Sucampo Pharmaceuticals, Inc. (NASDAQ:SCMP) Q3 2016 Earnings Conference Call November 9, 2016 8:30 AM ET
Silvia Taylor – Senior Vice President, Investor Relations and Corporate Affairs
Peter Greenleaf – Chairman and Chief Executive Officer
Peter Lichtlen – Chief Medical Officer
Andrew Smith – Chief Financial Officer
Brandon Folkes – Guggenheim Securities
Ami Fadia – UBS
Michael Higgins – ROTH Capital Partners
Good morning, and welcome to Sucampo's Third Quarter 2016 Financial Results and Operating Highlights Conference Call. For opening remarks and introductions, I would like to turn the call over to Silvia Taylor, Sucampo's Senior Vice President of Investor Relations and Corporate Affairs. Please go ahead.
Thank you, Brian, and good morning, everyone. Thank you for joining us today.
The earnings release and its attachments announcing Sucampo's third quarter 2016 financial and operational highlights were distributed this morning. For those of you who have not yet seen them, you will find them posted in the Investors Section of our website at sucampo.com. In addition, during this morning's call we will be referring to presentation slides. These are also posted in the same section of our website. We plan to file our 10-Q later today. And once filed, a link to that document will also be posted on our website.
Joining me for the call today are Peter Greenleaf, Chairman and Chief Executive Officer; Dr. Peter Lichtlen, Chief Medical Officer; and Andrew Smith, Chief Financial Officer. Before we begin, please note that various remarks made on this conference call, as well as the information contained in today's earnings release are based on expectations as of today, November 9th, 2016. We assume no obligation to update forward-looking statements made in this conference call or contained in the earnings release as a result of new information, future events, or developments.
Forward-looking statements including those about our future operating and financial performance, business plans and prospects, marketed products and product candidates involve substantial risks and uncertainties, which may cause results to differ materially from those set forth in the statements. Please refer to our most recent Annual and Quarterly Reports for additional risk factors affecting our forward-looking statements.
Additionally, during this call, we will make reference to non-GAAP information. Please refer to our earnings press release issued today, which features a reconciliation of GAAP to non-GAAP information. With that, I would like to turn the call over to Peter Greenleaf. Please go ahead, Peter.
Thank you, Silvia, and welcome everyone. This morning we are pleased to be announcing another quarter of continued strong financial performance driven by global revenue of our flagship product AMITIZA. The strength of our third quarter has lead to an improved outlook for the rest of 2016 and also includes positive first look in 2017. In addition to our strong financials this quarter overall, we also resolved our patent litigation with Dr. Reddy's Laboratories regarding AMITIZA.
Additionally, we have multiple pipe line updates including results from our phase 3 trial of AMITIZA in children 6 to 17 years of age. First, I want to kick off by talking about our strong financial performance for the quarter, which was driven by strong revenue growth of 73% versus the prior period of $58 million. This growth resulted primarily from increased royalties for AMITIZA sales in the U.S., an increased sales of AMITIZA in Japan as well as the inclusion of results from R-Tech Ueno which we acquired in the fourth quarter of 2015.
Later when we exclude our R-Tech Ueno related revenue, we still demonstrated 33% growth in revenue, demonstrating our base business continue to drive significant growth. This top line growth led to GAAP net income of $8.1 million or $0.19 per diluted share during the third quarter of 2016 compared to GAAP net income of 7.2 million or $0.16 per diluted share during the third quarter of 2015, representing an increase of 12% and 19% respectively.
EBITDA was 35.6 million for the third quarter of 2016 compared to EBITDA of 11.9 million for the same period in 2015, an increase of approximately 197%. On adjusted basis, Sucampo reported net income of $12.4 million or $0.28 per diluted share during the third quarter of 2016. This compared to net income of $7.8 million or $0.17 per diluted share during the third quarter of 2015, an increase year-over-year of 58% and 68% respectively.
Adjusted EBITDA was $28.8 million for the third quarter of 2016, compared to $14.6 million in the same period of 2015, an increase of 97%. Note that the adjusted figures exclude several items that were reconciled in the earnings release we issued this morning, and I would ask you to please take a few moments to review this reconciliation.
I will now review the details underlying this long quarterly financial performance starting with the U.S. market. In the third quarter, Takeda reported U.S. net sales of AMITIZA for royalty calculation purposes increased 7% year-over-year to $109 million. This growth is driven by a combination of a price increase taken in January of 2016, and increased volume.
Royalty revenue from Takeda grew 7% to $21 million. In addition to this royalty revenue, we had $10 million milestone of AMITIZA product sales to Takeda, bringing total U.S. revenues to $32 million. Total AMITIZA prescriptions in the third quarter were approximately 374,000 as reported by IMS. This was a decrease of 1.4%, compared to the third quarter of last year. However, U.S. AMITIZA prescription growth for the first nine months of 2016 is still positive at 2% compared to the first nine months of 2015.
While we acknowledge that U.S. prescriptions in the third quarter were below our expectations, we are very confident that our partner Takeda continues to strongly promote and permit physician AMITIZA in the growing branded constipation market, and we remain optimistic that 2017 will provide continued growth opportunities for AMITIZA. This optimism is driven by several factors that we believe will impact the business positively next year, including removal from the CDS fair market exclusion list. Key formulary wins based on competitive contracting with payers and a highly targeted direct-to-consumer television campaign in select key AMITIZA markets and of course patients that Takeda launch last month.
Turning next to Japan, we are pleased that the region continues to be a major driver of AMITIZA's global revenue growth. Revenue from sales of AMITIZA to Mylan increased 69% to $17.4 million in the quarter, compared to about $10.3 million in the prior year period. This increase is determined by strong volume growth.
In Q3, AMITIZA volume reported by Mylan increased more than 40% through the first nine months of 2016, compared to the same period in 2015 based on strong product demand. Drivers of our continued exceptional performance in Japan are strong underlying market growth, AMITIZA's place as the only branded constipation prescription medication in Japan, and its broad label of "Chronic Constipation" which allows Mylan to target the needs of patients who suffer from constipation due to different reasons and different underlying conditions. Mylan continues to see great success with key marketing and promotional efforts.
Overall financial results of AMITIZA in the U.S. and Japan reinforce our confidence in achieving our projections amidst the high single digit global growth for the near to mid-term. And based on these results today we are increasing our guidance to the full year 2016 to total revenue of $220 million to $225 million adjusted net income of $50 million to $55 million, adjusted EPF with $20 through $25 and adjusted EBITDA to $110 million to $115 million.
Please note that this guidance includes our expectations that we will earn a one-time $10 million milestone related to the achievement of AMITIZA sales in Japan in the fourth quarter. Our CFO, Andrew Smith will provide you with an update with our first look for 2017 later in the call.
Next, I will move to the settlement of patent litigation regarding AMITIZA. Today we are pleased to announce that Sucampo together with our partner Takeda have entered into a settlement and license agreement with Dr. Reddy's that will solve the patent litigation in the United States related to the 8 microgram AMITIZA and 24 microgram soft gelatin capsules of AMITIZA.
What I would like to underscore first is that this settlement provides much greater certainty in the future value of our AMITIZA franchise. We are incredibly pleased to put the litigation behind us and believe that the agreement is in the best interest of Sucampo and its shareholders as it significantly de-risks the AMITIZA business plan later in our years and provide for continued revenues throughout the next decade.
Under the terms of the settlement and license agreement, Sucampo is granting Dr. Reddy's a non-exclusive license for marketing generic version of lubiprostone in the United States. This license does not begin until more than six years from today's date or earlier under certain circumstances. Dr. Reddy's will take Sucampo with share of net profits of the generic lubiprostone products sold by them during the term of the agreement. Dr. Reddy's may also elect to purchase generic lubiprostone products from Sucampo under the terms of a manufacturing and supply agreement and the negotiated price.
In connection with this settlement, Sucampo, Takeda and Dr. Reddy's have all agreed to dismiss with prejudice the path of litigation filed in the U.S. District Court for the Southern District of New Jersey. This settlement agreement follows the settlement agreement we entered into in 2014 with Par Pharmaceuticals, now Par Endo.
As you may recall, under the settlement Par may launch generic lubiprostone products starting January 1, 2021, or earlier under certain circumstances with a payment of 50% of gross profit to Sucampo. While the launch for the second generic of lubiprostone by Dr. Reddy's would reduce the share of gross profits that Sucampo would receive under the Par agreement, by settling today with Dr. Reddy's we have secured a significant portion of the initial profits with Par and ensured continued revenue from both generic partners in the future. As a reminder, we also have profit-split arrangement with Takedo for the branded AMITIZA products starting in 2021.
Now I'd like to turn the call over to Dr. Peter Lichtlen to discuss the announcement we made today regarding the outcome of our Phase III clinical trials of AMITIZA in children six to 17 years of age, as well as other updates regarding our pipeline. Peter?
Thank you, Peter, and good morning everyone. The Phase III pediatric trial was a multi-center randomized placebo-controlled double-blinded study of the efficacy, safety, and pharmacokinetics of lubiprostone in pediatric subjects, age six years up to 18 years of age with functional constipation. The trial evaluated doses of 12 and 24 microgram VID over 12 weeks with a primary endpoint of overall STM response.
I would like to note that this was a very stringent endpoint, and one that has never been tested in a pediatric population with functional constipation vivo before. Importantly, there are no drugs for pediatric functional constipation either currently approved nor slated for approvals within the next several years.
Additionally, I will note that this is the largest trial ever done in the pediatric functional constipation population, which is quite different from the adult CIC population. It's important to remember that the entire pediatric program for AMITIZA is a pediatric research equity act for pre-op commitment.
While the trial did not achieve its primary endpoint of overall Spontaneous Bile Movement or SBM response, it did show a trend in favor of lubiprostone for the primary endpoint. Additionally, the trial achieved statistical significance in key secondary endpoints that we believe are clinically meaningful. Notably, overall SBM frequency, training, and stool consistency as well as respective changes from baseline thereof. Also, and consistent with AMITIZA's 10-year marketed history, AMITIZA was generally well tolerated in this 12-week study.
I want to emphasize that while we are working through and evaluating the full dataset, we believe these data warrant continuation of the pediatric program and continued development of a sprinkle formulation, top checks to discussions with the FDA which is our next priority. We are looking forward to working with the FDA to find a best way to effectively communicate the potential pediatric benefit and risks of AMITIZA to physicians in the updated product label.
Additionally, we will address with FDA the incorporation of our findings in the pediatric capsule study into a discussion of the endpoints we will use in the upcoming pivotal Phase III trial of the younger children with the new sprinkled formulation. In the meantime, as we prepare for our FDA meetings, we intend to continue clinical development of the sprinkle formulation of AMITIZA, first in adults who may not be willing or able to take the currently approved soft gel capsule formulation of AMITIZA.
We've remain on track to initiate this Phase III program and at adult patients with chronic idiopathic constipation by the end of this year, and we expect to report results of that program in the first part of next year. This program consists of two independent trials. The first trial is a study in healthy volunteers looking at the comparative PK and tolerability between the capsule and the sprinkle formulation that will be processed on.
The second trial is a one week randomized placebo controlled study in adult CIC patients, aiming at demonstration of superiority versus the placebo-controlled and bioequivalent between the two active formulations. The primary efficacy end point for the patient trial is SBM frequency at leak one.
Finally, subject to politics sprinkle formulation data in the adult population and/or discussions with the FDA, it is our intention that we would initiate the Phase III program, children six months through five years of age using the sprinkle formulation around mid 2017. We will keep you updated as our discussions of FDA at next steps in the program continue.
Next I want to move on to our collaboration with Cancer Prevention Pharmaceuticals or CPP. We have an exclusive option for North America for the combination of CPP-1X/sulindac, the combination product that is in Phase III development for Familial Adenomatous Polyposis or FAP, which has been granted orphan status.
The ongoing Phase III study is 150-patient, three-arm, double-blind randomized trial of the combination agent with comparators of the single agents. Enrollment in the study has been completed. I want to remind you that this trial is the event driven, but basically the primary endpoint is delay in time to FAP related event. Based on the current rate of events, occurring in the study, we now expect results from the futility analysis of the trial in the first half of 2017 versus the second half of this year. Given this we still expect the trial to conclude in 2018 with potential for approval in 2019.
Finally I want to round out our pipeline update by letting you know that we have decided to discontinue development of RTU-1096 an oral vascular adhesion protein-1 inhibitor compound recently under development for indication in autoimmune and inflammatory diseases and immuno-oncology. While previously reported Phase I results showed no relevant safety issues and there was evidence of -- in the addition of VAP-1 in the blood at all doses tested. We have decided to discontinue development of the compound, based on additional non-clinical data generated in the quarter.
I will now turn the call over to Andrew Smith for details of our financial. Andrew?
Thank you, Peter, and good morning everyone. Peter previously provided a summary of the financial performance across our revenue components that drove on net income and EPS results, and I'll detail them a bit more. For the three months ended September 30, 2016, we reported revenue $58 million, which represents a year-over-year growth of 73%.
Revenue for the quarter included an additional $13.3 million as a result of R-Tech Ueno results, product sales increased by a 186% to $31.6 million driven mainly by the inclusion of R-Tech Ueno. Product royalty revenue associated with AMITIZA increased 7% to $20.8 million due to an increase in AMITIZA revenues by Takeda used for royalty reporting purposes. In addition, RESCULA sales in Japan for the court were $2.4 million. Overall, RESCULA has contributed about 7.3% or 4% of our revenue in the first nine months of 2016.
On a GAAP basis, we've reported net loss of $8.1 million and a diluted EPS of $0.19 per share, during the third quarter versus net income of $7.2 million and diluted EPS is 16% in the period year period. We reported adjusted net income of $12.4 million and adjusted diluted EPS of $0.28 for the third quarter of 2016, compared to adjusted net income of $7.8 million and diluted EPS of $0.17 for the same period of 2015.
In addition to the top and bottom line growth, GAAP EBITDA increased 197% to $35.6 million for third quarter compared to $11.9 million for the same period in 2015 and adjusted EBITDA increased 97% to $28.8 million for the third quarter compared to $14.6 million in the same period in 2015.
Gross margin, calculated as product sales revenue less cost of goods, sold as a percentage of product sales revenue was 50.6% for the third quarter of 2016 compared to 52% for the same period in 2015, a slight decrease was primarily due to the amortization of R-Tech Ueno acquired intangible asset amortization. Excluding the intangible asset amortization, gross margin and product sales was 71.8%, an increase of 38%. The growth was driven mainly by the acquisition of R-Tech Ueno.
R&D expenses increased 19% to $10 million for the quarter, mainly due to increased spending on lubiprostone pediatric studies as well as the inclusion of R-Tech Ueno. As a reminder, certain clinical development expenses for lubiprostone pediatric indication and alternate formulation development are reimbursed in large part by Takeda.
As previously mentioned by Dr. Lichtlen, the company has discontinued its VAP-1 inhibitor development program this quarter. As a result the company impaired the related in process, research and development asset and recognized the write-down of $7.3 million in the quarter. The company has adjusted for this as a onetime charge in its results from operations.
G&A expenses increased by 42% to $11.1 million for the quarter, and the increase was primarily due to the inclusion of Dr. Reddy's legal costs, R-Tech Ueno expenses and other related restructuring costs for the period, when these amounts are excluded, G&A costs remain at a reasonably constant level.
Selling and marketing expenses were $700,000 compared to $400,000 in the prior period. The increase was due to the inclusion of commercial activities associated with sales of RESCULA in Japan. Including in other income for the quarter is a onetime gain of $9.3 million related to the termination of a loan from the Japan Agency for Medical Research and Development or AMED for development of lubiprostone, which was discontinued in early 2015 prior to our acquisition of R-Tech Ueno. The item is not included in adjusted numbers and included on the legal settlement in the reconciliation time.
The effective tax rate for the third quarter of 2016 was 47.8% compared to 37.5% for the same period in 2015. The change in the tax rate is due to the mix of U.S. and foreign source income combined with allowance for elimination of foreign tax credits in 2016. And once we expect to see a small reduction in the right for the remaining 2016, we anticipate 2017 rate in the 35% to 38% range.
Moving to the balance sheet, at September 30, 2016, our cash, cash equivalents and restricted cash was $153.7 million compared with $163.5 million as of December 31, 2015. The fluctuation was primarily due to the pay down of the company's debt obligation, founded notes, and squeeze out payments in connection with the R-Tech Ueno acquisition, offset by an increase in cash flow from operating activities of $30.3 million.
Notes payable at the end of the quarter were $218.7 million compared to $252.4 million at December 31, 2015, of which $21.7 million is current, the decrease driven by the debt repayments. The net debt position at September 30, 2016 was $65 million compared to $88.9 million at the end of 2015.
Peter detailed our increased full year guidance for 2016. Now I'd like to review our preliminary guidance for 2017, which is total revenue of $220 million to $230 million that our 2017 revenue guidance does not include any milestone payments such as the $10 million expected in the fourth quarter of 2016 from Mylan.
Adjusted net income of $75 million to $85 million and adjusted EBITDA of $145 million to $55 million. Adjusted net income guidance excludes amortization of acquired intangibles, restructuring related costs and debt financing related costs. Adjusted EBITDA guidance excludes stock option related costs and one-time restructuring related costs. These costs are detailed in today's earnings release.
With that, I'll now turn the call back to Peter for concluding remarks before we go to question-and-answers. Peter?
Thank you, Andrew. The third quarter demonstrated continued global performance for our company. Importantly, we succeeded in removing significant business in financial risk by signing a settlement with Dr. Reddy's and providing AMITIZA.
Our focus ending 2016 and heading into 2017 will be on the following. First and foremost, continuing to deliver financial -- outstanding financial performance driven by top and bottom line growth.
Interactions with the FDA for our Phase 3 trials results from AMITIZA's and the pediatric population in next step in the overall program will be critical. We are continuing to evaluate and execute on business development opportunities to grow the company and participate mid to long-term growth.
I'd like to note that this process obviously takes time but we remain committed to making smart strategic and value added transactions to further transform the company. I would like you to know that we continued to evaluate all appropriate opportunities and are continuously engaged in discussions on multiple fronts, and we'll update you as soon as we had news to share.
I want to thank you all for listening this morning, and I look forward to taking your questions. I'll now turn the call to the operator. Operator?
Thank you, sir. [Operator Instructions] Our first question comes from the line of Louise Chen from Guggenheim Securities. Your questions please?
Hi, everyone. It's Brandon Folkes on for Louise. Thank you for the updates in the quarter. I just want to confirm one thing quickly, so you all going ahead with the pediatric PFC and if it's possible for submission and improve next year until you come back -- until you met with the FDA and come back with us otherwise, is that safe to assume?
Yes, so I'll start and then ask Dr. Lichtlen to round up anything [ph] that I have not covered, but first, most of these results for the trial that we just completed, we believe it's critical to continue to work through that data and take the full data package to the FDA for discussion. It's our intention that we're going to continue to move forward the other lower age range trial which is a multi-step trial of a new formulation for adults who can swallow the capsules and kids at the younger range.
We believe that the conversations with the agency that we are going to have on the current trial will help inform the full paths of the Sprinkle trial moving forward, but we want to make sure that the trial continues the first step of the trial and results, so that we don't lose any time in that process, and we do believe that we can still stay consistent with those timelines by doing so. Peter, what would you add?
Yes. That's absolutely correct. I think, as we mentioned, yes, we missed on the primary endpoint, but as we also mentioned, we are off the opinion that there are clear clinically relevant data in that trial results, which we want to discuss with the FDA. In terms of the submission, in fact, we have to submit anyway, because as I mentioned, this is a prior requirement, so we will have to submit the data to the FDA. There will be a label upgrade in any case. And obviously the continuation of the program will depend on the discussions we have with the FDA, but in our current reading of data, there are clear signs of efficacy plus the product have been well-tolerated as we said. So, we see the potential definitely to continue with that program.
Okay, great. And then two more just, could you just talk about the margin expansion in 2017, is that just from the R-Tech acquisition? And then secondly, yes, just kind of with the events of sort of the last day, how do you think that shaped kind of the healthcare industry going forward and perhaps your outlook on business development? Thank you.
So, I'll allow -- ask Andrew to answer the margin expansion question, which I don't think is in consistent with what you are saying and then I'll try to give you my view albeit, and of one in the industry on our most recent events.
Yes, the margin expansion is due to the R-Tech Ueno, clearly we in Q3 of 2015 we did not have the R-Tech Ueno, so we're capturing that in the 2016 results, and Q3 margin is more consistent with the earlier quarter than the current year. So that's capturing the margin.
And Brandon, I guess not being a predictor where the industry is going to go under new leadership in the Whitehouse. I know that both Hillary Clinton and the current President Trump had very broad healthcare agendas. Obviously, Hillary Clinton's agenda was much more well-articulated. It will be interesting to see what we learn as Mr. Trump takes office, and we learn more about what his agenda is going to be for the industry.
As I look at where we are, and this is disregarding any changes that we see from this point forward, I still think there is great value opportunity out there in terms of both asset-based and company-based deals on the business development front in the current market, especially in this specialty pharma space where I think, again just my opinion, currently companies are trading at very low multiples relative to their current and future prospects. So, on PVD, I guess on the recent announcement as latest 2-3 o'clock in the morning, this morning, and you know, I think their business development front in future deals for asset base and company base continue to be very rich out there for companies to have the capital wherewithal to make deals happen.
Great. Thanks very much.
Thank you. Our next question comes from the line of Ami Fadia with UBS. Your questions please?
Hi, good morning.
So, I have couple of questions. First of all, in your settlement with Dr. Reddy's, could you share with us how much of the profit they will be sharing with Sucampo relative to par which you've disclosed its being 50%?
Yes, well, we've disclosed 50% on the initial and then we have disclosed historically with par then when we had another generic entrant that the 50% would change, but we've not given a specific number to that. That it goes down fairly significantly from the 50%. Unfortunately, we are not trying to be just give overly broad and general information here but its part of our settlements discussions with Dr. Reddy's that we have certain disclosure obligations with them in partnerships with them, where they would prefer that we not disclose all details of the actual settlement agreement itself.
I think its safe to say that after the time period that we announced today that we share very healthy way in full generics up into our last patent which is all the way to 2027. But at this stage I mean, we are not under the ability to disclose exactly what those terms are.
Okay. With respect to your 2017 guidance, could you give us a sense of how you are thinking about the evaluation of some of the costs SG&A and R&D into 2017?
Yes, great question. And of course, because we haven't historically given guidance down to the expense line item, I'll try to be fairly very general to give you an idea of what we're trying to do for management purposes internally. In our current pipeline carry-forward, while, historically we had multiple assets and multiple assets outside of AMITIZA and multiple programs for AMITIZA. On a go forward basis we see taking forward the new formulation trial and other prior commitments in our current expense estimates under R&D.
Now, that's subject to completion of our current trial that's Peter Lichtlen talk to you about, the adult trial with the new formulation. The results of that and our conversations with the FDA that should change in terms of going downward, meaning improvement in EBITDA for 2017 in fact we were do not be successful with the trial or for some unforeseen reason the agency did not support our efforts to move forward, which we don't foresee. So these numbers include taking forwards the new formulation work and the continuation of that work throughout 2017 knowing that the variable could be an outcome in the trial that's not favorable in those adult trial or subject to agency discussions.
On the G&A lines, and I would include that for SG&A category, we are going to continue to manage down to a more operationally efficient business and try to continue to work to lower our overall G&A or SG&A base to one that we would qualify as more specialty pharma industry leading level. As I said we are not giving guidance to this specific line item but you can see that there are reductions to both, because we are not carrying it's [indiscernible], but we are taking forward the new formulation trials, and on the G&A side with the solving of our patent litigation with Dr. Reddy's and the outcome of our current pediatric trial that we disclosed today that we are going to reduce our G&A expenses accordingly.
Got it. And then maybe a last question from me, just in the context of what's been going on in the pharma sector as well as more broadly with the Elections, has any of that impacted how you are thinking about business development opportunities for the company? And also just based on some of the work you might have been doing in the last few months, what has changed, are you more or less optimistic about being able to execute on a deal in the near term? Any color would be helpful. Thank you.
I would say, first and foremost, the unfortunate outcome of the pediatric trial, although qualifying that we have really strong secondary signals that we want to get to discussion with the FDA about, provides us with the benefit for even greater financial performance in 2017 and moving forward. So I wouldn't say that the Election outcome has really done anything to change our outlook and our pace for current and future business development.
Obviously, the pediatric program and the outcomes with cobiprostone in 2016 have led up to gaps in our pipeline and AMITIZA while we have been able to unleash some potential long term forecast challenges with the current settlement, still leaves us with a singular product focus. So, our need and desire to do business development for commercial and potentially for the right deal structure in the pipeline is probably greater than it's ever been.
I don't see that the environment is going to change drastically, I think it's a very good environment for value both in specialty pharma and for certain R&D based companies for small and large molecule that are currently doing later phase development in the market space. How the broader markets will react access to capital, capital markets changes to be determined I guess but our need, desire and our beliefs that the market will still provide good value is all very, very critical and we see as continuing throughout 2017.
Thank you, Peter.
[Operator instructions] Our next question comes from the line of Jason Gerberry with Leerink Partners. Your questions, please?
Hi, this is [indiscernible] filling in for Jason. Just wanted to know if you could provide a little bit more clarity on the potential to continue with the program meaning the 6 to 17 year old pediatric study? Would this involve additional studies, just wanted a little bit more clarity on what you meant by the potential to continue the program? Thanks.
Why don't I try to give the front answers to that and then Dr. Lichtlen can support any of the technical details. I think what we had tried to communicate; first and foremost, we have data we have to take to the FDA under an FDA pre-commitment. So we want to get feedback from the agency on the trial that we did for 6 to 17 year old kids. We don't know if that will mean they request we do more trials, we will have to take that under review if they request that. What's currently in our forecast are moving forward with the new formulation trial in the lower age range of kids which includes a study in adults first before we actually start doing this study in the lower age range of kids. We did not include in our current numbers of the projected first look for 2017 any other trials in the 6 to 17 year age range. Peter, what would you add?
I think we need to understand that we have an agreed pre-op commitment with the FDA which comprises a total of four trials. Two of them are in the patient population aged 6 to 17, you report the outcome of one of these trials data. The second one, the open label phased study is still ongoing but will end at beginning of next year and the other two are actually in the population 6 months to 6 years. So these four studies are a commitment. However we have now completed the first part of this program and we will not be forced to run any additional studies, we may still decide to do that but there is no regulatory requirement to run additional studies outside of those four that we are on the hook for the pre-op requirements.
Thanks for clearing that up. Thank you.
Thank you. Our next question comes from the line of Michael Higgins with ROTH Capital Partners. Your questions please?
Good morning, guys.
Good morning, Michael.
Hey there. Appreciate your comments on the adolescent trail, the six to 17 year olds, maybe it's just the morning after and I can expect more details on like pro accounts and economic details at this stage too but just looking for more information as we assess the outcome of the potential label change need for a Phase III etc. As I understand the three year patient Phase II in the 6 to 17 year olds probably efficacy or primary endpoint, I think it had adverse events, yet the press release described the trend towards rather than as stated results. Can you provide a little more detail on the primary endpoints? I can see here the secondary endpoints show some efficacy, but just some clarity there would be helpful. Thanks.
Yes, certainly. The primary endpoint as I mentioned was an overall SBM response. We did not test primary endpoint, but there was a trend in favor of lubiprostone for this endpoint. For all the secondary endpoints, the [indiscernible] secondary endpoints in terms of statistical significance, we also missed some secondary endpoints but overall across all efficacy endpoints in the trial there was always at least a trend in favor of lubiprostone. This result is consistent in this way that there are clear efficacy signals in favor of lubiprostone.
We also need to understand that in fact the pathogenesis of the pediatric functional constipation and adult CIC is actually rather different especially the younger the children get and remember you are testing here a population starting at the age of six, and it is interesting to see that we need to know secondary endpoints of overall change in SBM frequency, but in particular the symptoms endpoint like draining and stool consistency because there is actually a behavioral component, which is quite central to pediatric functional constipation and that's the withholding behavior in the young children. And physically they actually because this is a psychological event, it takes more time until bowel movement frequency will increase whereas symptoms can actually improve faster and that might have hit us on the primary endpoint.
The FDA in fact is aware of these potential differences and we should also understand that this endpoint was actually set by the FDA first in an approach to understand the similarities versus dissimilarities between the pediatric functional constipation and the adult CIC population. And therefore we believe it is critical and also informative for both the agency as well as for us to discuss these data with the agency as a next step.
Okay, that's helpful. With that my follow-up would be -- I don't know if you have got this yet, but what would the sample size need to be in the trend in order to reach the specific significance on the primary endpoint and then really the question is your timing of meeting with the FDA?
So, I don't know that we have any indication that the outcome in the trial was one that was sample size driven. We have sort of recorded, we haven't internally run that nor have we assessed that or think that it was just driven by pure sample size alone. Peter?
I agree. First of all there is always -- the key difference is between the statistical significance and clinical relevance. Of course if you blow up the trial to the top of the hill you will always find or most likely you will find statistical significance which however may not be clinically relevant at all.
So, of course, we could recalculate the sample size to make sure we would theoretically meet statistical significance but I don't think that is an approach we shall go. Rather the discussion we will have with the FDA wither its primary endpoint is actually really an adequate endpoint for the pediatric functional constipation population and based on our interactions with KOLs in the field this is actually not the case. So, that's an interesting discussion we will have with the FDA.
So, overall from the clinical perspective and from the statistical perspective.
Okay, understood. And the timing for meeting with the FDA?
We have a meeting with the FDA in February.
Okay. Thanks guys.
Thank you, Mike.
Thank you. We have a follow-up question from the line of Ami Fadia with UBS. Please go ahead.
Hi, thanks for taking the follow-up. Just if you were to go to the FDA and make a recommendation of another trial what would it be, what endpoint would you study or look at going forward for the sprinkled formulation? Thank you.
So, the important thing to note that the next trial will be in the younger population of patients aged six months to six years so in younger children where this behavioral issue that I just mentioned is actually even more important.
Now, based on the data that we have seen here it will be very important for us to discuss the data from the elderly children but the FDA are proposed there will definitely be and that's back up the discussions we have with KOLs to move away from an only SBM driven endpoint, but really towards a more holistic view at the indication because SBM frequency is just part of it. It is heavily influenced by this behavioral component in the pediatric constipation population. So we will propose to have a composite endpoint, which we do need to work on a proposal for, which will certainly contain symptoms as well and then other clinically important parameters such as for instance incontinence.
So Ami, just to add to that I just want to reinforce that we have not factored a new trial in the upper age grades of kids at this stage of the game. Our current guidance does not include that and it would have to, we'd have to be very encouraged by our meeting with the FDA for taking another trial forward. Our current plan would be just to take forward the lower age range of kids in the new formulation.
Thank you. Ladies and gentlemen this concludes our question and answer session for today. So now it's my pleasure to hand the conference back over to Peter Greenleaf. Sir, please go ahead.
I want to thank you all for taking the time with us today and look forward to meeting with you all live and talk to your over the next couple of days. Thank you very much.
Ladies and gentlemen thank you for your participation on today's conference. This does conclude the program and you may all disconnect. Everybody have a wonderful day.