Aerie Pharmaceuticals, Inc.
Q3 2018 Earnings Call Transcript

Published: 7 Nov 2018

[Operator:]

Good afternoon, ladies and gentlemen. Thank you for standing-by, and welcome to the Aerie Pharmaceuticals Third Quarter 2018 Earnings Conference Call. [Operator Instructions] Today's conference call will be recorded. It is now my pleasure to turn the floor over to Aerie's Chief Financial Officer, Rich Rubino. Please go ahead, sir.

[Rich Rubino:]

Well, thank you, Sydney. Good afternoon, and thank you for joining us. With me today are Vince Anido, Aerie's Chairman and Chief Executive Officer; Tom Mitro, Aerie's President and Chief Operating Officer; and John LaRocca, Aerie's General Counsel. Today's call is also being webcast live on our website, investors.aeriepharma.com, and it will be available for replay as indicated in our press release. Now for forward-looking statements and non-GAAP financial measures. On this call, we will make certain forward-looking statements, including statements forecasting guidance regarding our future financial and operating performance. These statements will include projections associated with our commercial launch of Rhopressa in The United States, including net revenue expectations and cash burn. They will also include expectations regarding the success, timing and cost of our clinical trials. Additionally, we will discuss progress regarding maintaining, requesting or obtaining approvals from the FDA or other regulatory agencies of our product and product candidate, including our efforts on international expansion. Lastly, we will address the timing and cost of our manufacturing activities and the potential of our preclinical product candidates and research findings as well as other statements related to future events. These statements are based on the beliefs and expectations of management as of today. Our actual results may differ materially from our expectations. Investors should read carefully the risks and uncertainties described in today's press release as well as the risk factors included in our filings with the SEC. We assume no obligation to revise or update forward-looking statements, whether as a result of new information, future events or otherwise. Please note that we will file our 10-Q tomorrow. In addition, during this call, we will be discussing certain adjusted or non-GAAP financial measures. For additional disclosures relating to these non-GAAP financial measures, including a reconciliation to the most directly comparable GAAP measures, please see today's press release, which is posted on our website. With that, I will turn the call over to Vince.

[Vince Anido:]

Thanks, Rich, and good afternoon, everybody thanks for joining us today. Having just returned from The American Academy of Ophthalmology Annual Meeting in Chicago, I'm very pleased to report that Rhopressa is gaining significant attention among the prescribers. And the experiences have just been generally quite positive. Now to be clearer as with other glaucoma products, it will only be patients that won't tolerate certain adverse events or will experience inadequate IOP lowering. That's pretty much to be expected. We continue to learn more and more about how Rhopressa works. A key differentiator for Rhopressa on top of being exclusively categorized in new class of drugs Rho kinase inhibitors or ROCK inhibitors for glaucoma and ocular hypertension. As Rhopressa, is specifically designed to increase outflow through trabecular meshwork. And you may remember that that's the main fluid grain of the eye. Earlier this year in August 15 to be exact released top line results of our Rhopressa, Mechanism of Action Study, where we observed a statistically significant increase in tubercular outflow facility of approximately 35% over baseline. Now, this study was performed on patients diagnosed with glaucoma or ocular hypertension with an unmedicated baseline pressures of 20 to 30 millimeters in Mercury. This is just one more example of the kind of research that we continue to do to further characterize the drug's activity, and this particular study is pretty consistent with all of the animal data that we saw in the early development of this product. And in the marketplace what we believe is happening now is many doctors have gained confidence in Rhopressa. It is the doctor actually expanding their usual Rhopressa in to many different patient preclinical scenarios. Now they do use Rhopressa by itself for those patients who just don't tolerate other products like prostoglandins or Bromadioline or some of these other products particularly well. We do see it as single use drug. But in addition to that, they are adding it on top of two or three other glaucoma therapies to get a further drop in intraocular pressure. Then at times they start removing other therapies that perhaps two to three times a day putting too much of a load on the patient. Ultimately, some of them are just migrating to prescribing Rhopressa on top of a prostaglandin analog and where we thought that most of its use would come. Each practice will of course make their decisions on a patient-by-patient basis. And we are optimistic that as physicians continue to gain experience with Rhopressa, there'll be organic growth within each practice. Thus far, we have over 5,000 doctors who have prescribed Rhopressa. And the top prescribers have already written several hundred scripts. Now I want to point out a couple of things. First of all, this 5,000 prescribers that we'd have, that particular number has grown about 130% over the last three months. And so, we do continue to grow the prescriber base and many of these prescribers, at the very top of the high-decile for prescribers, in fact, we have seven or eight territories right now around the country where all of their deciles eight, nine and 10 that the highest prescribers in those territories are all writing Rhopressa. We've got a couple of reps, one of them in Hawaii, where 70% of per targets, that is of all the doctors in a territory already writing Rhopressa and we have a young man out of New Hampshire where 60% of his targets are already writing Rhopressa. So the success is pretty widespread. At the top five territories we have – a couple of the top five reps. We have two of them out in Northern California and one of them is out of Chicago. We do have one, as I mentioned on the last call right in Manhattan. And the other one is out of Hawaii. So, we expect to continue to see these kinds of successes as the product continues to grow in acceptance. Now, as we've said many times, one important element of our long-term success in addition to Rhopressa performance in a patient population is our ability to gain market access. As of October 1, we now have 85% of commercial lives covered, including 40% in tier two and 45% in tier three. Importantly, we’ve made excellent strides in gaining access on the Medicare Part D side. The other half of the coverage universe that we have to worry about. By increasing our tier two coverage up to 40% and previously we had always talked about that being somewhere around 12% This progress is critical to our success. If patients aren't yet covered, the doctors in the offices can use prior authorization processes, which often is a administrative burden, will create a burden on the practice and are expensive in many cases to the patients. Now, regardless from launch-to-date, there have been several thousand prior authorizations that have been submitted to managed care plans for Rhopressa and we've seen approval rates for these authorizations averaging 89% range, which is far in excess of what other drugs have experienced and of course as our coverage increases the need for prior authorization decreases. Now looking forward, we expect to have the majority of both commercial and the Medicare Part D covered in preferred brand tier two as we enter 2019, which would further support our growth prospects. Now as a reminder, as we pick up coverage, particularly in tier two, we do have to pay rebates to the payers that bring our net revenue per bottle down. That net revenue was roughly $135 per bottle in Q2. It was $122 per bottle in Q3. As we pick up more coverage, it will ultimately level-off. As we approach the end of the year and that will get close to about $100 per bottle, which is consistent where we've always estimated the net prices to be. As you saw in our press release, based on our advances in gaining market access or trajectories on physician adoption we are reiterating our net sales guidance of $20 million to $30 million for 2018. Rich will go into a little bit more detail in terms of the kind of methods that we look to ensure that we feel comfortable with our numbers. Now recognizing that we're in strong demand for Rhopressa, one of the things that our manufacturing folks have heard me say many times, we want to make sure we maintain enough inventories in our warehouses, so that there are no stock outs. And we currently have about eight months supply of Rhopressa inventory on hand for ourselves. And that does not include the trade in channels, or no wholesalers or retail numbers there. That's just what we have available. So, as the uptake continues, we will have more than enough product in order to meet the demand. Now we also expect to have our second contract manufacturer providing Rhopressa, begin supplying us, assuming that they get early approval or they get approval, early in 2019, there'll be a second supplier on hand for us. Now this is critical because obviously we're gonna have Rhopressa on the market and we're also going to have Rocklatan on the market. We want to maintain, a lot of flexibility on the manufacturing side, so that we can make sure that we have de-risked our supply sourcing. Now in addition to that our own Ireland facility proceeding on track, I'm very proud of the progress that they've made. In fact, I saw it firsthand, just a couple of weeks ago I was there. And it was actually one year to the day that I visited the plant and they have made incredible progress. I actually just received not too long ago, the first bottle that was actually manufactured at that site. So, it's a very, very special occasion for that team. Our plan is to have commercial supply in Ireland starting in early 2020. We'll start with Rocklatan first and not only secure our ability to fully control sourcing, but also resulting in an estimated 40% reduction in our already low cost of sales. Now, one last point on Rhopressa that we haven't discussed previously. Rhopressa was nominated by the Galien Foundation for the best pharmaceutical agent. There was 20 innovative products that were nominated this year and as you know the Prix Galien Award give credit to the most important drugs introduced into the public market as well as to the achievements of the best research teams in the pharmaceutical field. Many of us were at the awards event in New York City just a couple of weeks ago, right in front AAO, and while we didn't win, we were honored just the same. Most of the contenders were large pharmaceutical companies with incredibly large research functions. Now for us, the Rhopressa molecule netarsudil was developed by a team of seven scientists, including the five guys on the bench. So we're very proud of that achievement. Let's move on to Rocklatan for a second. We continue to look forward to our PDUFA date set for mid-March of next year and make sure that our commercial team is fully trained well in advance to provide what we hope to be a very rapid launch post approval. Now remember we'll use the same salesforce of 100 territory managers to commercialize Rocklatan. Now I'm sure many of you have noticed and probably called Rich about us misspelling the name Rocklatan, but we have gone through the regulatory drug naming and approval process and they've asked us to add a k right after the c. So no, that's not a misspelling. That is the way that Rocklatan will be spelled from now on. There is an extraordinary level of interest in Rocklatan, as once again that confirmed at AAO, there’s the interest we think stems from how well Rhopressa appears to be performing when it's added to a prostaglandin. And so many have asked how doctors would prescribe Rhopressa versus Rocklatan and what we think the split is going to be. Personally, I think it's going to be very difficult to predict. I've mentioned that before. I think the doctors will follow their own path on a patient-by-patient basis. It's clear to us however, the Rocklatan if and when approved, ultimately have a very significant potential in the marketplace. From a pricing perspective, we do expect to price Rocklatan fairly consistently with Rhopressa, which we believe will write in the market acceptance, including the necessary gains in market access. Now turning to our initiatives outside the U.S., you may have seen that in early October, we announced at the European Medicines Agency accepted our MMA, our marketing authorization application for Rhokiinsa. That is the name for Rhopressa in Europe. We expect that it would be approximately 12 months to go through the review. And after we get that approval, then we will immediately file Rocklatan and that'll take another 12 months for a review. Our plans in Europe haven't changed. We expect to commercialize Rocklatan first in Europe and on our own. Also, by the end of 2019, we should have top line data for our Mercury 3 trial currently underway in Europe, which we expect to be beneficial for pricing purposes in the key European countries. We've been very active in the European ophthalmology conferences and forums. We have recently attended European Society of Cataract & Refractive Surgeons Congress in Vienna and earlier this year we attended the European Glaucoma Society meeting that was in Milan. We have noted, there's an awful lot of growing interest in Aerie, in this important region. And we now have over 60 employees in Europe. They have managed to build an operation of our manufacturing facility in Ireland. In addition to that, we have a number of employees in Europe focused on the execution of the Mercury 3 clinical trial I just mentioned. And we just started an incremental build for not only our clinical, with medical affairs and commercial teams in Europe. Now as we prepare to move into the Japanese market, in addition to a Phase 2 trial for Rhopressa, if you remember, we enroll Japanese and Japanese American patients in a Phase 2 trial. We're also now expanding our Phase 2 activities onto the Japanese mainland, which provide access to a much higher level of patient availability for the trial and really – and perhaps even more importantly, set the stage for the progression of our clinical trial programs in the Phase 3 trials and then we are going to be done in Japan. We have established a small office in Tokyo to oversee our clinical and regulatory activities in Japan. Now personally, Japan just a few weeks ago and had a chance to meet with the number of KOLs and then I do some of the interviews and things like that. And I think that there's an awful lot of a growing interest in Rhopressa in that country. Now looking at our pipeline, we are charging ahead with our two preclinical product candidates for the retina market. As you may know, the retina market is in the U.S., is larger than the glaucoma market. And we believe that there are significant unmet needs in that space relative to new therapies and sustained efficacy over a period of several months. The reminder, we have a couple products in here that we think the larger one is AR-13503, which inhibits both Rho-kinase and protein kinase C. The potential to treat both diabetic macular edema or DME and wet age related macular degeneration or wet AMD. We believe this is a completely new pathway for treating these diseases. And for 503, it's shown preclinical experiments, the ability to provide additive efficacy as an adjunct to market-leading Eylea, are being very efficacious on a standalone basis as well. We're also advancing 1105, AR-1105 which is dexamethasone steroid implant for the treatment of DME. And they remember this is a program that we acquired as part when we bought the rights to Envisia, a couple years ago, preclinical activities are ongoing for both AR-13503 as well as AR-1105. We're enthusiastic about each molecules, product candidates’ potential. Our capabilities through our DSM collaboration provide an exciting opportunity to gain long-term sustained release for small molecules such as AR-13503. Now we've also have a manufacturing platform to make ocular implants in very precise shapes and sizes through our exclusive ophthalmic rights to PRINT implant manufacturing technology. In fact, a couple of weeks ago, you may have seen the announcement, where we established our GMP validated PRINT Production Facility in our Durham, North Carolina headquarters. This facility will provide the time sustained release implants to be used for our retina product candidates, all in mere 1000 square feet of floor space. We're using this principally for all of our clinical development programs. We do plan on filing the IND for AR-1105 around the end of this year, and for AR-13503 in early 2019. We expect both retina program candidates to enter the clinic later on in 2019. We believe this is very important step as we continue to build our company using what we believe is highly innovative, sustained release platform. With our expanded collaboration agreement with DSM, we now have a worldwide exclusive license to use their technology for all ophthalmic indications and for an unlimited number of compounds. This combination of the DSM platform with PRINT manufacturing platform provide a unique opportunity for our company not only to potential to succeed in the retina space, but also to innovate and the sustained delivery products where the front of the eye, including glaucoma. Finally, as you know, we do own a library of Rho-kinase molecules, each with unique features and attributes that ultimately may address additional diseases beyond the eye. As I mentioned in our last call, we are evaluating on our own or through academic institution partners, opportunities for other medical uses, including certain pulmonary diseases, asthma and dermatology indications. We won't necessarily take any of these into clinic on our own, but it is incumbent on us to begin to understand the full value of our proprietary library. We will report back to you as we make continued progress and as part of our business. Now with that, I'll turn it back over to Rich to cover the financials. Rich?

[Rich Rubino:]

Thanks Vince. We recorded $7.3 million of net revenues in the third quarter, which is our first full quarter of sales following our commercial launch of Rhopressa in the U.S. on April 30th of this year. As a reminder, we recognize revenue when the product is received by the distributors. Our net revenues reflect volumes of nearly 60,000 bottles for the third quarter and nearly 78,000 bottles a year-to-date. As of the end of the third quarter, there was just over one week of demand in the wholesaler channel. Our gross margin for the quarter ended September 30, 2018 was 97.2%. Some of the inventory costs were expensed prior to FDA approval and our normalized gross margin would be approximately 96.3%. Our third quarter 2018 GAAP net loss was $85.4 million or $1.96 per share and includes the previously guided $24.1 million of other expense related to our convertible notes which were fully converted in July. As you may recall, that $24.1 million is a noncash expense. Additionally, the third quarter includes the $6 million paid to DSM as we previously announced, and that was in the form of cash. When excluding the $10 million of stock-based compensation expense or total adjusted net loss was $75.4 million or $1.73 per share. Adjusted operating expenses for the third quarter 2018 totaled $58.5 million, which includes $32.6 million in adjusted SG&A expenses, reflecting our Rhopressa launch. For additional information regarding our third quarter 2018 results and prior period comparisons, please refer to today's press release and tomorrow's Form 10-Q filing. Our year-to-date 2018 cash burn was approximately $163 million through September 30. We ended the third quarter with $236 million in cash, cash equivalents and investments and 45.5 million shares outstanding. Turning to guidance, as Vince already mentioned. We are reiterating the full year 2018 net revenue guidance in the range of $20 million to $30 million on a U.S. GAAP basis. As you know in terms of net sales, the fourth quarter will be our largest quarter of the year as we continue to ramp. Our net sales for September year-to-date totaled $9.7 million of which $7.3 million was recorded in the third quarter. This means that we will need to average only $1 million more in net sales per month in the fourth quarter than we did in the third quarter to enter the full year guidance range. Let me provide some additional color. Internally we received accurate shipment data on a daily basis, on a one day lag. Having seen recent performance regarding shipments to wholesalers and wholesalers’ shipments to the pharmacies I can confidently say we are seeing continued healthy growth. To be more specific, the shipments, the wholesalers, which is the basis for our revenue and the shipments from the wholesalers to pharmacies, which is a leading indicator of dispensing demand. Each achieved a record week last week and on top of that, a record day yesterday. As a further reference point, our sales out from the wholesalers to the pharmacies for last week ending November 2 amounted to 7,289 bottles. And those sales out have grown consistently over the last several weeks. I have to believe the recent significant additions to our formulary coverage, particularly in Medicare Part D as Vince mentioned are helping fuel this growth. Also with our coverage including 90 day plans, I expect to see further growth in the bottles per script over time. The current yield is 1.27 bottles per prescription. Of course, quite a bit can happen between now and the end of the year, but based on the growth rates we are currently seeing, we believe the $20 million to $30 million range for 2018 net sales is achievable. Further, we are adjusting our cash burn estimates for 2018 to a range of $210 million to $215 million, up from the previous range of $200 million to $210 million. The increase range reflects the $6 million payment to DSM in July 2018. To be clear, when I refer to cash burn that represents what I have called gross cash burn. It does not reflect the offset from the collections of accounts receivable. This year through September, we have collected over $12 million in accounts receivable, of which over $10 million was collected in the third quarter. Obviously as our sales increase, so too will our accounts receivable collections thus becoming an increasingly meaningful offset to our cash burn. That wraps up the financial discussion and now I'd like to turn the call over to questions, Sydney.

[Operator:]

Thank you so much. [Operator Instructions] And our first question comes from Adnan Butt with Guggenheim. Your line is now open.

[Adnan Butt:]

Hey, thanks for the question and congrats on the solid number. Vince or Rich, can you break out what the end user demand versus a channel number is of that $7 million plus total?

[Vince Anido:]

I can help you with that. I mentioned in my prepared remarks that there was about, just over a week of demand in the wholesaler channel. If you just look at the ship bottles, for the quarter compared to the QBA data that you would've seen for bottles dispensed, you'll come up with about – all-in about three to four weeks of demand in the channel. And as I mentioned just over a week of that is a wholesaler.

[Adnan Butt:]

And I believe, Rich, you might have made some comments in the past, but where do you expect the end user channel number to kind of normalize?

[Rich Rubino:]

It's consistent with what we've said all along. Actually, when we first launched we said you should expect it to be in the three or four week range.

[Adnan Butt:]

Shifting gears a bit, do you have any updated estimates on what adherence is like our discontinuations? Do they continue to stay low?

[Rich Rubino:]

Yes. One of the things that we did talk to the doctors about is sort of how things are going and the like, you may remember that the discontinuation rates, they're in that clinical trials where according to some kind of high, but obviously that was just a manufactured kind of a thing. What we noticed is that discontinuation rates are much lower than that now. We do still have them by the way. So there's that – I want to make sure you understand that there are some folks were the IOP just doesn't drop as much as they want to, we do have consistent with what we saw in the clinical trials and some folks who get hyperemia that's persistent and especially if it's combined with a low IOP drop, they're just not willing to continue on the medication. So we do get those. But the doctors are basically going to the patients and saying, stick with it. Let's see. Let's make sure that we understand how the drug is performing on you and the like and they appear to be quite happy. That's why we see the kind of numbers that we're putting up and that's why we see the results in the marketplace. Like I said, we've got an awful lot of sales reps that are doing extremely well and it's because the doctors are trying it and appear to be satisfied with it.

[Adnan Butt:]

Vince, just a quick follow-up, is the main cause for discontinuation still hyperemia or is it another side effect?

[Vince Anido:]

No, it's really not just, the hyperemia. I think it's usually a combination of perhaps either the hyperemia or maybe some other adverse events, and the fact that 70% of these patients, Rhopressa just is the drug for them. It just doesn't drop pressure enough or perhaps, they've already added it to something else and we just don't see the incremental pressure drop that we've seen in other cases. And so, there's hardly ever just one single item that doesn't.

[Adnan Butt:]

Okay. Thank you.

[Operator:]

Thank you. Our following question comes from Annabel Samimy with Stifel. Your line is now open.

[Annabel Samimy:]

Hi, thanks for taking my question. So the factor the 1.27 of 90 day supply that you had mentioned, can we expect this to continue to increase, is one 1.27, 1.3 kind of the factor to think of going forward, what is the steady state for a typical glaucoma product in the space. And then if he could explain the difference between the one week sold into the wholesalers and then the three to four weeks of channel demand. I guess I'm little bit confused by the two different numbers. Thanks.

[Vince Anido:]

Sure, sure. I can help you with those, Annabel, hi. On the factor – right now the factor is 1.27. So 1.27 bottles per script, you might recall in our last, in our last discussions that was more like 1.25 or so. So it is creeping up. As we get more coverage and certainly 90 day plans, we would expect that to go up. It's difficult to say at what rate and to what point. I can tell you that when you look at the entire glaucoma market in the U.S. that ratio is over 1.5, I’m not saying we'll get there overnight, but I would expect us to continue to increase. I wouldn't be surprised with the next several quarters. We'd be breaking beyond 1.3 and even certainly beyond that. To clarify the channel discussion, if we have three to four weeks of demand in the channel and if I said that there was just over one week in the wholesaler, a part of the channel. Then by definition the remainder would be in the pharmacy channel, which would include retail pharmacies and mail order pharmacies.

[Annabel Samimy:]

Got it. Okay, so the three to four weeks that's in the pharmacies and the mail order pharmacies, you expect that to be steady state, typical inventory for this product.

[Vince Anido:]

Yes, that's right. So on an ongoing basis, what you would do is you should assume three to four weeks and you would look at our last week of bottles shipped to give you a sense of what the demand – most recent demand is. And if you multiply that times three or four, you'll be pretty close to what's going to be in the channel at any one point in time.

[Annabel Samimy:]

Okay, great. And if I could just switch gears to Rocklatan, assuming approval, what are the mechanics for you to gain reimbursement for Rocklatan? Could it just be added to the current contracts? Is the pricing is generally going to be at par? Do you have to go through some the same kind of stage coverage and then our payors generally on board with rationale starting Rocklatan treatment rather than working through latanoprost first given the continued progression on latanoprost? Thanks.

[Vince Anido:]

Yes. So we do think and I’m sure that the – our managed care guys were actually listening to the call, probably holding the breath, wondering what I'm about to say. But we do think that it's going to be on a case by case basis depending on some of these plans laddered on pretty readily, I mean Rocklatan through existing contracts, other ones, many of them have already started talking to us about it and asked for data, et cetera, et cetera. So there is no doubt that the managed care plans. No, we're coming with this. And so I think you're going to see real mixed bag of folks who some will added immediately, other ones are going to wait a little bit, may not be that big of a rush. So Rhopressa will be available and on their formulary. So they'll try to control it that way if they choose to. The nice thing for us is that again, you typically worry about step edits and the like. Here, since almost every glaucoma patient gets put on prostaglandin, I just don't think that it's going to be that big of a deal for them to come to the conclusion that they may be better off with one drug, one co-pay, et cetera et cetera. And so, it's never easy, and we know and that's why we've tried to, as much as we can take price out of the equation so it's going to be based on the clinical outcomes and we know what those are. But having said that, I think as we think about the revenue projections for next year, I think it's going to be a real mixed bag because some of the plans will added immediately and possibly able to pick between Rhopressa and Rocklatan and other ones may have to wait a little bit until Rocklatan gets approved and into some of the main formularies that they have to deal with. So there's no easy answer for that one. So, I'm hoping it doesn't take near as long as this one. The good news is if we get approval on March 14th as planned or earlier, we won't have any troubles submitting for the Medicare Part D component. So hopefully we'll get a quick uptake on commercial and then it'll be a mixed bag on the Medicare Part D.

[Annabel Samimy:]

Great. Thank you.

[Operator:]

Thank you very much. Our next question comes from Dewey Steadman with Canaccord. Your line is now open.

[Dewey Steadman:]

Hi, thanks for taking the questions. I guess to beat a dead horse here on channel fell but to ask it a different way. I know last quarter you had mentioned there was a 60/40 split with revenue stocking versus demand. Is there a comparable metric that you can share with us for 3Q?

[Vince Anido:]

Yes, sure. Hi Dewey, if you went through the math I outlined earlier, you'd end up with roughly 25% of the revenue for this quarter representing channel and 75% representing pull through. So as we expected, we're seeing, the relative component of channel to pull through reduced over time.

[Dewey Steadman:]

That's great. Thank you. And then how should we approach for Rhopressa use and promotion with Rocklatan launch? Is there a limited bandwidth there from the reps obviously there's only one product in the bag, but can we see a blip in Rhopressa uptake as Rocklatan hits the market?

[Vince Anido:]

We're trying to do and I'm going to let Tom to talk to you through this. But we're going to try to make it as easy as possible for the reps as well as we're trying to do with managed care. We’re trying to make it somewhat neutral and it's answered the reps aren't going to make any more money talking about one versus the other, but let me just have Tom kind of walk you through what we think will happen.

[Tom Mitro:]

Sure, Dewey. We've done a number of ad board’s with ophthalmologist talking about this issue. And really what we're doing is following their lead. They go through different patient profiles in their offices. For instance, somebody that is just starting off with the treatment or somebody that's being added, someone that has a prostaglandin that they're adding another medication to, where somebody that's on two or three or four different medications. And they give us a sense for what their “favorite product” either Rhopressa or Rocklatan would be. So what we really think will happen is that Rocklatan is going to be used anytime that somebody is on a – prostaglandin going to go to a second drug, they will commonly go to Rocklatan first. Not all, but commonly go to Rocklatan first. If there are two or three or four as these physicians, get comfortable with Rocklatan’s performance, they want to try to pull off two of those medications and just try to replace it with Rocklatan, those sorts of things. Rhopressa’s positioning will be for things like for lower IOP is a great place or certainly for people that cannot. Maybe they're non-responders to prostaglandins or will not, they don't want to perhaps get some of the AEs, the adverse events that come with Rocklatan. So overall, we're not going to be leading the physician to say here's where you should be prescribing it, we place it in front of them and then they come up with their own compelling reasons on how they want to run their practices to where they'll use it.

[Dewey Steadman:]

All right, great. And then, Vince as you've been talking with docs in AAO and in Japan and all around the world, what sort of unmet needs are there in ophthalmology and where do ROCK inhibitors really fit in that treatment paradigm?

[Vince Anido:]

Well, I think it depends on what part of the country or what part of the world is you're talking about. I think that the, in all cases they hadn't had any new chemical entities being approved, in a long, long time. And so we think that, that's going to help tremendously, especially on once a day product, like Rhopressa that targets the trabecular meshwork and the like. And so we think that's one common element that we see pretty much across the world. In Japan, they do have actually one Rho-kinase inhibitor already in the marketplace, it's considered to be relatively mild in terms of its efficacy and it is twice a day. But with that, and I've mentioned this before, they actually got a 4% market share after the second year. And so the doctors are looking at ours and looking at our clinical data in the U.S. And again, we have to run the trials in Japan, but assuming consistent results there. They think that we will easily surpass that drug and could end up being one of the most important medications that they have ever seen in Japan. In Europe, what we're seeing there is an unmet need from – their market is mainly in combinations. And so they haven't had anything that wasn't a prostaglandin and timolol or a couple of other drugs, like an alpha-blocker and beta-blocker or alpha-blocker in a carbonic anhydrase inhibitor. Those kinds of combinations and so this will be the first one that has a new class of drug in it and so they're looking at the especially the responder analysis and they're looking at some of those. And if we are able to show the kind of results we expect to see in Mercury 3 that we think Rocklatan could be a pretty big deal in Europe, while Rhopressa in Europe will be playing second fiddle. So again, each of those major areas has a particular unmet need that we think one or the other drug we'll be able to sell.

[Dewey Steadman:]

Great. Thanks.

[Operator:]

Thank you so much. Our following question comes from Serge Belanger from Needham & Company. Your line is now open.

[Serge Belanger:]

Hi, good afternoon. A couple of questions on Rhopressa, first, can you talk about current sampling efforts. And then on formulary coverage, what do you expect to see starting in January? And could this, some of this expanded coverage take place between now and the year-end prior to January?

[Vince Anido:]

Well, I think we will see, I’m going to let Tom talk a little bit more about your first question. But in terms of the managed care coverage, we do see, as Rich said, we do expect that we're going to continue seeing progress there and we should get back up into. It's probably always going to be a plan or two that we don't get that we should be probably high 70s or so once – or high 80s once we get into 2019 for both commercial as well as Part D. Let me have Tom talk a little bit more about what we're doing in the field.

[Tom Mitro:]

Sure. From a sampling standpoint, Serge, it's going interesting way with Rhopressa, first off because we're getting better and better coverages. Rich and Vince both pointed out now there's far more patients that are opened up to be able to use Rhopressa especially getting 40% of the Part D lives covered in. That's really great for us. The good news from the opposite side though is we know that many physicians were giving a number of samples, not just one. But more than one sample probably to some of their glaucoma patients because the patients weren't covered. So they were trying to give them a couple months perhaps worth of treatment. I'm hoping that we will be able to get coverage in that period of time. So there's a push and a pull there in one way, have far more patients that are quite accessible, two Rhopressa, therefore they'll demand more samples. But the good news is we're going to be able to limit far better down to one sample per patient like it should be.

[Serge Belanger:]

Okay. And then, you reiterated 2018 guidance of $20 million to $30 million. I think in the past you've expressed a level of comfortableness with 2019 revenue consensus. Just wanted to check if that comfortableness has changed?

[Vince Anido:]

Well, Rich actually said that he was comfortable. We didn't provide the range. So and we're not going to split out the numbers because in terms of which one, how much is Rhopressa and how much is Rocklatan, I think you'll be able to pick up sort of how things are going based on prescription activity. It's a little too early to tell exactly sort of when or what numbers to talk about because until we know exactly when we get the approval, that'll give us some ideas in terms of when we can expect to start seeing revenues from Rocklatan kicking in so for now your numbers as good as any.

[Serge Belanger:]

In terms of Rocklatan is there still expectations for newly approval there given that Rhopressa was approved ahead of the PDUFA and will your sales force be ready if that really approval materializes?

[Rich Rubino:]

So the answer to the second part of your question is yes, the sales force will be ready, our manufacturing team will be ready as well so we will have product available in case we do get an early launch or get an early approval. It's a little too early for me to talk about whether I think we're going to get an early Christmas present like I did last year. I had quite a few more interactions with the FDA as the company did, prior to us being able to make that call. In terms of getting the early Christmas present, we just thought they ran out of questions and so that's why we were so hopeful that we were right about the early Christmas present. Yes, we have got some questions from them. We think we've been handling those quite well and so but it's – I just don't have a feel yet as to whether that early Christmas presents kind of come.

[Serge Belanger:]

Okay, thank you.

[Operator:]

Thank you. Our next question comes from [indiscernible] with Cowen And Company. Your line is now open.

[Unidentified Analyst:]

Hi. Thanks for taking the question. So, I've got two for you. After the commentary on your commercial team. Not trying to steer doctors towards Rocklatan or Rhopressa does that mean we can infer that you expect basically the same net pricing back to you from each of those products. And second, can you help us quantify maybe the Japanese opportunity and is that a market that a newer American company can penetrate or might you need like an established a Japanese Pharma company. Thank you.

[Vince Anido:]

Sure. So, on your first one. We always talk. I mean this goes back to before we really even knew we had the drugs. We always talked about that we didn't think there'd be much of a difference in price and net price between Rhopressa and Rocklatan. We thought that there may be about a 10%, 15% price delta between the two. And I think that, we're honing in on that somewhere in that range. And so that's why, again it's not new news, it's just consistent with what we've been saying for quite some time that we didn't think there is going to be more than say about $10 price difference or $15 net price difference between Rhopressa and Rocklatan and which we don't think will sway the reimbursement one way or another. We don't think the copays are going to be any different because we're still shooting to have both of those products in tier two. So again, we're trying to make it as easy for the managed care guys to put them on formulary as we possibly can. And again, from an incentive point of view, we're not, we want the doctor to choose because for some patients adding, maybe they don't want to be on a prostaglandin because as we've said before they have light colored eyes, they don't want any to deal with the potential irish color changes and stuff like that. So that's why, again, we just want the doctor to choose as to whether he just wants to add it, Rhopressa to bunch of stuff, or does he want to just switch some – a bunch of patients from multiple different drugs and just put them on one eyedrop that contains two products and gets a great efficacy that he's hoping to get. It is from that perspective that makes sense. From the Japanese perspective, we always talked about maintaining the development rights in Japan. So, that we would find a partner for commercialization. And so we do keep track of some of the things that are going on in the marketplace. And so we just don't see any reason to change our minds at this point. So, we do want to continue the development, we’ll have some data over the next short period of time. In terms of that – it will give us an inkling as to how we do in Japanese patients. And so from the original Phase 2 trial that we had here in the U.S. that included both Japanese and Japanese Americans. And so, we'll be able to use those to talk to the Japanese, to potential Japanese partners, and we do know that the reimbursement in Japan is very much focused on new innovative products at the expense of older products. And so we do know that the companies there are looking to find new products to add to their bags. So that's a great scenario for us. But again, we'll do the development and probably find a partner.

[Unidentified Analyst:]

Great. Thank you very much.

[Operator:]

Thank you so much. Our following question comes from Elemer Piros with Cantor Fitzgerald. Your line is now open.

[Elemer Piros:]

Yes. Good afternoon. I'm sorry, this is going to be a naive question gentleman. But, so what I observed here is that on the medical report D covered lives you are immediately on the preferred tier. But, on the commercial lives, it's roughly 50/50 at the moment. So two questions, how did it work, did you get immediately in the preferred tier for government payers and what does it normally take to move up from the non-preferred tiers to preferred commercial payers?

[Vince Anido:]

So, I’ll answer the second part first and then I'll let Rick talk a little bit more about the first part because it purely a rebate driven game. Some of these commercial guys have been in tier three is just where they start to and then based on utilization they'll move you down to tier two. And then on the Medicare side we chose because there's an awful lot of patients there and a lot of doctors don't like to give products, or write products that are not covered by both sides. So, we try to be a little bit more aggressive on the Medicare side knowing that could be a gating item. And, so we had a couple of big plans and, we fought hard from a rebate point of view to make sure we got into tier two right out of the gate. I’ll just have Rich talk to you through the first part.

[Rich Rubino:]

Yeah. Generally you'll see Med D contracting in a tier two. You don't see any meaningful tier three activity because the copays in tier three for Medicare Part D are just too high. So it's not affordable for the patient. With tier two, of course, you're contracted with the payer, paying the rebates, as Vince mentioned, that ultimately reduces to an affordable level the copays for the patient.

[Elemer Piros:]

I understand. Thank you very much.

[Operator:]

Thank you. Our next question comes from Difei Yang with Mizuho Securities. Your line is now open.

[Difei Yang:]

Hi, good afternoon and thanks for taking my questions. So just a couple on Rocklatan and Rhopressa. For Rocklatan is there any reason to think that on the commercial launch will be faster or slower or maybe about the same as Rhopressa. Then on Rhopressa net pricing, I think you have talked about eventually stabilizing around $100 per prescription. So do you think we will get there in 2019 or is it further out?

[Vince Anido:]

So, we do think that we'll get to the $100, as we get complete coverage. So, that'll be sometime in the early part of 2019. So, as we continue these earnings calls, you'll see that the price continue to trickle down towards that $100 range and then start stabilizing. So, that's not going to be much of a surprise. In terms of the update from on the uptake for Rocklatan we do think that some of the plans, we've put it on a little bit faster than others. And then the nice thing is we already have a salesforce and we'll start training them actually this year and so they should be getting out of the gate. They don't have to learn territories, they don't have to learn anything about us. They've been employees now for a while. So, I think that's going to help tremendously in getting that sourced. There's obviously a lot of interest in the company, by the physicians, there's a lot of interest in Rhopressa. And obviously there's a whole bunch of doctors out there that are actually awaiting Rocklatan and that's going to be their drug of choice as Tom mentioned out of the market research that we've done. And so I think again, it's just too early to tell as to whether it's going to be faster. I think the we may get coverage a little bit faster, we think that it's going to be on an individual case by case basis in terms of the plans that put it on and if we are able and will try everything we possibly can, we’ll land as many big plans as possible. And if we're successful I could then accelerate the growth for both. And so again I think the last time we talked that I thought that 2019 was going to be a year where we were outrageously successful, but we're not really sure yet which, whether it's Rhopressa or Rocklatan, that is going to be driving that success until we get full coverage for both.

[Difei Yang:]

Okay. Thank you for that color. And then turning to the clinical development programs in Japan, do you, would you remind us when we will be expecting readouts on the Phase 2 program and then how many Phase 3 programs you'll need and then following that, when would you be in a position to file for sort of the NDA equivalent over there? And/or are you looking for the partner to run the Phase 3 over there? Thank you.

[Vince Anido:]

Yes. I’ll work backwards, so we do plan on running the Phase 3s in Japan. If a partner does come through and we're happy with getting them involved and we'll do that, but we're fully expecting that well run the Phase 3s in Japan. The Phase 2s that we ran here in the U.S on Japanese, Japanese American patients you may remember we had issues with the requirements that they be pure Japanese. And so that made it difficult to enroll the number of patients that we needed on, fast enough, which is why we're starting an independent Phase 2 trial in Japan obviously on Japanese only patients. It'll take us, we'll start that early next year. We've got everything on the ground, we've got a CRO selected, et cetera, et cetera, et cetera. So it'll take roughly about a year or so to run. So, you'll see that sometime in the early 2020 timeframe in terms of results. Remember all the Phase 2s take anywhere from right around nine months plus to run and get the readouts. Japan because of enrollment that may take a little bit longer, but, again, it's going to be an nine to 12 months timeframe from the date we start. We think our early discussions with the PMDA, which is their FDA indicated assuming success in Phase 2, that we would have to run at least one efficacy trial and one safety trial. And the safety trial would be, as you would expect over a 12 month period. The efficacy trial doesn't have to run out that long. And the trial that they've made, the other Rho kinase inhibitor run, was a additive trial. So they would take prostaglandin patient wash their mouth, but them back on the prostaglandin and get the pressure stabilized, and then they would add the Rho kinase inhibitor on top of that. We think that what we've seen so far would indicate that, again assuming no surprises that they'll make us do the same trial. And so, which we think would be fabulous because, we obviously know what that results should look like because it's going to be again an additive trial. But we think the results will be similar to what we've already seen with Rocklatan. But it's going to take – we're looking at another two, three years in development before we can file.

[Difei Yang:]

Okay. thank you.

[Vince Anido:]

Thanks Ma’am.

[Operator:]

Thank you. Our next question comes from Donald Ellis with JMP Securities. Your line is now open.

[Donald Ellis:]

Thank you for taking the questions. My question is actually for Rich and Vince. You guys have been very active and busy acquiring and licensing early stage assets to build out your R&D pipeline. What's your appetite level for acquiring later stage assets? You know, NDA filed Phase 3 or even marketed drugs and do you have a preference for front versus back of the eye? Thank you.

[Vince Anido:]

So, hey Don, we are very active and so I think I've mentioned to you before, we've got a guy running business development for us, that I call our human Google because he knows every program that anybody is running in ophthalmology, whether it's front or back of the eye. We don't really have a preference. The big thing for us is the focus that we have and so would we buy a late stage asset with NDA ready or marketed drug shirt? But the focus has, again, it can't take, it can't really take away much from Rhopressa and Rocklatan. And so that does put up a pretty good barrier in terms of what we could bring in, which is why if you take a look around development, but we do continue to explore other ways of delivering Rho kinase inhibitors to the front of the eye for glaucoma using our print technology and the like. The other programs are back of the eye because the markets are so much larger and it's going to take us a while to develop those and by the time we get them out the door it be great. So, these drugs that we have Rhopressa and Rocklatan could be so big that, bringing in a product that could own, that we generate just kind of $20 million in revenues just may not be for us. It will be too distracting and we can end-up selling more in one month of Rhopressa and Rocklatan than we would in an entire year of some of these other drugs. So, we do have some things that we continue to look at that could be very exciting. And, it by the way if you've got or if you or your bankers, have any ideas, we'd love to hear them.

[Donald Ellis:]

Okay. Thank you very much.

[Operator:]

Thank you. Our next question comes from Elliot Wilbur with Raymond James. Your line is now open.

[Elliot Wilbur:]

Thank you. Just two clean up questions here. First with respect to the current level of Rhopressa Rx’s based on the data you guys have, which is certainly much better than what I have. Do you have a sense of what percentage of the Rhopressa Rx levels are currently additive to existing baseline latanoprost therapy? And obviously that's the question trying to get a sense of sort of the ongoing durability of Rhopressa revenue streams once Rocklatan is launched?

[Vince Anido:]

I don't get that. I guess it's too early to get that kind of cut and be able to make any projections out of that Elliot. It's just one of those things where in the market research that Tom attends and, perhaps he's got some better data than I do, but I think it's just too early to tell. We still believe that, at parody meaning fully covered by managed care, a year or so into the market for both products, et cetera, et cetera, Rocklatan will still be king relative to Rhopressa. But we still think Rhopressa will be pretty meaningful because not every plan is going to allow folks to jump right into Rocklatan. Not every doctor likes latanoprost. They prefer Lumigan or Travatan or no prostaglandins at all. So, I do think that there's still going to be a pretty significant chunk of patients that I get treated just as adjunctive with Rhopressa and not just immediately jump to Rocklatan. But Tom, do you have any further ideas from your market research?

[Tom Mitro:]

No. The only thing I can tell you, we don't have any data as to how much of it is used in the naive eyes or without a prostaglandin versus that I can’t tell you though, and I think Vince knows this too, that every market research, or every ad boards that we go to, people always say don't forget about people that don't want to be in a prostaglandin. So it's, nothing that we really need to remind them of. It's on their mind all the time as well. So it's very popular phrase for them to be able to use it.

[Elliot Wilbur:]

Okay, fair enough. And then just one final question for Rich. Looking at your SG&A levels, it's been relatively steady the last couple of quarters. As we think about maybe some of the initial, Rhopressa launch costs tapering off, obviously you have more associated with Rocklatan in early 2019. So, maybe any reason to think that there would be sort of a kind of a large incremental one time step-up from, from current levels or is this kind of cruising speed and expense levels should be relatively, increase relatively modest rate going forward.

[Rich Rubino:]

Yes sir. So, I certainly expect in the world of SG&A that will be consistent fourth quarter compared to third quarter. Obviously, we've got the commercial team fully in place and remember as we get into next year, with the Rocklatan launch, it's the same team, but we may have some launch expenses, but just like they were last year earlier this year for Rhopressa, you're talking about a relatively nominal amount, low single-digit millions. So, you're not going to see a huge pop in preparation for the Rocklatan launch.

[Elliot Wilbur:]

Alright. Thank you.

[Vince Anido:]

Thank you. Thank you so much. I'm showing no further questions at this time. I would now like to turn the call back to Vince Anido, Chairman and CEO for any closing remarks.

[Vince Anido:]

Thanks Sydney. I want to thank everybody for taking time out of a busy day today. Especially, hopefully all of you have got a chance to vote. As you can tell from the Company the complexity of our businesses has moved along pretty nicely. We got an awful lot of arms in the fire. And as I got things are going pretty well with Rhopressa, we're looking forward to getting Rocklatan out the door and the pipelines progressing as we've talked. I think the emphasis, as we did on the call, I’ll talk a little bit more about what we were doing it QS is also an important component of the future of the company. So, the good news is that we appear to be firing on all cylinders. And it's one of those we just knock on wood every time we say that because as we all know, things can go bad in hurry and so we're just happy that things are going well for us right now. And hope to keep it going as long as possible. So again, thank you and have a great evening.

[Operator:]

Thank you ladies and gentlemen for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.