The Par royalties on U.S. and Canadian sales are in our COGS.

Steve Byrne - BofA Merrill Lynch, Research Division

And the COGS on your U.S. and Canadian sales look like they're something less than 10% of sales, is that a sustainable level?

Stephen W. Webster

Yes, we think it is. We had some early expensive cost COGS in prior periods and we've kind of -- we've been talking to folks about a 10% long-term COGS rate as we get efficiencies in manufacturing and scale up. So I think this number is indicative of where you can expect it to be, still vary a couple of points here and there, but not at the prior levels.

Pedro Lichtinger

This is Pedro, just as a reminder, in the early stages of the launch, we have a fully expensed inventories from the batches that were done to validate the CMC. And later on, we did have a 1 issue with cost that was reflected but we do believe that the 10% is our long-term expectation and that does include already the Par royalty.

Steve Byrne - BofA Merrill Lynch, Research Division

And then one commercial question for you, Pedro. What hospital characteristics would you associate was the heaviest use of DIFICID, and is there a correlation with the percent of patients that are served by that hospital that are Medicare.

Pedro Lichtinger

Well, the first answer is, these are the most intelligent hospitals. I'm just kidding. We have all types of hospitals that tend to use the drug wisely. We have one academic -- a couple of academic centers. We have a couple of community hospitals. So I don't think you can say that this drug will become a drug of choice of one segment over the other. This is a drug that should cross all types of hospitals given its advantages and its characteristics. So that's the first answer. The second is we have achieved significant shares in a couple of hospitals where the first-line use is in place, and we expect that share to expand in those hospitals and we're very excited with what it represents.

Operator

Our next question comes from Alan Carr with Needham.

Alan Carr - Needham & Company, LLC, Research Division

Canada. So I'm wondering about reception over there. Are there any differences in how well DIFICID has been received over there and what have you heard from Astellas in terms of how well it's received in Europe and are there any, I guess, lessons from those 2 territories that apply here over to the U.S. And then the second question is, I'm wondering about remaining milestone payments from Astellas with your deal over there in Europe, what might be ahead there?

Pedro Lichtinger

So let me start with Canada. You know everyone of these marketa is different, and the biggest differential is the reimbursement and access processes. In the case of Canada, you have a national reimbursement process. You have a provincial process and then you have an individual hospital process. But it is basically one. In the United States, as you know, we have multiple providers. We have every individual hospital, multiple types of hospitals. You have, of course, Medicare. So the U.S. has an extreme complex system and the biggest difference that I would say is that, in the United States, the benefit of the drug is split against multiple stakeholders. In Canada, the benefit is a lot more concentrated in the 1 payer system and the same would apply in Europe. So what this means is the cost effectiveness of the drug is better perceived outside of the United States because of the closeness of the system. Having said this, and we have said this from the beginning, both in Canada, as well as in Europe, it takes time to go through the process. So at this stage, we do not have either national or provincial acceptance in formularies. So we are selling on an exceptional basis and we're starting to sell to the private insurance system, which are sizable in Canada. But the lion share of the market, we will not be able to reach until we get those endorsements. So it will take time. Having said that, we are extremely pleased that there are very few drugs in Canada that have sold at the levels that we're selling without being in the formula resistance. When you move to Europe, we are extremely pleased with how the market is reacting. The most important element is that the pricing is firming up and is being accepted by the European countries. This was as you recall, a couple of years ago, the most important perceived issue in the European market. So the price has been accepted in key places like the United Kingdom, it is in the process of being finalized in France and Spain and, of course, in Germany. We will only know a year after, after our launch, but all the signs are quite positive. So overall, in Europe, we're very pleased with the early performance. Again, it is on a country-by-country basis and the biggest first step is getting on formularies. And, again, that takes time and it varies by country and it's sequential. But I mean overall, the receptivity is very high and, as I already said, the most important first element is we are getting acceptance of what we believe is a very reasonable price and are very pleased with the development in the international markets.

Stephen W. Webster

And as to the European milestones, Alan. We have a couple of European commercial milestones there, generally triggered off a calendar year in which European sales equal a certain euro total. We haven't disclosed those but there are 4 milestones. I mean, it's really hard to predict because, obviously, Q3 was the first quarter of any significant European launch. So stay tuned on that, but there are some milestones based on European commercial sales.

Alan Carr - Needham & Company, LLC, Research Division

There's 4 separate ones in Europe, 4 different thresholds?

Stephen W. Webster

Yes.

Alan Carr - Needham & Company, LLC, Research Division

How much do you have remaining in the milestone pool, so to speak?

Stephen W. Webster

There's up to $65 million still available from Astellas Europe.

Operator

Our next question comes from Heather Behanna of JMP Securities.

Heather Behanna - JMP Securities LLC, Research Division

First sticking with Canada and Europe, I just wanted to know how much of that -- if all that revenue was demand or if there was stocking involved?

Pedro Lichtinger

There is very limited stocking in the European market today. They do not have, I mean, large wholesalers to deal with. In most of these countries, you deal with the hospitals directly and so I do not believe there is a very large stocking. There is a very small stocking like it is today in the United States. So the answer is, it is slow until you get on formularies in the same way as I described before.

Heather Behanna - JMP Securities LLC, Research Division

Just a quick financial question. For the $60 million for October and then the first quarter, is it a 50-50 split or can we get a little bit of color on that?

Stephen W. Webster

You mean on the OBI closing?

Heather Behanna - JMP Securities LLC, Research Division

Yes.

Stephen W. Webster

Yes, I can tell you that the first closing that came in on October 19 had net proceeds of $39.4 million, Heather, and net proceeds on the second tranche will be $20.4 million.

Heather Behanna - JMP Securities LLC, Research Division

Just one more question, we noticed that there was a lower gross profit split to Cubist this quarter from last, and just wanted to know if that was a reflection of all sales or Cubist sales are down and if they're continuing to promote DIFICID at the same level?

Stephen W. Webster

No, that's pretty much a gap anomaly. The calendar year -- the sales year with the Cubist relationship, year 1 ran from June of '11 through July '12. Second year starts August 1 of this year and runs to July 31. So what you saw in the P&L in the third quarter, Heather, was their July profit share that was not accrued in the second quarter.

Operator

Our next question comes from Eun Yang with Jefferies.

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

With this newly implemented commercial strategy, can you comment on how do you see October sales compared to September sales?

Pedro Lichtinger

Obviously, we know what they are, but we're not commenting at this time. And the reason for that, as we have seen in the past, one very good month cannot be indicative of a continuation. So we prefer to wait until we have a solid track record.

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

Okay. And then, so gross-to-net adjustment in third quarter was better than second quarter, but you've also implemented a 25% discount to hospital sales. So is that going to be reflected in the gross-to-net in the fourth quarter, and going forward?

Stephen W. Webster

Yes, it will. The discount was not implemented until October 1. So the Q3 gross-to-net is apples-to-apples with Q2. And the slight variation from 15 and change to 14 and change is mostly just timing of some of the government payments that we have to make to true up Medicare Part D stuff. Going forward, you will see the gross-to-net increase with the hospital discount, Eun. Again, when Pedro mentioned in his remarks that the discount could be 7% to 8%, you can pretty much suggest that hospital gross-to-net will be in the 40% range. So the 15% currently existing plus the 25% discount, the remainder of our business will stay in the 15% gross-to-net range. So depending on how much you think will be derived from the hospital you can come up with a blended gross-to-net that I would suggest would be in the 22%, 23%, 24% range.

Operator

Our next question comes from Chris Holterhoff with Oppenheimer.

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

First question is just on the 6,300 shipped in the quarter. Apologies if I missed that, it was probably in the prepared remarks, but give us just a rough idea of the percentage going to hospitals versus long-term care facilities and retail pharmacies?

Stephen W. Webster

Yes, we generally think long-term again, as Pedro suggested in his comments, long-term and the hospital represents about 30% of the potential market for DIFICID. Right now it's been a little bit higher because that's where we're starting. So currently, we're in between 30% and 40%, I think 35% is a good number. As far as the breakdown of the rest of the business, you can generally suggest that the retail segment is about twice as big as the long-term care segment right now, although long-term care is growing. Did that help you?

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

Yes, that's helpful. And then with the $1.9 million in the revenue line, is it possible to kind of break that up between contract revenues and royalty revenues for the quarter?

Stephen W. Webster

We're not breaking that out. You can -- I will tell you that a substantial chunk of that was bulk pharmaceutical sales to the 3 collaborators and, again, European markets, just the sales -- really just launched it in the third quarter, so we did see some nice royalties come in, but the bulk of the $1.9 million is bulk. Sorry about that, weird phrasing.

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

And just finally, I know when DIFICID was launched, usually you kind of talked about being able to reach profitability 3 years after launch and just kind of wanted to get your updated thoughts there to see if that's something you still think you can achieve.

Pedro Lichtinger

Yes, we have consistently reaffirm our commitment to breakeven at 3 years, which is around July of '14, and we reaffirm that commitment again. After 3 years, after launch, we would expect to be breaking even.

Operator

Our next question comes from Sara Slifka with Morgan Stanley.

Sara Slifka - Morgan Stanley, Research Division

Maybe I missed this, but could you guys provide a breakout between Canada and U.S. sales? And then my second question was, you had mentioned in the past a possible head-to-head trial in oncology versus metronidazole. Is this something you still plan on doing? It hasn't been mentioned in a while.

Stephen W. Webster

I'll take the first question, Sara. Going forward, we'll probably not going to be breaking out U.S. and Canadian sales. However, you got a sneak peek this quarter because ahead of the Analyst Day, we announced that U.S. gross sales were $18.4 million and what we've told you today was U.S. and Canada gross sales were $18.7 million. So you'll get a sneak peak at Canada this quarter, but going forward, we will probably not break it out. It was about $300,000 in Canada and their gross-to-net is much, much, much tighter than ours because there's not a lot of discounting and costs going through the wholesaler system there.

Pedro Lichtinger

Let me address the other question. First of all, we believe that since we made those comments, vancomycin went generic, and as a result of that we believe that over the next 5 to 10 years vancomycin will be displacing metronidazole in moderate and in segments of the mild patients. So it does not make strategic sense for us to compare our drug with metronidazole any longer. However, we are looking at a potential trial to prove superiority in cure of our drug against vancomycin in oncology.

Operator

Our next question comes from Juan Sanchez with Ladenburg.

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

I only have a couple of questions. The first one is in the 25% discount to hospitals. If you could find some precedents of companies that have followed this strategy and what the long-term outcomes of the strategies have been? And the second question is, how are you preparing for transitioning away from the Cubist collaboration and what kind of investment that entails in the second half of next year?

Pedro Lichtinger

The answer to the first question is that there are no precedents, to my knowledge, in the hospitals of companies reducing the acquisition cost of the drug. Certainly not in the antibiotic segment. There are others outside or across the hospital and retail. It was done for example, with Zmax, with Zithromax in history. In but any case, our decision was not made on with respect to precedent, it was made based on the perceived cost effectiveness and cost value at hospitals, as well as the perceived cost of acquisition impact on infectious disease prescribing practices. We believe that these discounts is targeted at addressing both and that it will significantly erode those cost barriers.

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

And the Cubist question?

Pedro Lichtinger

Yes. We continue to plan for a transition in July of next year as defined in the contract. And as I have been saying consistently, we plan to add up between 40 or 50 sales representatives, although we have not defined that completely at this stage.

Stephen W. Webster

And just for comparison, Juan, you know that the guaranteed minimum, the contractual minimums to Cubist aggregate $15 million a year. We think we could put that number of reps on the field for less than that number.

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

One last question, on the bone marrow patient population, do you know what percentage of patients take any antibiotics during the same period of time you want to expose those patients to fidaxomicin?

Pedro Lichtinger

The majority of those patients are taking prophylactically quinolones.

Operator

[Operator Instructions] Our next question comes from Ritu Baral with Cannaccord.

Ritu Baral - Canaccord Genuity, Research Division

Could we get an update on where you are as far as the multiple relapse study that you had spoken of, as well as the pediatric plan?

Pedro Lichtinger

Well the pediatric study, we have 2 components to the pediatric study. The PK study is well advanced and doing very well, and the second study has also started and we are recruiting patients. So both of those pediatric studies will be achieved in time and as I said at the beginning, they are FDA requirements. We do not believe that the incidence of the disease in children represents a major market opportunity, but it will exceed IP protection of the product by 6 months. The multiple recurrence study is projected to start in the second half of next year and we are very advanced in its design and in proceeding with it and we will make announcements as we get closer to it.

Ritu Baral - Canaccord Genuity, Research Division

And the prophylaxis study that you announced, any sort of pointers or guide lines as far as enrollment rates and when we might expect data, even just roughly?

Pedro Lichtinger

Well, we have 45 centers enrolled, about 40 in the United States and 5 in Canada. That means that we have 40% of the centers that conduct bone marrow transplants in the United States. That gives you an idea of how many patients go through the centers that are enrolled. And we're talking, therefore, of anywhere between 6,000 and 8,000 patients enrolled in the next 6 months in those centers, and we're talking about enrolling 340 patients. So I'm not saying we're going to do it in the next few months, but our target is to complete the study by, as what's announced in writing by the early, early in the first quarter of '14. However, we do have an interim reading of this adaptive design study that we expect will happen in the second half of '13. That will indicate how the study is proceeding so that we can determine whether we need to increase the sample and the number of patients. We can stop the study because it's achieved its objectives, so we abort the study because it is not working. So most likely, there will be some level of announcement in the second half of '13.

Ritu Baral - Canaccord Genuity, Research Division

And could you go over for us about, right now, what percentage of transplant patients come down with CDAD and what the assumption, at least, the current assumption is for CDAD rate in transplant patients in the trial?

Pedro Lichtinger

Yes. Well, let me address it. The literature calls for a 9% incident rate, that's the only published literature that exists, which dates to 2009. The average of the 40 centers that we are working on is about 20% and the reported data overall is that up to 30%. So I mean this gives you the parameters. As you know, this disease has not been widely studied and there is not adequate information. So these are our best guesses, if you want to call it that. The one that I feel the most confident about is the 40 centers we're working on because we know. We are working with them and they have, on average, about 1 in 5 patients developing CDAD.

Operator

There are no more questions in the queue, Mr. Lichtinger.

Pedro Lichtinger

Thank you very much, this concludes our earnings call. I want to thank you, all, and wish you a good weekend. Thank you.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation in today's conference. You may now disconnect at this time.

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