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Auxilium Pharmaceuticals (NASDAQ:AUXL)

Q3 2012 Earnings Call

November 07, 2012 10:00 am ET

Executives

Adrian Adams - Chief Executive Officer, President and Director

William Q. Sargent - Vice President of Investor Relations and Corporate Communications

James E. Fickenscher - Chief Financial Officer and Principal Accounting Officer

Analysts

Eric Schmidt - Cowen and Company, LLC, Research Division

Salveen J. Richter - Canaccord Genuity, Research Division

Thomas Wei - Jefferies & Company, Inc., Research Division

Michael J. Yee - RBC Capital Markets, LLC, Research Division

Derek Yuan - UBS Investment Bank, Research Division

Gregory D. Fraser - BofA Merrill Lynch, Research Division

Joshua Riegelhaupt - Stifel, Nicolaus & Co., Inc., Research Division

Operator

Welcome to the Q3 2012 Auxilium Pharmaceuticals Incorporated Earnings Release Conference Call. My name is John, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to CEO and President, Adrian Adams. You may begin.

Adrian Adams

Thank you, operator. Good morning, everyone, and thank you for joining us for Auxilium's Third Quarter 2012 Financial Results Webcast. With me this morning, Chief Financial Officer, Jim Fickenscher; Chief Medical Officer, James Tursi; and Vice President of Investor Relations and Corporate Communications, Will Sargent. Before I proceed, I would like to ask Will to go over some information regarding our forward-looking statement. Will?

William Q. Sargent

Thank you, Adrian. Before we get started, I would like to remind everyone that we have a slide presentation to accompany our conference call this morning, which can be viewed at our website at auxilium.com. If you are listening to this call on your telephone, you may access the synchronized slide deck on our website by choosing the link on our webcast page.

This conference call and presentation contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995, which convey management's expectations, beliefs, plans and objectives regarding future performance.

These forward-looking statements are described in more detail in Slide #1 and all of those participating should review the slide. Generally, our forward-looking statements are subject to wide range of risks and uncertainties that could cause results to differ in material respects, including those relating to revenue, expense, earnings and cash utilization expectations, timing and content decisions made by regulatory authorities, including the U.S. Food and Drug Administration, business development activities, competitive products, result and timing of clinical trials, success of marketing efforts and intellectual rights, adverse litigation developments, product commercialization, product development, need for additional research and testings, delays in manufacturing and funding.

Actual results could differ materially from those described in this conference call and presentation. Information on various factors that could affect Auxilium's results is detailed in the reports we filed with the Securities and Exchange Commission. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements. I urge you to review the full Safe Harbor on Slide 1. Now I'll turn the call over back Adrian.

Adrian Adams

Thank you, Will. On Slide #2 is the agenda for today. As always, I will begin with a brief overview of Auxilium's recent accomplishments and commercial performance in the third quarter of 2012. Next, I will turn the call over to Jim, who will review the financial results and some updates to our 2012 guidance. I will then conclude our prepared remarks with an update on our research and development programs, which have some key corporate milestones that we believe are very important to shaping the future for Auxilium. I will finally open the call up for your valued questions.

Please now refer to Slide #3. As we've moved through 2012, we have remained focused on the 4 fundamental strategic goals that are illustrated on this slide, and we are optimistic that continuing to strengthen our execution on each of these will result in increased shareholder value over the course of time. We believe that we've made tangible progress with these goals this year and look forward to continuing to deliver for the remainder of the year as we strive to build a strong platform for growth in 2013 and beyond.

Please now refer to Slide #4. Since our last earnings call, we have made significant progress in many areas, particularly in research and development. We are very excited that we announced this morning that we filed our sBLA with the FDA for XIAFLEX for the potential treatment of Peyronie's disease well in advance of our end-of-year guidance for the filing. During the third quarter, we also completed enrollment in our cellulite Phase Ib, Frozen Shoulder Phase IIa and Phase IV Dupuytren's retreatment clinical trials. Additionally, we began enrolling the 600-patient Dupuytren's contracture multi-cord study in the third quarter which, if successful, may allow us to seek expansion of the Dupuytren's label for XIAFLEX.

For the third quarter, total net revenues were $71 million, representing a 6% growth over the third quarter of 2011. Although we had a net loss of $10.5 million for the quarter, compared to a net loss of $4.1 million in the same period in 2011, we continue to expect to deliver full year profitability for 2012. We ended the quarter with a strong balance sheet and with no debt. On the commercial side, the third quarter of 2012 was a solid quarter for XIAFLEX. Testim sales, on the other hand, were weaker than we anticipated due mainly to challenges in the managed care environment and some operational disruption as we settle into the co-promotion partnership with GSK. In the third quarter of 2012, we did, however, see growth in usage of both Testim and XIAFLEX versus the same period in 2011.

Global Testim revenues were $55.4 million, a 3% increase versus the third quarter of 2011, while XIAFLEX global revenues reached $15.7 million. In the United States, XIAFLEX revenues were $13.2 million, representing a 29% growth over the third quarter 2011. Also within the third quarter, we began our efforts to increase disease awareness of Peyronie's in the United States.

In the corporate development and licensing scenario, our collaboration partner, Actelion, received approval for XIAFLEX in Canada and they plan to launch it in the first half of 2013. Actelion also plans to seek approval over the next 15 months in Brazil, Australia and Mexico. We also began our co-promotion in late July for Testim with GlaxoSmithKline in the United States. This morning, we also announced that we have mutually agreed to terminate our partnership with Pfizer for XIAPEX in the Eurasian territories on April 24, 2013, and we will regain rights for both Dupuytren's and Peyronie's in those territories at that time. We will discuss all of these points in greater detail during this call.

Turning now to more details on our commercial performance. Please refer to Slide #5. The testosterone replacement therapy, or TRT, market has experienced tremendous growth over the past 5 years as more physicians have appreciated the need to diagnose and treat hypogonadism. In the third quarter of 2012, according to IMS, the TRT gel market grew 30% versus the same period in 2011, and 4% versus the second quarter of 2012. We continue to believe that the population of hypogonadal males remains underdiagnosed and untreated. And with continued high levels of commercial efforts and education in this area by several major competitors, we continue to anticipate that a significant growth opportunity exists for Testim, particularly as the operational effectiveness and efficiency of the GSK co-promotion takes hold.

The TRT marketplace has become more competitive over the last year as each of the 4 participants aggressively tries to hold or gain market share. Based on recent data, we believe that the efforts of our sales force, combined with GSK's expertise and reach, have stabilized Testim's market share decline. But nevertheless, we did not to grow our prescriptions in the third quarter at the pace that we would like. Testim U.S. prescriptions in the third quarter grew by 1% over the third quarter of 2011 to approximately 197,000, and Testim revenues were $54.6 million in the United States, which is an increase of 3% over the same period in 2011. Through September 2012, Testim U.S. revenues were $175 million, representing 18% growth over the same period in 2011.

Let's move now to Slide #6. Several new challenges came together in the third quarter that we believe contributed to this underperformance with Testim. But importantly, we believe that we can and have addressed them moving forward. This said, I want to speak to some of these challenges that arose during the quarter and then discuss what opportunities we believe exist as we move through the fourth quarter and into 2013.

In the first place, we think that some of the Testim weakness in the third quarter can be attributed to the disruption that took place with the initiation of our co-promotion in July. There were processes and procedures that needed to be implemented and new promotional resources created, and we clearly underestimated the time and resources that needed to be dedicated in order to ensure a seamless initiation of the co-promotion.

Additionally, the initial TRT prescribed targeting may have been suboptimal. Both we and GSK are committed to the success of Testim and we have taken corrective steps that we believe have put initial disruption around promotional activities behind us. We believe that we've refined our targeting mix to allow our joint sales forces to increase coverage to 72% of the TRT gel prescribers, up from 66% in the third quarter of 2012, and significantly improve our call frequency against the highest potential TRT gel prescribers.

Another challenge in the third quarter was some additional pressure from payors. Specifically during the quarter, we experienced a negative impact with a significant plan, which caused us to lose some volume in the third quarter. We are working through these issues currently and believe that this loss will have minimal incremental impact for the remainder of 2012.

Contractual gains and losses is something that happens in the competitive market, and we continue to believe that on balance, we are well-positioned with managed care players on a going-forward basis. Although the TRT gel market continues to grow at a healthy rate, we have seen some slowing this year and do expect a slowing in growth moving forward. However, putting this into context, moving from a 30% growth rate in the 2012 to anything greater than a 15% growth rate, we believe would still qualify the TRT gel market as a high-growth therapeutic area, particularly for market with the first priority in the class was launched 12 years ago.

As a result of this strong growth, we continue to see increasing competitive resources brought to bear in the market, and realize that our efforts need to keep pace with changing competitive dynamics in the TRT gel market. We do believe that the TRT market response to promotion by sales representatives and this was and is the basis for our co-promotion agreement with GSK. We are encouraged by some of the recent leading indicators that we track for Testim.

Most importantly, we believe that Testim's TRT gel market share is stabilized in recent weeks due to the efforts of the combined Auxilium and GSK sales teams. We are also encouraged by Testim's share of voice, which is based on third-party data that we have reviewed, is rising in all 3 specialties that we call on and we anticipate that this should result in increased prescriptions going forward. Additionally, Testim's recent new-to-brand prescriptions have shown some steady growth within the overall TRT gel market, another reassuring lead indicator for ongoing prescription growth.

In summary, we are encouraged by the share commitments of the GSK and Auxilium teams and the recent trends that we see. Combined with decisions recently put in place and some additional new tactics and strategies that we'll be rolling out soon, we believe we can vigorously defend Testim's position as the #2 prescribed TRT gel in the United States. We feel that we have a solid revenue runway going forward with Testim, and that the Testim franchise has a long life in front of it.

Let us now turn our turn attention to XIAFLEX on Slide #7. In the third quarter 2012, XIAFLEX U.S. revenues were $13.2 million, a 29% growth over the third quarter of 2011 revenues. And through the first 9 months of 2012, XIAFLEX U.S. net revenues were $37.7 million, a 31% growth over the comparable period in 2011. Additionally, XIAFLEX revenues in the third quarter represented an 11% growth over the second quarter of 2012. Importantly, with only 19 selling days in September, XIAFLEX had its most successful month ever.

As we've discussed in the past, when we look at claims dates over the last 7 years to evaluate trends, there appears to be a consistent seasonality affecting the distribution of Dupuytren's procedures. Let me draw your attention to sequential quarter-over-quarter trends, which are laid out in the illustration at the bottom of this slide. While the fourth quarter over third quarter has historically captured the majority of the year-over-year growth, the third quarter over the second quarter has historically been flat. While we don't yet have the overall third quarter 2012 total number of procedures to compare, XIAFLEX's relative 11% third quarter over second quarter revenue growth this year appears significantly stronger than historical procedure growth for this time period. This is very encouraging.

Moving on to Slide #8. We continue to make progress in expanding the XIAFLEX user base. In the third quarter of 2012, we saw a steady growth in cumulative site and physician enrollment in the XIAFLEX Xperience program. As you may recall, this program is required before prescribers can order and receive vials of XIAFLEX for treatment. We saw the cumulative number of sites who have ordered XIAFLEX continue to increase during the quarter. Of the 4,500 target sites that we believe exist in the United States, approximately 42% have used XIAFLEX through the end of 2012. In the remainder of 2012, we will look to continue enrolling new sites into the XIAFLEX Xperience program, as well as to narrow the gap between prescribing sites and sites that have enrolled but have not yet used XIAFLEX.

Our next slide, Slide #9, demonstrates how XIAFLEX's progress since launch has translated into market share evolution. As shown on the slide, since its launch in the second quarter of 2010, XIAFLEX has continued to increase market share at the expense of fasciotomies or removal of the cord, and continues to mark towards becoming the standard of care for the treatment of adult Dupuytren's contracture patients. And in the second quarter, just shy of 30% market share for those 3 months. We believe this trend of growing XIAFLEX use will continue towards an intersection with the surgical trendline, and that the message of XIAFLEX's increasing use amongst treaters of Dupuytren's contracture will resonate with those who have not tried XIAFLEX are only in the early stages of incorporating a noninvasive alternative treatment into their practice.

Turning now to Slide #10. We have also recently undergone a refresh of the potential XIAFLEX users that our sales force calls upon. Using proxy markets for the treatment of Dupuytren's and other prioritization research, we have made some changes to what specialties will be targeted by our sales force going forward. Overall, this will lead to an increase in the number of physicians that we will target. As you can see, we will significantly decrease the number of plastic surgeons and increase the number of rheumatologists that we will call on, while reinforcing our presence with high potential hand and orthopedic surgeons. Although it is not clear yet if these rheumatologists will become users of XIAFLEX, we believe a significant number of Dupuytren's patients who receive noninvasive treatments like steroid shots or anti-inflammatories, might be eligible for XIAFLEX treatment through these rheumatologists or be referred to another trained XIAFLEX treater for a noninvasive, efficacious and well-tolerated alternative to surgery.

In summary, we continue to believe that we have the appropriate expectations for 2012 that capitalize on customer insights and focus on integrating efforts and resources across payors, physicians and patients. We believe this will translate into a year of continued progress as we move toward establishing XIAFLEX as the standard of care in the treatment of Dupuytren's contracture.

Now let's turn to the Eurasian markets in XIAPEX on Slide #11. As we announced this morning, after almost 3 years of partnership, Auxilium and Pfizer have mutually decided to terminate our collaboration for the development and commercialization of for the treatment of Dupuytren's contracture and Peyronie's disease in the European Union and additional Eurasian markets as of April 24, 2013. Prior to the mutual termination date both we and Pfizer will continue to perform all of our respective obligations when we will regain all rights to commercialize XIAPEX in the Eurasian territories. We very much look forward to having the strategic flexibility for the continuing commercialization of XIAPEX for the treatment of Dupuytren's contracture and for seeking approval for XIAPEX for the treatment of Peyronie's disease in these markets and we are currently evaluating all of our strategic options.

Now I would like to turn the call over to Jim to review the financial results for the third quarter 2012. Jim?

James E. Fickenscher

Thank you, Adrian, and good morning, everyone. Unless otherwise stated, our remarks will relate to the 3 months ended September 30, 2012, or 2011 as appropriate.

As shown on Slide 12, total revenues for 2012 were $71 million, an increase of 6% over the $66.7 million recorded last year. Global Testim revenues grew 3% over 2011 to $55.4 million. XIAFLEX U.S. revenues grew 29% to $13.2 million in 2012, while ex-U.S. XIAFLEX revenues decreased by approximately $300,000 compared to 2011. 2011 included cumulative catch-up revenue adjustments aggregating $1 million relating to international contract milestones earned in the period.

Please refer to Slide 13. Gross margin on net revenues was 78% for 2012 compared to 80% in 2011. The decrease in the gross margin rate is primarily due to the high margin catch-up amortization that was recognized from XIAFLEX milestones earned in the third quarter of 2011 and a nonrecurring credit in 2011 related to the company's royalty obligation on XIAFLEX sales due to the licensor of the product. Research and development spending for 2012 was $10.6 million compared to $14.2 million in 2011. This decrease in expense resulted principally from the lower level of spending in the current year on the development of our larger scale XIAFLEX production process and XIAFLEX Phase III clinical trials for the treatment of Peyronie's disease. Offsetting part by the spending 2012 for the study of XIAFLEX for the treatment of adult Dupuytren's contracture patients with multiple palpable cords.

Selling, general and administrative cost for 2012 were $55.3 million compared to $43.3 million in 2011. This increase was primarily due to a higher level of spending and changes in the timing of spend this year for XIAFLEX and Testim marketing and advertising. I would also point out that the 2012 period includes a noncash expense of $2.2 million for post-contract expiration payments under the co-promotion agreement with GSK.

The net loss for 2012 was $10.5 million or $0.21 per share, compared to a net loss of $4.1 million or $0.08 per share reported for 2011. Net loss for 2012 includes total stock-based compensation expense of $3.5 million compared to $3.8 million for last year. As of September 30, 2012, Auxilium had $173.5 million in cash, cash equivalents and short-term investments, compared to $181.3 million at June 30, 2012, and we had no debt.

We have updated certain elements of our 2012 guidance, which is detailed on Slide 14. First, I would like to address the accounting surrounding the mutual conclusion of the Pfizer agreement. This is a fourth quarter 2012 event, although you will find a certain subsequent event disclosures contained in our third quarter 10-Q.

As of September 30, 2012, we have $103.4 million of deferred revenues on our balance sheet related to cash previously received from Pfizer, which we have been amortizing over an originally expected 20-year life. We also have $9.3 million of deferred cost on our balance sheet, which represents the share of the cash we received from Pfizer and which we paid to BioSpecifics Technologies, Inc. pursuant to our agreement.

As a result of the mutual termination of the Pfizer agreement, we will need to amortize all of these deferred revenues and cost into our income statement by the termination date of April 24, 2013. Therefore, in the fourth quarter of 2012, we will recognize approximately $94 million in deferred revenues and $9 million in deferred cost with a net impact of $85 million to our net income. The balance of the deferred revenues and cost will be recognized in the first 2 quarters of 2013.

With respect to the chart on Slide 14, the first column represents our previously announced guidance. The column in the middle represents our revised guidance under GAAP accounting, while the last column on the right removes the effect of the $94 million in deferred revenue and $9 million in deferred cost from our guidance. In comparing this column to our previous guidance, you can see that we have made the following changes to the underlying guidance. We have lowered global Testim guidance for the year by $10 million to a range of $235 million to $245 million. Although we are disappointed by the need to lower this guidance, I would point out that this range is still well in excess of our initial guidance for 2012 the fiscal year that we announced in February of $215 million to $225 million. Overall, 2012 should be a good year for Testim.

With respect to XIAFLEX U.S. revenues, we are tightening the overall range and lowering the bottom end of the range to a revised guidance of $52 million to $60 million. Ex-U.S. XIAFLEX revenues in this column reflect no Pfizer milestone for the balance of the year and as a result, the range has been lowered to $7 million to $9 million. We are tightening our guidance on research and development cost to the low end of our previous range and are now expecting these costs to be in the range of $45 million to $50 million. SG&A expenses are being lowered by $15 million and should be in the range of $185 million to $195 million. As a result of these changes, we continue to believe that we will achieve full year profitability with net income guidance unchanged at $0 million to $5 million. Now, I would like to turn the call back over to Adrian.

Adrian Adams

Thank you, Jim. That brings us to Slide #15 and an overview of our internal pipeline. As we move forward in building for our future growth, we are developing a pipeline of additional potential indication that reside within that XIAFLEX franchise. Today, we are delighted to announce that we submitted the sBLA for the potential treatment of Peyronie's disease with the FDA, and we expect to hear back from the FDA if the sBLA will receive priority review by the end of January 2013. Top line data for our Phase Ib XIAFLEX study for the treatment of cellulite remains on track for the fourth quarter of this year, while of the Phase IIa XIAFLEX study for the Frozen Shoulder syndrome remains on track for the first quarter of 2013.

Given our excitement around the sBLA submission, I would like to share some further information on our preparation for the potential Peyronie's launch. Please now turn to Slide #16. Whilst we have requested a priority review from the FDA, we are currently assuming a 10-month review by the FDA, which would mean if approved, a possible launch of the Peyronie's indication in the fourth quarter of 2013. XIAFLEX would then be the first and only FDA-approved biologic treatment for Peyronie's disease. We believe that this represents an exciting opportunity for physicians, patients and shareholders.

In anticipation of our launch, we have multiple key pre-launch activities ongoing. We are making progress on our Phase III data publication plan and expect additional journal publication and conference presentations of new data in 2013. We're also prepared to continue our dialogue with the FDA over the near-term on any questions that may raise during review of our sBLA, and will prepare for the potential of an FDA advisory board sometime over the next 6 months.

We are also conducting research with physicians, key opinion leaders, patients and payors to understand how XIAFLEX could be incorporated into the treatment paradigm. We are continuing to determine the size and structure of our commercial organization and plan what events need to take place in the events of both the standard and expedited scenario with the agency, assuming receipt of FDA approval.

Slide #17 is a compilation of some of the market research insights we've gathered to date regarding the unmet medical needs in Peyronie's disease, both from a physician and patient perspective. I want to highlight a few observations that are very encouraging to us.

Nearly half of PD patients are highly motivated to seek treatment, and the majority of patients who do seek treatment do so within 3 months of diagnosis. We believe that as an office-based alternative to more invasive procedures which only a small fraction of patients opt to undergo, XIAFLEX represents a significantly new and less frightening option for patients who are bothered by their penile curvature deformity.

From the urologist standpoint, the majority of the approximately 8,000 urologists are familiar with Peyronie's disease, but not all of them classify themselves as knowledgeable about the disease characteristics. This knowledge gap drove our physician disease-awareness program that is currently ongoing to help raise the profile of this devastating disease. For those urologists who do treat Peyronie's disease, they are not satisfied with the currently available minimally effective treatments and have trepidation about surgical correction.

Turning now to Slide #18. We've obtained some additional data about how those urologists who treat Peyronie's are distributed. This is shaping our launch strategy for XIAFLEX in Peyronie's disease. We believe that less than 1,000 urologists use invasive treatments, including Verapamil and the surgical correction to treat approximately 5,000 to 6,500 Peyronie's disease patients every year. Within this group, approximately 400 urologists account about 90% of the surgeries performed annually in the United States.

At launch, our current thinking is that the initial focus of our sales and marketing organization will be concentrated on promoting the benefits of XIAFLEX treatment to this subgroup of around about 1,000 urologists who have experience with invasive Peyronie's disease treatments and treat larger-than-average numbers of Peyronie's patients annually. After sufficient adoption of success has been achieved in those early adopter segment of Peyronie's treaters, we will then turn our attention to the larger population of urologists who use noninvasive treatments or expectant management with Peyronie's disease patients.

Moving to Slide #19, we have updated the slide with some important new potential clinical milestones that I would like to highlight. The XIAFLEX in Dupuytren's, we expect 3 new data sets in the near future that could change how XIAFLEX is viewed as a treatment for Dupuytren's contracture. In the third quarter of 2013, we expect our 5-year recurrence data, which follows patients from Phase III clinical program and assesses recurrence rates and any retreatment the patients opt for. 5 years is an important time points as many of the surgical issues there use that as a benchmark even more of the definitions of recurrence may vary. Following up in the fourth quarter of next year, we will get a look at baseline data from our open label registry, examining outcomes of XIAFLEX versus fasciectomy, and needle aponeurotomy, which could provide some interesting insights regarding shorter-term outcomes like regaining function and return to work.

Finally, our Phase IV study for the concurrent treatment to Dupuytren's patients multiple cords should have its top line data readout in the first quarter of 2014. With a positive read-out from this Safety trial, we will plan to seek a label change for the XIAFLEX that could allow physicians to operate noninvasive treatment for the estimated 40% of procedures that are performed on concurrent cords annually.

Looking beyond Peyronie's, we have begun planning the next stage of clinical studies for the next 2 potential indications for XIAFLEX. Assuming we receive positive efficacy and safety data from our ongoing cellulite and Frozen Shoulder studies, we anticipate beginning double-blind, placebo-controlled Phase II studies for both indications in the second half of next year.

Finally, regarding Testim. We anticipate beginning early phase work in the first half of next year to develop a Testim franchise with a focus on new formulations of Testim that could end the pivotal clinical studies in the beginning of 2014. We anticipate discussing more specifics around this program in 2013.

In summary, on our final slide, Slide #20, I believe Auxilium has made some significant progress on these 4 fundamental strategic goals. We anticipate that 2012 holds additional opportunity for Auxilium. And we will continue to focus on executing on our strategies with the goal of creating shareholder value. I would now like to open the call up for your questions about the quarter. Operator, can you please give the instructions.

Question-and-Answer Session

Operator

[Operator Instructions] You have a question from Eric Schmidt from Cowen and Company.

Eric Schmidt - Cowen and Company, LLC, Research Division

I guess the first, maybe for Adrian. What kind of work are you going to be required to do or to take over from Pfizer in Europe in April of next year, if any? I'm trying to get a handle on whether we'll see an increase in spend out of the termination and collaboration?

Adrian Adams

Well, thank you for that the question. Clearly, given the -- this is recent news, as I mentioned in the call. I think we are assessing all those different types of options, whether that be going alone or whether it's through another partnership. It's far out too early for us to comment on this, not at this particular stage, but I would emphasize that we're very excited about this mutual termination, and we're also very excited about the potential opportunities in both Dupuytren's and Peyronie's in the Eurasian territories. But it's too early to comment on the strategic options that are in front of us. But certainly, we'll be assessing those vigorously over the course of next number of months.

Eric Schmidt - Cowen and Company, LLC, Research Division

Maybe I'll ask a different way. You commented in the press release, I think on the call as well, that you expect 2012 to be Auxilium's first profitable year. Should we assume that profitability is sustainable into 2013 and beyond?

Adrian Adams

Most certainly. I think that would be the plan that we will be moving forward with. And we do not anticipate, but that any actions that we would take in relation to leveraging the products in Europe will impede our ability to move forward with a sustainable profitability.

Eric Schmidt - Cowen and Company, LLC, Research Division

Okay. And then just moving to the Testim franchise. I recall from last quarter that you did have a bit of an inventory build in Q2 that probably also impacted or maybe impacted quarter-on-quarter sales in Q3. Can you comment on any inventory changes as of the end of September?

Adrian Adams

Yes. So there was a -- if you recall, Eric, at the end of last quarter, we were kind of the top end of our normal range. On inventory, there was a bit of a build in the second quarter number, definitely. In the third quarter, we were pretty close to the same number of days outstanding. Obviously, with a decreased volume of prescriptions, that means that each day is worth slightly less. So that would have affected us. But we didn't see a large decrease in inventory nor increase in days on hand.

Eric Schmidt - Cowen and Company, LLC, Research Division

Okay. Last question for you to also, Jim. I guess, that $9 million in deferred costs in Q4 associated with the termination. I couldn't tell on Slide 14 where that was being booked, what line of your P&L?

James E. Fickenscher

Yes. It goes through the cost of goods sold. So -- because we don't give guidance on cost of goods, that's why it just flows down into the net income line.

Operator

Your next question is from Salveen Richter from Canaccord Genuity.

Salveen J. Richter - Canaccord Genuity, Research Division

I'm just wondering the rationale for the Pfizer collaboration to be concluded? And was there any discussion really around the value of the asset or is Pfizer not as focused on urology going forward? And then, can you also just comment on the strategic options that are open to you at this point?

Adrian Adams

On the second of those points, I think clearly, discussions in relation to Pfizer and urology are best answered by Pfizer. I mean, clearly, I think with the commentary, I think both parties, Auxilium and Pfizer, have been disappointed with -- that the partnership has not achieved its expectations. That said, there are significant different opinions in relation to the value proposition overall in support of XIAFLEX in Europe and the Eurasian territories. That in many ways is -- whilst we're disappointed with the progress to date, we're very excited about the strategic options that it provides us. I don't necessarily want to comment on what those particular options are. As I mentioned, I think we're very early in the assessments of those books. Obviously, on the back of the excitements around the submission of the sBLA for -- in the United States for our Peyronie's disease, we see that as being a nice opportunity. So within the broader context of that, I think, and given our views on the value proposition moving forward, we're excited to be able to assess those options moving forward. But it's far too early for me to comment on what those are or any progress that we've made to date on that.

Salveen J. Richter - Canaccord Genuity, Research Division

Okay. And then Adrian, I'm just wondering as well on the Testim front, when you refined your targeting. Is it -- was the targeting really just based on you had the wrong mix of prescribers or was there anything else that was refined with this agreement?

Adrian Adams

Well, I think as we mentioned, I think when we initially put in the overall target in for both sales forces, I think we made certain assumptions in relation to the speed, with which we will be able to move into those targets interfaces. And also, it is driven on the basic dynamics of deciles of prescribing physicians. So in some of the changes that we've made, we've been able to tweak our targeting, very important tweaks in relation to ensuring that the Auxilium sales representatives are focused on the high decile physicians. The overall overlap between GSK and Auxilium also has led to us having a far greater impact in the broader urologist area, which we're very excited about. So as I mentioned, I think on the call, we've been very encouraged by some of the recent trends over the course of the last 5 to 6 weeks that we've seen in the marketplace. So we already feel that some of the tweaks we've made to our overall targeting is starting to pay dividends. So I think in essence, I think in moving towards the end of July to the initiation of the co-promotion, I think there were some tweaks, we needed to make to the operational effectiveness and efficiency of the co-promotion. And we remain very confident about the efficiency that's going to come out of that moving forward. As I've mentioned, the last number of weeks, we've seen some very important lead indicators that give us confidence, not just in the fourth quarter, but in the co-promotion moving into 2013.

Operator

Our next question is from Thomas Wei from Jefferies.

Thomas Wei - Jefferies & Company, Inc., Research Division

I had a couple of questions on Testim. So if I look at the revised guidance, even though you're bringing that down, I guess if I'm looking at this correctly, that the guidance still implies actually a nice quarter-over-quarter growth in Testim. Maybe I'm not looking at that correctly, but could you just help us understand what some of the dynamics are there? And when I, maybe more specifically, when I look at the first 4 weeks of October, script data here, it looks like you're still running at a quarter-over-quarter decline in Testim. What are you seeing there that really gives you confidence?

Adrian Adams

Yes. I think that's a good question. And you're correct, that the guidance range that we put in place, the revised guidance, reflects a solid, unexpected solid quarter in the fourth quarter. You are also correct to point out that during the third quarter, we've seen some continued market share declines. But as I mentioned, I think our confidence in the fourth quarter and the number that fall in the best of that range of guidance is dictated by a number of the very important lead indicators that we've seen in the marketplace. Our market share decline has stabilized. We've been very encouraged by movements in our share of voice in all 3 specialties that we call all on, all of them moving upwards. And we feel that, that is in itself is a very good lead indicators for prescription growth moving forward. In addition, I think our confidence around the fourth quarter is also related to some other important lead indicator there, particularly on the new-to-brand prescriptions, where we've seen some very nice increases in that area. And that in itself is also a good lead indicator for prescription growth. So it's a combination of those lead indicators, the operational efficiency and effectiveness that we now believe is in place with the co-promotion arrangement. And that's one of the basis of the revised guidance and our confidence on the quarterly aspects of that best on all the lead indicators. So we feel good about fourth quarter and indeed that guidance range.

Thomas Wei - Jefferies & Company, Inc., Research Division

And just so that I'm clear, everything that you're talking about there seems to have to do with volume, like underlying volume, increases in end user demand. There isn't -- is there anything else embedded in that optimism in terms of maybe price that I'm missing on a quarter-over-quarter basis?

Adrian Adams

No. I think you're correct. A lot of the aspects that I'm referring to or relate to volume prescription, stabilization on projections for increases over the fourth quarter. And I think we believe those are very important dynamics in the marketplace. We really do believe that the co-promotion now, all the logistics and the operational effectiveness of that is working more optimally, and we're confident about that. Jim, do you want to add anything?

James E. Fickenscher

Yes, there's one other comment I would make, Thomas, and that is if you go back and look historically, the fourth quarter typically is a more positive quarter from a volume point of view in the market as well. So I think that there's certainly also some belief that we'll see what I call a normal end of year spike in testosterone prescriptions overall in the market. And as we're able to stabilize the market share with GSK and take advantage of that, that, that gives us reason for optimism towards the end of the quarter as well.

Operator

Next question is from Michael Yee from RBC Capital Markets.

Michael J. Yee - RBC Capital Markets, LLC, Research Division

Question one, Testim, when you look at the sequential declines. You mentioned a lot of things there. Maybe you could better quantify or to the best of your ability, qualify, which had the most impact and talk about the specific payor contract issue that you mentioned versus the call in effort disruption? And how much of that actually would flow through to next quarter? In other words, just break that down a little bit. And why would the payor change or payor pressure not impact you for going forward? How do you know that?

Adrian Adams

Yes. I mean, as it relates to the challenges in the third quarter, I think as we mentioned, think it was a combination of particular aspects that we think contributed to the less performance than expectations. You're correct, the reference to the loss of an important managed-care account, and I'll ask Jim to comment on that in a moment. We do feel that significant contributors to the third quarter, as I mentioned, were the disruptive aspects of the initial settling in and transitioning into the co-promotion. That was a significant part of that underperformance. And also, we believe that in the third quarter, there was a kind of a softening in the overall growth of the market. A number of these things are well behind us, and I think -- and again, I think, if one looks at the lead indicators, the efficiency, what I believe now is a very solid co-promotion arrangement with a lot of the basics and efficiencies are now in place. So I think it's that, that lead us to the confidence that we have. As it relates specifically to the managed care area, whilst we don't necessarily comment on individual plans, I think I'll ask Jim to comment on that.

James E. Fickenscher

Sure, yes. So that's where I was going to start, was to say just last year, when we saw some wins, we don't get into the specifics by the plan. But I think that it's safe to say that the loss that we had was a plan that would be of modest size. We think that we saw the majority of the loss in share that we were going to see occur in the third quarter. We've had -- we've been in discussions with them, and we think that our managed care team has a pretty good handle on the fact that most of that is behind us. So we think we've kind of settled in. That was an impact to the third quarter. But going forward, we don't believe that there is incremental, tremendous amount of volume to be lost on that, Michael.

Michael J. Yee - RBC Capital Markets, LLC, Research Division

Okay. And then a Peyronie's question. I was surprised that you or -- and actually happy that you give so much color about your sort of early prelaunch activities. Can you comment on, broadly speaking, what your early discussions have been with both regulators in regards to the key considerations for a potential panel. Since you brought that up, what should we think about there? And then in regards to payers, what is the early feedback? What things should we be considering with the payors?

Adrian Adams

Yes. On the FDA interaction, I think no one's to comment specifically on that. Suffice to say, they're obviously prior to submission of the sBLA. We did have some interactions with the FDA. And subsequent to that, we filed the sBLA ahead of schedule. So -- and we're very excited about that. As it relates to, obviously, the first area of priority review, we have requested a priority review. This is an area of high unmet need where there's nothing else really available apart from surgery. And so, we feel that, that is a strong case. But obviously, all that is subject to FDA consideration. As it relates to a panel, clearly I think with the XIAFLEX in Dupuytren's, we did have an advisory panel. Obviously, now that the safety aspects of XIAFLEX has been relatively well-established, we look forward to getting some feedback from the FDA as to whether or not there will be any need for any panel. That said, I think we are obviously planning for all eventualities. And clearly, in the event that the FDA determined that there will be an advisory panel, we will be well prepared for that. And so, from that perspective, I think we're going to be pretty well-prepared. I think on the aspects of payors, we've still got some ongoing work to do in this area. We've, as I mentioned in the presentation, we've been doing a lot of both qualitative and indeed, quantitative market research in these areas of payors, the patients and the physicians. And the one area that really comes out very, very strongly, particularly in the urologist area is almost a very high level of frustration with this condition, and that there is nothing else available that allows the urologist to treat these patients for this devastating disorder. We obviously feel that, that is a dynamic that's going to be very important in the early adoption of this particular asset. As it relates to specific discussions with payors or indeed the health economic messages we're going to be making with this, those are areas that are still evolving at this particular point in time. But we are very encouraged by the kind of the feedback we're getting from the kind of [indiscernible], the high unmet need that we hope that XIAFLEX addresses. And again, a lot of our prelaunch activities are over the end of making sure that we have -- we can have a good offtake in a very controlled manner when we get to, and if and when we get approval.

Operator

Our next question is from Ami Fadia from UBS.

Derek Yuan - UBS Investment Bank, Research Division

This is Derek for Ami. Just to see if you guys could give any color on when you expect the bulk of impact that the co-promotion for Testim will start taking in. Then, any commentary on your current outlook for the growth potentials of these products over the next year or so?

Adrian Adams

Yes. That's a very good question. I've tried to give some color on that in the call and in my questions. I think, obviously, within any co-promotion, I think our partnership and the interactions with GSK have been very high quality. I think as with all aspects of co-promotion arrangements, and I've been involved in a number over the course of time, I think inevitably, you can have well laid-out plans and all the different moving parts that fall on the basis of an efficient and effective co-promotion arrangements. And there's no doubt that I think a lot of the kind of teething problems, the transition issues that we had when we initially started the co-promotion are behind us now. We feel that the true benefits of the co-promotion are now starting to come through best on the lead indicators that I referred to in terms of share of voice, new to brand, market share stabilization. So all of that, we believe, gives us confidence around not just the fourth quarter, but obviously a good platform in which to leverage this partnership in 2013. So when it comes down to the overall benefits of this, the rationale from the co-promotion remains very solid, very sound. I think now, we've got these transition issues behind us, and the lead indicators are moving in the right direction that. We feel good that as we move through this, a latter part of this year into 2013, that that's going to form a very nice base for prescription growth on an ongoing basis.

Operator

Our next question is from Greg Fraser from Bank of America.

Gregory D. Fraser - BofA Merrill Lynch, Research Division

First on Testim. Could you talk a bit more about the competitive dynamics in the testosterone market? And specifically what you're seeing from competitors, particularly Abbott in recent months?

Adrian Adams

Yes. That's a very good question. I think and clearly, you are very familiar with this marketplace. I appreciate the question. I think there's no doubt given the very fast growth that's been seen within this market, the main competitors have continued to invest. We've seen with Abbott, the significant increase in the number of sales representatives they've put behind the brand. We've also seen by Abbott and indeed Lilly. We've seen significant increases in direct to consumer, television and consumer advertising. We see that as a being a positive for the market clearly, with a very, very focused strategy from a targetings perspective with the co-promotion amongst the highest decile positions and making sure we have a precision in that. In the event that the dynamics in the market being driven by the competitors from noise within the marketplace, that gives a broad awareness in the TRT marketplace that we can benefit from, provided we continue to execute well against our targeting strategies, and make sure that we call on those high decile physicians. And so we believe there's been increased competitive noise. We feel that. We see that. That's positive for the market. And we hope, with our execution, that with the stabilization of market research, all the lead indicators move in the right direction, that we can leverage that to the best effects of the co-promotion, Testim, and more specifically, for Auxilium moving forward.

Gregory D. Fraser - BofA Merrill Lynch, Research Division

Can you say that it's a fairly playing level field, level playing field that there's a point with respect to payor coverage and patient co-pays?

Adrian Adams

Well, I think from an overall managed care point of view, as we've mentioned, I think we feel good about our overall managed care position. As we've mentioned, I think within a course of any 1 year or 2 years, it's competitive. You always have to have your finger on the pulse. And I think there are always going to be some gains and some losses. But overall, as I mentioned in the call, I think we feel good that from an overall managed care perspective and our competitive position within that, that the plans that we have in place, together with the positive lead indicators we've got, speak well to the potential momentum for Testim moving into 2013.

Gregory D. Fraser - BofA Merrill Lynch, Research Division

Okay. Then on the new SG&A guidance, how much of the reduction is related to lower payments for GSK versus dialing back on advertising and promotion or spending in other areas?

James E. Fickenscher

So there is, in effect, some of the new disclosures that we'll have in our 10-Q that we'll file relates to the exact percentages surrounding the GSK co-promotion, and about $0.65 on the dollar above a baseline is what we're paying to GSK. So to the extent that our revenues have been above the baseline, any amount that we bring that down, we're basically offsetting about $0.65 on the dollar, Greg, from our SG&A. So it's a pretty substantial amount of that reduction is there. The other thing I'd point out is to remind everybody that the third quarter of this year, we've spent significantly higher amount of money on advertising and promotion, particularly on XIAFLEX in advance of the fourth quarter, which is obviously the busiest quarter of the year for Dupuytren's contracture procedure. So some of the reduction from the third quarter to the fourth quarter is just a pullback to a normalized spending on advertising and promotion in XIAFLEX and most of the balances and reduction in the co-promotion payment that we assume to GSK.

Gregory D. Fraser - BofA Merrill Lynch, Research Division

Okay, that's helpful. On XIAFLEX share, when you talk about procedures share, are your estimates based on total procedures for Dupuytren's or a subset of procedures in patients for which XIAFLEX indicated those patients with a palpable cord one quarter at a time?

James E. Fickenscher

Yes. So it is based on total procedures is the way that we've looked at it. So to the extent that somebody would have multiple cords done in a surgery at one point in time, that would in the data that we get from the various sources is just one procedure. So to the extent that we're successful in the future of convincing physicians to use XIAFLEX for multi-core, I think there's a good ability for us from the procedure point of view to expand that overall procedure market, as people use XIAFLEX instead of surgery.

Gregory D. Fraser - BofA Merrill Lynch, Research Division

Okay. Then last one on Peyronie's. On the prelaunch planning, what is your current thinking on the size and timing for a sales force expansion?

Adrian Adams

Well, I think as we've mentioned in the past that this particular point in time, we do not feel that there's going to be a need for us to increase the amounts of selling resource overall within the organization. I think, as you know, one of the very important differences between the commercialization in Peyronie's versus commercialization with Dupuytren's is that we're already starting from a point of view, where we have, within the Testim sales force, a sales force that based on the context with urologists, they have very, very strong relationships. And if you -- dynamic of those strong relationships and also the frustration that I made reference to the urologist, we feel that's going to create some momentum that we hope to maximize on during the course of next year. So overall, we do not anticipate the need to increase selling resource. We may, as we assess this market and look at to this control rollout of the asset in a targeted fashion, we may kind of allocate different levels of sales representives to different areas. But that forms the basis of the work that we're doing. But overall, we will not be increasing the number of sales representatives. We'll be optimizing what we have, and making sure that the skill sets that are important in terms of dealing with the Peyronie's disease are the right skill sets, but within the headcounts that we currently have.

Operator

Our next question is from Annabel Samimy from Stifel, Nicolaus.

Joshua Riegelhaupt - Stifel, Nicolaus & Co., Inc., Research Division

This is Josh sitting in for Annabel. Just one question. In Dupuytren's, you noted a change in your marketing approach to more rheumatologists and a decrease in plastic surgeons. Can you kind of comment on what's changed in your thinking in terms of why you're marketing this way?

Adrian Adams

Well, certainly, I think the last time we had a refresh or put our targeting list together was at the launch of XIAFLEX in March of 2010. So as we've seen our overall market share increasing in terms of numbers of procedures, and as we've seen a greater move towards standard of care. We've also noted that if one looks at the kind of overall aspects of rheumatologists, we think there may be an opportunity there. We do know that in terms of the referrals from the primary care physician area tend to go through a range of physicians and rheumatologists are part of that. We have commented on, in past calls, that we've been planning to develop a rheumatology centers of excellence, and we've got some good -- we are good on in that area. So we believe that in the broader refresh of our targeting, where we increase the number of targets that we're calling on within that. We've decreased the number of plastic surgeons. But whilst maintaining our efforts in hand surgeons and orthopedic surgeons, we've added these additional targets in rheumatologists. And we believe that, that may be predictable over the course of time. But we will see, and all of this has been best on the evolution that we've seen, the move towards the standard of care with XIAFLEX, and now is the time for us to really make sure that we can leverage other parts of the target audience to determine whether or not we can add additional growth going forward. So that's one of the best of our refresh on targeting.

Adrian Adams

Operator, I think we've now completed our questions. I'd like to thank everybody for joining us this morning, and we look forward to updating everyone on the progress on our next quarterly call. Thank you so much to everybody for joining us this morning, after what was a very busy day and evening yesterday. Thank you.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.

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