Puma Biotechnology (PBYI) Q4 2017 Results - Earnings Call Transcript

Puma Biotechnology, Inc. (NASDAQ:PBYI) Q4 2017 Earnings Call March 1, 2018 4:30 PM ET

Executives

Mariann Ohanesian - Puma Biotechnology, Inc.

Alan H. Auerbach - Puma Biotechnology, Inc.

Steven Lo - Puma Biotechnology, Inc.

Charles R. Eyler - Puma Biotechnology, Inc.

Analysts

Cory W. Kasimov - JPMorgan Securities LLC

Yigal Dov Nochomovitz - Citigroup Global Markets, Inc.

Derek Yuan - Credit Suisse Securities (USA) LLC (Broker)

Michael Schmidt - LEERINK Partners LLC

Qian Wang - Merrill Lynch, Pierce, Fenner & Smith, Inc.

Kennen Mackay - RBC Capital Markets LLC

Operator

Good afternoon. My name is Tim and I will be your conference call operator today. At this time, all participants are in a listen-only mode. After the speakers' formal remarks, there will be a question-and-answer session. As a reminder, this call is being recorded.

I would now like to turn the call over to Mariann Ohanesian, Senior Director of IR for Puma Biotechnology. You may begin your conference.

Mariann Ohanesian - Puma Biotechnology, Inc.

Thank you, Tim. Good afternoon and welcome to Puma's conference call to discuss our 2017 fourth quarter and full-year financial results. Joining me on the call today are Alan Auerbach, Chief Executive Officer, President and Chairman of the Board of Puma Biotechnology; Steve Lo, Chief Commercial Officer; and Charles Eyler, our SVP of Finance and Treasurer.

After market close today, Puma issued a news release detailing 4Q and full-year 2017 financial results. That news release, the slides that Steve will refer to and a webcast of this call are accessible via the home page in Investors sections of our website at pumabiotechnology.com. The webcast and presentation slides will be archived on our website and available for replay for the next 90 days.

Before I turn the call over to Alan for an overview of our performance and operations, I would like to point out that during this conference call, we may be making forward-looking statements within the meaning of Federal Securities Laws and based on current expectations, forecasts and assumptions. Such statements are only predictions, which are subject to risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.

Please refer to the documents that we file from time to time with the SEC and which are available on our website, including the company's quarterly report on Form 10-Q for the quarter ended September 30, 2017 for information concerning the risks and other factors that could affect the company. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this live conference call, March 1, 2018. The company undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call, except as required by law.

During today's call, we may refer to certain non-GAAP financial measures that involve adjustments to our GAAP figures. We believe these non-GAAP metrics may be useful to investors as a supplement to, but not a substitute for, our GAAP financial measures. Please refer to our 4Q news release for a reconciliation of our GAAP and non-GAAP results.

I will now turn the call over to Alan.

Alan H. Auerbach - Puma Biotechnology, Inc.

Thank you, Mariann, and thank you for joining our call today. The fourth quarter of 2017 represents the first full quarter of commercial availability of NERLYNX, Puma's first approved drug. NERLYNX was approved by the U.S. FDA in July 2017 for the treatment of patients with early stage HER2-positive breast cancer who have previously been treated with a trastuzumab containing regimen. We are pleased to report, NERLYNX net sales of $20.1 million for the fourth quarter of 2017 and $26.2 million for the full-year 2017.

In a moment, I will turn the call over to Steve Lo, Puma's Chief Commercial Officer, who will provide an update on NERLYNX launch related activities and detail our promotional progress in the U.S. to-date. In June 2016, we submitted a marketing authorization application to the European Medicines Agency for neratinib for the same extended adjuvant indication.

Last week, the Committee for Medicinal Products for Human Use, also known as the CHMP, adopted a negative opinion on the NERLYNX MAA, recommending the refusal of Marketing Authorization for the medicinal product, NERLYNX. The CHMP noted that Puma may request a re-examination of that opinion and that a letter of intent to seek a re-examination should be submitted within 15 days of their notification. We anticipate that we will submit our letter of intent to request a re-examination by March 9.

Looking forward, we have several additional milestones that we anticipate for neratinib. An abstract with updated data from the ongoing Phase I/II trial of neratinib in combination with Kadcyla, also known as T-DM1, in HER2-positive metastatic breast cancer has been submitted to the American Society of Clinical Oncology Annual Meeting, and if accepted, will be presented in the second quarter of 2018.

In addition, we expect to report the results from the Phase III trial of neratinib in third-line HER2-positive metastatic breast cancer, also known as the NALA trial, in the first half of 2018. In our presentation at a recent investor conference, we disclosed that the event (5:21) rate in the trial was coming in slower than we expected. And that due to this, we anticipate the data to come out in the latter part of the first half of 2018, and more specifically, in late June. We will continue to update investors on the updated timing of this in the future.

We also anticipate reporting additional data from our Phase II CONTROL study involving the use of colestipol with or without loperamide prophylaxis on neratinib-associated diarrhea in HER2-positive early breast cancer in the fourth quarter of 2018.

I will now turn the call over to Steve Lo, who will discuss our U.S. commercialization strategy and progress to-date for NERLYNX. Steve will be followed by Charles Eyler, who will highlight key components of our financial statements for the 2017 fourth quarter and full year.

Steven Lo - Puma Biotechnology, Inc.

Thank you, Alan. I am pleased to discuss the progress we have made with the launch of NERLYNX. We continue to be off to a good start and look forward to continuing this momentum. First of all, a reminder that during my presentation, I will be making forward-looking statements.

As you may recall, we set up a network of six specialty pharmacies who provide NERLYNX directly to the patients when a prescription is received. These specialty pharmacies conduct benefit investigations, obtain a prior authorization approval from the insurance company and then arrange with the patient to ship NERLYNX to their home. Additional services, such as co-pay assistance, medication counseling, anti-diarrheal medications are offered.

We have also established a separate specialty distribution channel, where the prescription does not need to be sent to the specialty pharmacy. This helps to facilitate the ability for certain patients to obtain NERLYNX directly from their physician's office. These allow patients to have direct access to NERLYNX in physician networks, such as US Oncology, ION, integrated systems such as Kaiser-Permanente and also the VA.

I will now provide you with our updated launch results since FDA approval. Later on the call, Charles will review the full financial results. What I am showing you in slide 4 is the monthly and cumulative net sales for NERLYNX through the month of January.

Please note that the revenue chart includes both specialty pharmacy and specialty distribution channels. We are pleased to see the month-over-month sales growth during the initial months of our launch and believe this is indicative of the strong initial demand for NERLYNX. Moreover, we have started off 2018 with a strong January in estimated net revenue.

This slide shows a snapshot of January 31 of specialty pharmacy prescriptions. Please note, this is from our specialty pharmacy channel and does not capture NERLYNX usage through the specialty distribution channel because we do not receive that prescription data. The specialty pharmacy channel represented approximately 89% of the total volume in Q4.

From FDA approval through January 31, over 1,600 new patient prescriptions have been received by the specialty pharmacies. Of those, 1,300 patients have received at least one shipment of NERLYNX. 265 patients are in process, which means they could be awaiting a prior authorization approval from their insurance company or scheduling a delivery to the patient. At any given time, patients are flowing from prior authorization to insurance approval to delivery.

While it is still early in the launch, we are encouraged to see patients are also receiving their refills in a timely manner. The specialty pharmacies actively reach out to patients during the first month of NERLYNX to counsel them and provide patient support. So far, we have seen 238 patients discontinued NERLYNX, which is an 18.3% discontinuation rate. Because this is unique specialty pharmacy data, if a patient transfers to another specialty pharmacy or to physician office dispensing or delays therapy for personal reason such as travel, this could be classified in the specialty pharmacy system as a discontinuation.

We have conducted monthly audits of this data and believe the discontinuations due to adverse events is only half of the total discontinuations, or approximately 9% to 10% discontinuation rate due to adverse events. In terms of new patient prescriptions in the specialty pharmacy channel, you can see in slide 6 steady growth every month since launch. As our sales force reaches more physicians, we should continue to see this growth.

Once the prescription comes in, the specialty pharmacy works to obtain the insurance approval to dispense NERLYNX. On slide 7, you will see both monthly and cumulative dispenses to patients, shown as NRx and TRx in the graph. We have seen the NRx's tick up with the start of the year likely due to increased penetration in our accounts. Importantly, we have seen a steady growth in NERLYNX refills.

Please note that some patients are told by their physician to lower their dose to improve tolerability or stop and start NERLYNX due to side effects. This could result in not every patient refilling every four weeks, but every five to six weeks, but they do remain on the drug.

We are also pleased to see that most patients receive NERLYNX in 10 days or less and 74% (sic) [70] of the patients receive it in 15 days or less, which is a sign of a smooth reimbursement process. There are a small number of patients who choose to wait to start NERLYNX due to personal reasons such as travel. There are also a small number of patients who have been prescribed NERLYNX for off label use, such as metastatic cancer, which we do not market or promote, where the insurance company needs more information. Those situations contribute to the longer times to fill shown on the right side of the graph.

Now on to prescribers, we are very encouraged to see that there are now over 1,000 unique prescribers as of January 31. The number of prescribers continues to grow and we are seeing these oncologists prescribe NERLYNX to more patients in their practice. Thus, we are seeing both breadth and depth of prescribers.

Recall that our sales force has only been actively promoting NERLYNX since September. Therefore, as you see in slide 10, we have made very good progress on penetrating our target physician audience, increasing from 22% in October to 53% in January. While we have made steady progress since launch, we have not fully penetrated our physician audience and there are still more opportunities to reach more physicians, especially increasing their awareness of diarrhea management options. We are highly optimistic we will reach all of our targets in a timely manner, which will result in continued growth in NERLYNX prescribers.

We are also happy to report that in a recent sales force detailing audit through IQVIA, formerly known as IMS, you can see that in the HER2 setting, our sales force has the highest share of voice amongst the physicians surveyed. Combined with reaching more physicians, we are pleased with our current progress and remain optimistic about our continued launch success.

Now turning to the rest of the world, we made a strategic decision that working with partners in certain regions that have local regulatory and commercial expertise is best for patient access. We are thrilled that we have licensing agreements in place now with Specialised Therapeutics, Medison and CANbridge. We are confident these partners will be successful in obtaining regulatory approval and launching NERLYNX.

So to summarize, we are highly encouraged with the progress we've made with physicians, payers and patients. We executed the launch of NERLYNX according to plan, are continuing to reach more prescribers and helping patients receive and stay on their medication. We are committed to ensuring all appropriate patients have access to NERLYNX.

I will now turn the call over to Charles Eyler for a review of our financial results.

Charles R. Eyler - Puma Biotechnology, Inc.

Thanks, Steve. Let me start with a quick summary of our financial results for the fourth quarter of 2017. Please note that I will once again be making comparison to Q2 of 2017 and Q3 of 2017, as we believe this is a better indication of our progress in becoming a commercial company than year-over-year comparisons.

For the fourth quarter of 2017, we reported a net loss based on GAAP of $64.1 million, or $1.71 per share. Our GAAP net loss for Q3 and Q2 of 2017 were $77.2 million and $77.8 million, respectively. Our GAAP net loss for the year was $292 million or $7.85 per share.

As Alan mentioned, net revenues from NERLYNX sales were $20.1 million and $26.2 million for the fourth quarter and full year ended 31 December 2017. Our cost of goods for the fourth quarter and the year-to-date were $4.1 million and $5.6 million, respectively.

Included in our cost of sales is the amortization of the milestone payments to the licensor of approximately $0.9 million for the fourth quarter and $1.5 million for the year. Going forward, we will continue to recognize amortization of the milestone payment to licensor.

In the fourth quarter of 2017, we also recognized license revenue of $1.5 million. For the fiscal year 2018, Puma anticipates that NERLYNX net revenues will be in the range of $175 million to $200 million. This only includes revenue from the currently approved extended adjuvant indication.

SG&A expenses based on GAAP were $30.9 million in the fourth quarter of 2017 compared to $32.5 million and $24.9 million for the third and second quarters of 2017. Non-GAAP SG&A expenses were $22.7 million for the fourth quarter compared to $24.2 million and $17.5 million for the third and second quarters of 2017, respectively.

Research and development expenses based on GAAP were $50.2 million for the fourth quarter compared to $49.5 million and $53.3 million for the third and second quarters, respectively. On a non-GAAP basis, R&D expenses were $32.9 million compared to $31.3 million and $33.7 million for the third and second quarters of 2017, respectively.

Our net cash used in operating activities for the fourth quarter of 2017 was approximately $36 million compared to $55 million and $46 million for the Q3 and Q2. Our cash burn for the quarter was approximately $25 million compared to a cash burn of approximately $45 million and $42 million for the third quarter and second quarter, respectively. As we continue to reduce our cash burn through 28 (sic) [2018] we believe that beginning in the fourth quarter, we will transition to cash flow neutral slightly positive cash flow.

We ended the fourth quarter of 2017 with $82 million in cash and cash equivalents. Per our license agreement with CANbridge Life Sciences, we received a $30 million upfront payment. Based on the new rev rec standards issued by FASB, we anticipate recording the $30 million as licensing revenue in the first quarter of 2018. However, we are currently reviewing with our auditors our position on recording the full amount of the revenue in the first quarter.

As previously mentioned, we secured a term loan of $100 million last October, subject to funding in two tranches. The first tranche of $50 million, which was received on October 31, is being used for general corporate purposes and to support the NERLYNX commercial activities. The second tranche of $50 million may be drawn down at Puma's option and is subject to achievement of certain milestones. The loan will mature on October 31, 2022. Overall, we continue to deploy our financial resources to focus on the advancement of neratinib through ongoing trials and the commercialization of NERLYNX in the United States.

I will now turn it back over to Alan.

Alan H. Auerbach - Puma Biotechnology, Inc.

Thanks, Charles and Steve. Since we launched NERLYNX for the treatment of early-stage HER2-positive cancer in the third quarter of 2017, we have continued to receive positive feedback from patients, prescribers and payers. We will continue to move forward with our plans to advance and expand our commercial activities for the balance of 2018 and beyond.

This concludes today's presentation. We will now turn the floor back to the operator for Q&A. Operator?

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. Our first question comes from the line of Cory Kasimov of JPMorgan Chase & Company. Please proceed with your question.

Cory W. Kasimov - JPMorgan Securities LLC

Hey. Good afternoon, guys. Thanks for taking the question. A couple of them for you. First of all, on the discontinuation rate, when you disclosed, I think it was 11% on your third quarter call, how much of that was due to adverse events? I'm just, I guess, trying to understand if this aspect of dropouts has changed at all since your last update, or if it's been pretty consistent. And also, what's the rate of dose reductions you're seeing?

Alan H. Auerbach - Puma Biotechnology, Inc.

Yeah. Thanks, Cory. So, on the Q3 call, when we mentioned the 11%, about half of those as well are due to adverse events. And as Steve mentioned, what we're seeing is that there's times that the specialty – again, we have two networks here. We have the specialty pharmacy and we have the specialty distribution. The specialty distribution is the in-office dispensing. And there's times, like Steve was mentioning, that we get it something reported as a discontinuation and through the specialty pharmacy. And that can be, they just switched from one pharmacy to another, because we've got six of them, or it could be they switched over to the in-office dispensing. So through that channel or through that specific pharmacy, it may be a discontinuation, but the patient is actually still on the drug.

Cory W. Kasimov - JPMorgan Securities LLC

Okay. Okay. And then the dose reduction?

Alan H. Auerbach - Puma Biotechnology, Inc.

That's a great question. So, we are definitely seeing that to improve tolerability, patients are going from the 240 milligram dose down to 200 milligram or even sometimes down to 160 milligram. And we saw that in the ExteNET trial as well. And again, the bottle that they get with a prescription is a 40 milligram pill. They're actually very tiny pills, so patients actually like that. And it's six of them a day. So, obviously, if they dose down, they're taking either five a day or four a day.

So that obviously can push out when they're getting a refill, instead of getting it every four weeks, it might be over five weeks or six weeks. And you could also have dose interruptions where for side effects, they stop taking it for a day or two and then go back on. And again, we saw that in ExteNET as well. We're still working out what percent of the patients fall into those categories. So, we're going to need to get back to you on that.

Cory W. Kasimov - JPMorgan Securities LLC

Okay. And then, the one other question I have is, can you talk about some of the key items that go into determining the 2018 guidance you have for NERLYNX? And what that potential key variables are around that number? Because when you look at the pretty impressive growth you've shown quarter-over-quarter of late, especially with that January number, the low end of your guidance seems like there's the possibility of pretty minimal growth from that number as we kind of go over the course of the year.

Alan H. Auerbach - Puma Biotechnology, Inc.

Yeah. So, I think we would obviously rather err on the conservatives. And I think that's the feedback we've gotten from speaking to shareholders as well if they would rather us err on the conservative side. So there's certainly an element of that as well.

It's basically taking conservative guidance and that we're going to just have revenue in the extended adjuvant indication. Until we get results from the metastatic trial, which we still are uncertain as the timing of, we haven't included those in our projections yet.

Cory W. Kasimov - JPMorgan Securities LLC

Okay. Understood. Thanks for taking the questions.

Operator

Our next question comes from the line of Yigal Nochomovitz of Citigroup. Pleased proceed with your question.

Yigal Dov Nochomovitz - Citigroup Global Markets, Inc.

Yeah. Hi. Hi, Alan. Thanks for taking the questions. On the NALA study, could you just clarify a bit? When you say late June, is that when you're going to hit the 420 or so events or is that essentially when we're going to get the data? Meaning, you would need a few weeks or months to analyze the data and have the event set earlier in the second quarter, if you could just clarify. Thanks.

Alan H. Auerbach - Puma Biotechnology, Inc.

Yes. Thanks, Yigal. To clarify, that would be when we would announce the top line data. So, in this study, what we are waiting for is essentially confirmed PFS events. So, at the local level, at the physician level, they could have a PFS event, but unless it's essentially confirmed, it doesn't count toward the number we need.

So, we're seeing that coming in at a slower than expected rate. As of right now, we would anticipate announcing top line data in late June. To be fair, that could get pushed out and we will keep investors updated as to the timing of that.

Yigal Dov Nochomovitz - Citigroup Global Markets, Inc.

Okay, great. And could you give a little bit more color in terms of market dynamics regarding types of patients that are coming on to therapy now? I think on the last call, you mentioned that it was a mix of HER2-positive, HER2-negative. I'll be curious if that's changed or not. And with respect to the risk profile of the patients, are they ending to be the high-risk patients with the multiple positive nodes or poor response to neoadjuvant therapy and things like that? Or has it brought in through some of the more moderate risk patients as well? Thanks.

Steven Lo - Puma Biotechnology, Inc.

Yeah. Hi. This is Steve. I'll take that question. First of all, we have patients that are very consistent with our label. So they could be hormone receptor negative, hormone receptor positive, lower risk, et cetera. I will say that the newer prescribers, typically, I think when they decide which patient to put on neratinib, they will typically go with the hormone receptor positive, higher risk patients. But over the course of time, particularly with our more experienced prescribers, they're also using it for the lower risk patients.

Yigal Dov Nochomovitz - Citigroup Global Markets, Inc.

Okay, great. And then just one on the EU process. With regard to the reexamine and potentially submitting more data to the EMA, can you just clarify if the timing of additional data for the budesonide and colestipol cohorts for the CONTROL study to get that 12 months data will fall within the window that you expect for – the timeframe for the reexamination procedure? Or would you have to carry through the re-exam procedure, get an answer and then do another data submission potentially, if necessary, if the re-exam didn't work? Can you just help us understand that? And then also just regard to whether maybe the NALA data would be relevant for that discussion, too. Thanks.

Alan H. Auerbach - Puma Biotechnology, Inc.

Thanks, Yigal. With regard to the reassessment process with the CHMP, I don't know if we're allowed to submit any new data or if we just have to go on what's already been submitted. I don't know the answer to that. So I think I would rather wait until we meet with the rapporteurs, which I believe will be in somewhere around 60 days, and then we can get back to you on that. I don't know the answer to that to be accurate. So I need to get back to you on that.

Yigal Dov Nochomovitz - Citigroup Global Markets, Inc.

Okay.

Alan H. Auerbach - Puma Biotechnology, Inc.

Thank you.

Operator

Our next question comes from the line of Alethia Young of Credit Suisse. Please proceed with your question.

Derek Yuan - Credit Suisse Securities (USA) LLC (Broker)

Hey, guys. Thanks for taking my question. This is Derek Yuan on for Alethia. I have two questions, if I may. So first one is the NERLYNX price was raised in January, so I was just wondering how much was the 4Q sales that was due to the stocking. And I have a follow-up.

Steven Lo - Puma Biotechnology, Inc.

Yeah. This is Steve. There was no stocking in fourth quarter. The stocking occurred right at the FDA approval. And if you're asking about the growth between December to January, the price increase occurred in January, and our units grew 37% and our revenue grew 48%. So you can see that most of that growth is actually from demand and not from the raising of the price.

Derek Yuan - Credit Suisse Securities (USA) LLC (Broker)

Okay. Thanks. And for the reexamination, is this strategy to restrict to high-risk patients, like positive or negative or like neutral (28:38) status? And was that discussed in SAG Meeting already? I'm asking the question because I want to understand, will you get higher likelihood of approval, if you propose the restriction when you do the reexamination. Thank you.

Alan H. Auerbach - Puma Biotechnology, Inc.

So in terms of the reassessment period, again, I think we need to wait until we meet with the rapporteurs to see whether or not we're going to be looking for approval in the ITT population or whether or not it's going to be a sub-group. So we'll need to get back to you on that and post our meeting with the rapporteurs.

Derek Yuan - Credit Suisse Securities (USA) LLC (Broker)

Okay. Thanks.

Operator

Our next question comes from the line of Michael Schmidt of LEERINK Partners. Please proceed with your question.

Michael Schmidt - LEERINK Partners LLC

Hey, guys. Congrats on the launch so far, and thanks for taking my question. I had a follow-up on the discontinuation rate and it's obviously tough to compare the sort of point in time to the trial, which was cumulative over a one year period. But if you were to compare the current experience in the market in terms of dropouts to the trials, either the CONTROL or the ExteNET trial at a similar time point, how do the dropout rates compare?

Alan H. Auerbach - Puma Biotechnology, Inc.

That's a really good question, Michael. I don't have that data in front of me. That is a great question. Let me analyze that and I will get back to you on that. That's a very good question. We just don't have it in front of us.

Steven Lo - Puma Biotechnology, Inc.

And just in terms of the commercial setting, typically when patients do drop off, we see it in the first month. But I will also say that now that we've been in the marketplace, we haven't been in the marketplace for a full year, we have many patients who have gotten their six refill, their seventh refill. So I think it's certainly been positive on the commercial setting, because once again, the specialty pharmacies spend time and counsel the patients. We also have nurse educators on our team who work with the physicians practice. So we're certainly doing everything we can to make sure that the patients stay on drug.

Michael Schmidt - LEERINK Partners LLC

Great. And then, I guess a question on the sort of slight decrease in NRx volume in December. Is that just an artifact due to the holidays?

Alan H. Auerbach - Puma Biotechnology, Inc.

Yeah. I don't know if we know the answer to that. That most likely could be what that's due to.

Michael Schmidt - LEERINK Partners LLC

Great. And then, did you see any change to the gross to net adjustment of the drug price?

Alan H. Auerbach - Puma Biotechnology, Inc.

In terms of the drug price, are you asking whether or not like people were trying to get ahead of the drug price or something?

Michael Schmidt - LEERINK Partners LLC

No, I'm just wondering if the discounts and rebates have changed since launch, now that the price increase is there. What is the expectation for gross to net adjustment in general, I guess, going forward?

Steven Lo - Puma Biotechnology, Inc.

Yeah. Our gross to net has actually been fairly stable. So, remember, this is an early breast cancer population, so we don't have that many Medicare patients. In fact, only about 13% are Medicare patients. So, we aren't subjected to higher rebates. We don't discount the drug because there isn't a competitor per se. So, that's remained pretty stable throughout the launch.

Michael Schmidt - LEERINK Partners LLC

Okay, great. Well, thanks for taking my question and congrats on the progress.

Steven Lo - Puma Biotechnology, Inc.

Thanks.

Operator

Our next question comes from the line of Ying Huang of Bank of America Merrill Lynch. Please proceed with your question.

Qian Wang - Merrill Lynch, Pierce, Fenner & Smith, Inc.

Hi. Thank you for taking my questions. This is Qian on for Ying from Bank of America Merrill Lynch. So, a couple of quick ones. The first one is a follow-up on the discontinuation. You do see like 18%, which has increased from the 11%. Can you provide more color on that in terms of, in a real world, what kind of prophylaxis are used in a treatment clinic? And I believe you recently talked about you're going to have a new cohort of patients in collectible alone. Just trying to understand what is your thoughts on that.

And second one is, in a real world like do we know, they're relatively used between academic centers and community centers. And lastly, what is your confidence level for the European approval? Thank you.

Alan H. Auerbach - Puma Biotechnology, Inc.

Okay. Steve, do you want to take first one?

Steven Lo - Puma Biotechnology, Inc.

Yeah. I will take the first few questions and then I'll turn it over to Alan. So, you had a question regarding the discontinuation rate and why the change. So, remember one thing, when we first reported last quarter, we had patients who were only on drug for a short amount of time and many patients had not even started drug. So, I think essentially the maturing of the patient population certainly gives us a better handle of that. What I also would remind you is that we have done some audits with our discontinuations and we see that it's about 9% to 10% related to adverse events.

So from my perspective, I think that's certainly better than what we've seen with the clinical trial, which had no prophylaxis. So the good news is that we are seeing with the right education that physicians are using loperamide. They're also because of the San Antonio poster, et cetera. They are using colestipol, budesonide. I think it's a handful of choices that the physician can use, but that's certainly happening and that's why it's helped us keep patients on the medication.

Your next question...

Alan H. Auerbach - Puma Biotechnology, Inc.

Yeah.

Steven Lo - Puma Biotechnology, Inc.

... was not academics versus community physicians. Most of our prescriptions are coming from the community, which I think is very promising. Now, as you know, a lot of academic physicians don't see these patients once they are in the early breast cancer setting. So it is, again, promising that we're seeing most of our growth and most of our prescriptions coming from the community.

Alan H. Auerbach - Puma Biotechnology, Inc.

And then to add to what Steve was saying on what regimen is being used, we don't really get to that transparency because we don't have access to prescription data for colestipol or something like that. So we really just get it more anecdotally. We are definitely hearing good feedback on the colestipol regimen.

To your second question, which was the new cohort that was open in the CONTROL trial, that is correct. The data that was previously reported was the combination of loperamide with colestipol. The feedback we were getting from a lot of the physicians was that the side effects of the loperamide, which was the fatigue, et cetera, were the ones that were most concerning to the patients. So, we now have a cohort that is enrolling and it's just colestipol only. I believe it's one pill twice a day or something, so it's pretty easy regimen to take as well. And we should have data on that at the San Antonio Breast Cancer Meeting this year.

And then, your last question regarding Europe, in terms of our confidence level with the European reassessment, I think we need to wait for feedback from the rapporteurs and then we can give much better feedback on that.

Unknown Speaker

Thank you so much.

Operator

Our next question comes from the line of Kennen Mackay of RBC Capital Markets. Please proceed with your question.

Kennen Mackay - RBC Capital Markets LLC

Thank you for the question. Two questions. Last quarter, you had provided a little bit of insight on how much free drug was provided. I was wondering if you could help us out with that this quarter. And I'd wanted to get a sense of gross to net on the quarter. And whether – with the new accounting rules relating to inventory, whether any of the sort of minimal inventory that it sounded like was in Q4, whether there was any recognition of the donut hole early in Q4 or if that just wasn't an issue because again there was so little inventory?

And then, second just a question on the guidance of becoming cash flow positive or potentially profitable by the end of the year. I'd wanted to get a sense of whether that was thinking about GAAP or non-GAAP, and specifically if that was referring to Q4? And was also hoping if you could maybe help us think about expenses once the NERLYNX trial concludes and how maybe those could come down? Thanks a bunch. I know that was a lot.

Steven Lo - Puma Biotechnology, Inc.

Yes. Hi. This is Steve. I'll take the free drug question as well as the donut hole question. So, first of all, these slides will be available online for you later, but on slide 5 of my presentation, we do talk about that 5.6% of those patients that we received prescriptions for are on free drug. And those are typically patients who are uninsured where they do not have access to Medicaid coverage, et cetera, so only 5.6%.

In relation to the donut hole, remember that we only have about 13% payer mix related to Medicare, so we didn't come across many patients who were subject to the donut hole. If they were, they were referred to a foundation and practice (37:52) in most cases, they were able to receive the medication. If they were subject to that, let's say, around December, many of them just started drug in January. So that hasn't been a major hurdle to patients starting on drug.

And then, what I will do is I will pass the rest of the questions first to Alan.

Alan H. Auerbach - Puma Biotechnology, Inc.

Yeah. Hi, Kennen. So in terms of your question on gross to net, we actually saw an improvement in gross to net this quarter. It was 11.3%. So we saw an improvement there. And then in terms of the guidance in terms of becoming cash flow neutral/cash flow positive in the fourth quarter, I think you can expect R&D expenses to be flat to trending down toward the end of the year. And as you can see, the majority of that – and you saw in the quarter, our cash burn went from $45 million in Q3 to $25 million in Q4. That was largely driven by revenue growth. So, obviously, with us keeping a good tight fix on expenses, and as I said, R&D will trend down and increasing revenues, that's where we believe the driver is going to be to get to cash flow neutral/cash flow positive in the fourth quarter of 2018.

Kennen Mackay - RBC Capital Markets LLC

Got you. Thanks, Alan, and congrats on the progress and the launch.

Alan H. Auerbach - Puma Biotechnology, Inc.

Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Mariann for closing remarks.

Mariann Ohanesian - Puma Biotechnology, Inc.

We appreciate your interest in Puma Biotechnology. As a reminder, this call may be accessed via replay of the webcast at pumabiotechnology.com beginning in about an hour. Thank you again for your time and attention today.

Operator

Ladies and gentlemen, thank you for participating in today's conference call. This concludes our program. Everyone have a great day. You may now disconnect.