BioDelivery Sciences International, Inc.
Q2 2017 Earnings Call Transcript

Published: 10 Aug 2017

[Operator:]

Good day and welcome to the BioDelivery Sciences Second Quarter 2017 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Al Medwar, Senior Vice President of Corporate and Business Development. Please go ahead.

[Albert Medwar:]

Thank you. Good afternoon and welcome to BioDelivery Sciences Second Quarter 2017 Earnings Conference Call. Leading us to the call today are Dr. Mark Sirgo, President and Chief Executive Officer; and Ernie De Paolantonio, Chief Financial Officer. Scott Plesha, Senior Vice President of Sales and Marketing; and Mike Bullock, National Director of Managed Markets, will join us for the question-and-answer session, following prepared remarks for Mark and Ernie. In order to best communicate the data that will be discussed during this call, we will be using slides. Those on the webcast will be able to follow along with the presentation and for those joining by phone, the slides are posted in the Investor Relations section of the BDSI website. That said, I will now read the company's safe harbor statement. Certain statements that BDSI's management made during today's call or in responding to questions and any other public documents of BDSI or statements of its management may contain forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on management's current beliefs and assumptions about the future, but are not statements of fact and therefore, involve and are subject to significant risks and uncertainties. Forward-looking statements may include, without limitation, statements with respect to BDSI's plans, objectives, projections, expectations and intentions and other similar statements about the future. Forward-looking statements are typically identified by words such as projects, may, will, could, would, should, believes, expects, anticipates, estimates, intends, plans, potential or similar expressions. These statements are based upon the current beliefs and expectations of BDSI's management and are subject to significant risks and uncertainties, including those detailed in today's conference call, as well as BDSI's filings with the Securities and Exchange Commission. Please note that actual results, including without limitation, results of the commercial launch of BUNAVAIL and BELBUCA in clinical trials for an FDA review of BDSI's products in development may differ significantly from those set forth in the forward-looking statements. The risks and uncertainties relating to forward-looking statements are also is subject to change based on a very sectors, many of which are beyond BDSI's control. BDSI undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. You are advised to review BDSI's SEC filings for risk factors that could impact BDSI's ability to achieve these goals described in the forward-looking statements. Now with that, I'll turn the call over to Mark Sirgo. Mark?

[Mark Sirgo:]

Thank you, Al. Good afternoon, everyone and thank for joining BDSI's second quarter 2017 financial results conference call. I'm pleased to have the opportunity today to update you on the progress we've achieved on the execution of our commercial plan for BELBUCA. We're off to an excellent start with this product since reacquisition over this year and I will share with you today a number of key metrics that support this, as well as our insight into how we see the product growing over time. In addition, I will also mention the groundwork we're laying to position ourselves for success for BELBUCA outside the U.S. So let me begin though with a brief and high-level review of our second quarter accomplishments. Our revenue for the second quarter of 2017 was $8.7 million versus $5 million for the same period last year, with BELBUCA and BUNAVAIL contributing $7.9 million of the total revenue. In particular, we're pleased with our accomplishments with BELBUCA this quarter, with revenue up 44% to $6.6 million versus $4.6 million in the first quarter of the year and importantly, gross profit up 43% from $3.7 million to $5.3 million quarter-over-quarter. Furthermore, BELBUCA prescriptions continue to move upward. For the second quarter, prescriptions growth is 12%. Keeping in mind, we just assumed control over this asset in January and did not have a full complement of sales representatives in the field until March. I believe these early results speak to the going-forward value of this asset and the strength of the sales team we have assembled. The prescription growth from Q1 to Q2, coupled with an increase in the value per prescription and the continued favorable gross to net, have contributed to the strong increase in revenue. I will further review with you the sales metrics behind this growth momentarily. Also, during the past quarter, we received our first ex-U.S. approval for BELBUCA, with marketing approval from Health Canada, closely followed by the signing of an exclusive agreement in July with Purdue Pharma for the licensing, distribution, marketing and sale of BELBUCA in Canada. Partnering with a company, like Purdue, given their long history and commitment to pain management, as well as their expertise and strong presence in the Canadian pain market, represents another important validation of the significant global market potential that exists for BELBUCA. We expect Purdue to launch BELBUCA in Canada in early 2018. Canada is the world's second-largest per capita consumer of opioids, with over 21 million prescriptions dispensed in 2014 and sales of over $880 million according to public data. The licensing of BELBUCA in Canada is a very important step for BDSI in broadening access to BELBUCA beyond the U.S. We've also made important progress in further strengthening our intellectual property position across our portfolio of products, two important new Orange Book lifted patents were granted, strengthening the patent protection around all 3 of our FDA-approved BEMA products. Our 843 patent was granted, providing additional patent coverage for BELBUCA and BUNAVAIL that extends to July 2027. Additionally, our 288 patent was issued, extending protection of ONSOLIS through 2020 to 2027 which is significant, as Collegium makes plans to launch the product next year. Let me now revert back to BELBUCA performance in more detail and share with you some key sales metrics in the second quarter. First, looking at weekly BELBUCA prescriptions over the quarter, we have seen a solid upward trend. We began the quarter in April, with just over 1,400 prescriptions per week and according to Symphony Health prescription data, we recorded the highest weekly sales level since launch during the weekend of July 21 with 1,750 prescriptions. When you look at the next slide on a monthly basis, you can see the impact of the growth on monthly total prescriptions for BELBUCA. Moreover, May and June prescriptions both exceeded the sales peak reached by Endo with BELBUCA in December of last year. So in the 2 quarters since we reacquired the product and 4 months of active selling, we have managed with our 65 person sales force, not only gaining back the lost prescription volume from January and February this year, but also further growing the product beyond levels previously achieved by Endo. Now we attribute the majority of the growth we've seen this past quarter to increased prescribing of BELBUCA among the healthcare practitioners targeted by our sales force. As a matter of fact, as shown on this slide, the average number of prescriptions from our targeted physicians increased from an average of 6.6 to 7.5 from Q1 to 2Q. So while we're seeing solid growth in prescriptions, our overall sales are also being driven by an increase in the average cost or value per prescription. As health care practitioners are becoming increasingly more comfortable with BELBUCA in its efficacy and safety profile in prescribing BELBUCA to patients with more severe pain, health care practitioners have been prescribing higher dose strength of the product, keeping in mind we have 7 dose strengths, ranging from 75 micrograms up to 900 micrograms. Specifically, over 1/3 of BELBUCA prescriptions in June were for the higher dose strengths, meaning the 450 micrograms dose and above, compared to just over 10% shortly after launch in February of last year. These higher dose strengths have a higher average price. As such, the average price for BELBUCA prescription reached $372 in June compared to $253 in the first full month, following Endo's launch or an increase of 47%. Of this increase, the vast majority is related to the higher doses of BELBUCA, though a 9% price increase was put in place during the first quarter of the year. Now the next slide makes some comparisons between January of 2017 when we first reacquired the product and June of 2017 based on the data from Symphony Health. Specifically, total prescriptions in January were 5,843 versus 7,099 in June, representing an increase of 22%. Collectively, these metrics give us the confidence that our commercial strategy is having a positive impact on sales and key prescription trends. So as shown on the next slide, both the increase in prescription volume and the use of higher dose strengths that I have pointed out are helping to drive BELBUCA revenue, growth and profitability, leading to a doubling of our net revenue 12-month run rate for BELBUCA from $17 million in January, when we reacquired the product, to nearly $34 million in June. Now before moving on to our managed care access for BELBUCA, I want to review some data that provides further insight into the rationale for our current targeting strategy and I would also point out the substantial opportunity that remains within these key targets for growth. Our sales force is currently calling on approximately 6,400 health care practitioners. This represents only about 5% of all opioid prescribers. Yet importantly, these prescribers are responsible for nearly 50% of all the branded, long-acting opioids prescribed. Now with these 6,400 health care practitioners, over 90% have prescribed Butrans which has produced buprenorphine 7 to 8 transdermal patch, while only 40% have yet to prescribe BELBUCA and in total, these health care practitioner's response were an average of 32 Butrans prescriptions per prescriber each in the first half of 2017 versus 12 for BELBUCA. These figures simply point out that there remains tremendous potential for BELBUCA growth among our current targets, who know the value of buprenorphine through Butrans and they remain the focus of our current sales strategy and other commercial efforts. Now let's turn to the progress we're making with managed care access for BELBUCA, followed by our key marketing initiatives driving our commercial strategy. We have very good managed care access with BELBUCA. Specifically, BELBUCA is covered on formularies that represent approximately 85% of the commercial prescription potential of this category, with BELBUCA available without restrictions beyond label, meaning falling use of short-acting opioids in nearly 75%. These are the groups 3, 4 and 5 labeled on this slide. Furthermore, we're pleased to see prescriptions for BELBUCA approved about 80% of the time within commercial plans. And as the year progresses, we continue to work on improving access among the limited number of plans, where BELBUCA is not covered or is covered with restrictions. Now we also continue to monitor prescriptions from the UnitedHealthcare, the largest payer in the U.S. Our agreement with UHC implemented on January 1st of this year put BELBUCA in a preferred position over Butrans. We're approaching 700 prescriptions per month in June, with prescriptions increasing nearly 20% from first to second quarter of this year, as this agreement continues to have meaningful impact on our business which we expect throughout 2017. Looking at further managed care opportunities for the remainder of 2017 and 2018, we're encouraged about the opportunity for BELBUCA with Medicare Part D. Bids for BELBUCA have been submitted and we expect to be seeing the decisions on these contracts the next few months, as formularies are published in the October time frame, with implementations starting in January of next year. Part of the reason for the interest in Medicare is the size of the overall prescription volume in this segment. In June, Medicare represented approximately 39% of all the long-acting opioid market. And as you can see, depicted here, Butrans was the second most commonly dispensed branded long-acting opioid within Medicare and represented nearly 12% or 156,000 claims in the past 12 months. The use of Butrans in this group, we believe, points to the particular benefits of buprenorphine in the elderly patients, with a low rate of constipation and cognitive impairment and concern over respiratory depression are a particular importance in this population. We believe BELBUCA offers distinct advantages in the Medicare population and as such, this segment is a potential important growth driver for BELBUCA as we move into the next year. In addition, our discussions with the Veterans Affairs Administration regarding formulary access for BELBUCA remain ongoing which offers an additional important opportunity for future potential growth. Now before I turn to BUNAVAIL, I'd like to share with you our new sales and marketing campaign for BELBUCA which debuted in late May, following a considerably amount of marketing research around product messaging and positioning. The campaign helps to set the dialogue between the BDSI sales force and our customers and focuses in our BELBUCA message of what we believe to be the most important attributes of the product and the ones most likely to drive product usage, all while addressing the tremendous challenges health care practitioners are facing, as they try to both address the needs of their patients with chronic pain, as well as minimizing the associated risk of misuse, abuse and addiction, as well as the risk of overdose with opioids. With over 2.5 million people in the United States diagnosed with opioid dependence and prescription opioid overdose becoming a leading cause of accidental death in the United States, with 20,000 deaths specifically from prescriptions opioids in 2016, it has become imperative for healthcare practitioners to rethink their approach to management pain with opioids specifically. As such, our campaign is titled, Rethink Relief and focuses on these key challenges these physicians face in their decision to prescribe opioids for chronic pain, particularly rethinking the safety and addiction potential of these products. This is where BELBUCA comes in. Our sales campaign highlights the buprenorphine molecule and its important benefits, including buprenorphine's dose-ceiling effect on respiratory depression which is the typical cause of death in an opioid overdose and of course, our Schedule III designation, meaning it has less abuse and addiction potential compared to Schedule II opioids. We believe our new sales material delivers stronger and more relevant message that will resonate with healthcare practitioners treating chronic pain. Around these key concerns, health care practitioners in our marketing research commented that Rethinking Relief is exactly what they're doing in this era of increased oversight from government entities, payers and the press. In another words, stop and think before you prescribe an opioid and if a long-acting opioid is the right choice for your patient, consider a buprenorphine product as your first choice based on its lower potential for abuse and addiction and respiratory depression, also with a lower potential incidents of other opioid-type side effects such as constipation. The reaction to the campaign so far has been very favorable. The theme of our new campaign also ties in well with the constant and significant attention around opioid addiction and overdose by the media, our new FDA Commissioner, Health and Human Services, the DEA, CDC and most recently, by the Department of Justice. The heightened awareness of the opioid crisis have led to unprecedented action, such as the recently created new national opioid commission, created in March, by an executive order from President Trump and the report from the President's Commission on combating drug addiction and the opioid crisis which has urged the President to declare a national emergency. A statement from the recently appointed FDA Commissioner, Scott Gottlieb, when he stated on July 13th that, "reducing the scope of with the epidemic of opioid addiction is my highest immediate priority as commissioner", continues to highlight the importance of the problem. And most recently, in last week's announcement by the U.S. Attorney General to form the Opioid Fraud and Abuse Detection unit, a new Department of Justice program to combat the opioid crisis by focusing on opioid-related health care fraud. There is a clear movement to address the opioid epidemic and we believe the current dynamics will help to improve the exposure to the benefit to BELBUCA to further separate it from the other opioids. Practically speaking, there are over 100 million Americans suffering from chronic pain. Opioids are effective in treating this pain and there is nothing on the horizon to replace them, but health care practitioners have to make wiser and safer decisions and choices. We believe BELBUCA gives them that option. Frankly, we don't think it's difficult to rationalize that a molecule, like buprenorphine, has been used for over a decade in this country to wean people off of prescription opioids and treating opioid addiction should not be the appropriate molecule to begin with in treating chronic pain with a long-acting opioid. We realize there's still a long way to go in our efforts, but our message is starting to resonate. So as the next slide points to, in addition to new and stronger messaging, we see a number of potential cabinets that will support sustained growth of BELBUCA, going forward, starting with continued execution of our current focused sales strategy. In our continued effort to educate healthcare practitioners on BELBUCA and the benefits of buprenorphine by the end of the second quarter, we completed 60 peer-to-peer speaker programs and are planning for another 100 in the remainder of the year. These speaker programs are one of the most effective ways of educating healthcare providers in the benefits and use of BELBUCA, as they allow peer-to-peer discussion between opinion leaders and relatively small groups of healthcare providers. In addition, we're able to determine the direct impact of these meetings on prescribing of BELBUCA. Separately, we also look forward to the annual PAINWeek Conference in September, the biggest pain conference of the year, where we will have a strong presence which will include exhibiting, poster presentations in a major symposium on BELBUCA. We also believe from our safety messaging platform that the removal of Opana ER from the marketplace represents an opportunity for BELBUCA. Following an announcement last year that requested that Opana ER be removed from the market, Endo announced they will stop shipping Opana ER on August 31st. And with Opana ER currently responds for over 6,000 prescriptions per week, we believe there's an opportunity for BELBUCA to benefit from the migration of some of these patients to other products to treat their chronic pain over the remainder of 2017. Another [indiscernible] the launch of BELBUCA in Canada in early 2018, as we continue to pursue additional partner opportunities ex-U.S. And finally, as I discussed previously, we continue to believe there is a potentially significant opportunity for BELBUCA in the Medicare Part D population and within the VA system, both of which we continue to pursue. So with that, let's turn to BUNAVAIL. Let me begin by reviewing our second quarter sales, followed by our commercial strategy for this product. As the graph show and depicts, we saw a 60% decline in overall BUNAVAIL prescriptions in the second quarter. By design, we significantly reduced our commercial effort here in the first half of 2017, as we focused on the majority of our efforts and attention of the sales force on the relaunch of BELBUCA. Subsequently, the BUNAVAIL sales results are a direct reflection of that decision. As shown on the next slide, current BUNAVAIL activity is limited to approximately 1,700 physicians, who are active prescribers of BUNAVAIL versus the 8,000 previously targeted. Our goal, going forward, is to keep our business stabilized around the current levels, with the upside of modest growth through this focused sales activity, along with participation in key national, regional and local conferences and meetings. Our real ability to enhance BUNAVAIL sales continues to be through managed care contracting opportunities that will provide us with better formulary access at minimal added cost. When these contract opportunities open the door for renewed growth, we will pursue them more vigorously. We recognize the size and growth opportunity in this market, particularly with the increase in access to care with the cap lift and the opening of prescribing to physician assistants and nurse practitioners and believe there remains a very real opportunity for growth, but we also acknowledge some of the significant challenge that remain within the category currently that could be overcome mainly through managed care efforts. We will continue to explore additional opportunities such as nonpersonal promotion or other alternatives that help to maintain or grow our business are allowing us to primarily focus on BELBUCA. As we described previously, the revenue generated from each BELBUCA prescription is nearly 3.5 fold that of BUNAVAIL and our efforts have demonstrated greater promotional sensitivity in the pain space versus the addiction space. So I'm hopeful that our decision around BUNAVAIL and going-forward strategy is clear, as we put the majority of our effort behind BELBUCA, given the significant and sustainable opportunity it provides for BDSI to become a profitable company. Now turning to our research and development efforts. Besides working on BELBUCA and BUNAVAIL for its marketing and approval commitments, we've also finalized our formulation and manufactured clinical trial supplies to support our initial clinical Phase I study, a sustained-release buprenorphine injection which is designed to evaluate single ascending doses of the product in opioid-dependent subjects and assess its safety and tolerability, while confirming the 30-day profile. So we're now in position to initiate this trial. And finally, upon -- as mentioned earlier, there have been some meaningful developments and constituents around the addition of some important patents over the last couple of months. We announced that 2 new Orange book listed patents were granted, strengthening patent protection around all 3 of our FDA-approved BEMA products, BELBUCA, BUNAVAIL and ONSOLIS. Our 843 patent was screened at providing a broader scope of coverage around BELBUCA and BUNAVAIL through July 2027. In addition, our 288 patent was issued, extending protection from ONSOLIS from 2020 to 2027 which is associated with a $3 million milestone payment to BDSI from our partner, Collegium which is due upon FDA approval of our supplemental application, supporting the new ONSOLIS manufacturer that we anticipate in the first half of 2019. So overall, we've made excellent progress in further strengthening our intellectual property position across our entire product portfolio. Now we'll use the next 2 slides to summarize our top line financials for this quarter before turning things over to Ernie. As you see here, total BELBUCA and BUNAVAIL sales revenue for the quarter were $7.9 million versus $6.1 million in Q1, an increase of 30% when you remove the impact of the change in accounting in Q1 and only account for product sales that took place in the quarter. Our BUNAVAIL revenue was slightly lower in the second quarter of this year. The 44% increase in revenue for BELBUCA from $4.6 to $6.6 million more than overcame the BUNAVAIL decline and our gross profit for BELBUCA rose by 43% from $3.7 million and $5.3 million. Finally, as we progress through the year and in early next year, we will remain focused on continued organic growth of BELBUCA prescriptions, as the pursuit of additional ex-U.S. partnership opportunities remain. We also look forward to partnership milestones and royalties for the launch of BELBUCA in Canada in early 2018 and the expected return of ONSOLIS to the U.S. market from our partner, Collegium Pharmaceutical. As you can see, the time since our last call has been extremely busy and productive for BDSI. We're pleased with our current operating and financial positions and look forward to a strong second half of the year. So with that, I'll turn things over to Ernie to cover the financials in detail and then we'll return for Q&A. Ernie?

[Ernest Robert De Paolantonio:]

Thank you, Mark and good afternoon, everyone. Before I review our financials for the second quarter, I want to remind everyone that for a more thorough review, to see our 10-Q which will be filed this evening. Let me start my review of the financials by reminding everyone of a few things relating to the reacquisition of BELBUCA and the termination of the Endo licensing agreement that will impact our financials going forward. The first is the $45 million intangible, created as a result of the favorable impact of the BELBUCA valuation to BDSI, as BELBUCA was valued at more than the purchase price paid. The amortization of the intangible is a noncash charge that will be amortized in G&A at $4.5 million per year over the next 10 years. And second, the $3.2 million of fair value assigned to the inventory purchase from Endo as part of the transaction which is another noncash charge that will be amortized in cost of sales, as the purchase inventory is sold. Now to review the second quarter financials. Please reference this slide, labeled BDSI Q2 P&L. The far left-hand column on adjusted P&L represents the P&L prior to any BELBUCA purchase adjustments just mentioned. In the second quarter, BELBUCA net revenue increased 44% from $4.6 to $6.6 million and continue to have a positive impact on our overall net revenue, while yielding a gross profit of 80%. Total net revenue of $8.7 million, including other revenue of $1.3 million for BUNAVAIL; $0.9 million of royalty and R&D reimbursement revenue versus 2016 second quarter net revenue of $5 million that mainly consisted of $2.1 million of BUNAVAIL revenue and $2.5 million of the upfront payment for U.S. rights to ONSOLIS with Collegium. Sales and marketing expenses for the second quarter were $7.1 million due to a one-time investment in BELBUCA marketing, including advertising and promotion for the creation of new sales materials Mark referred to and paying weekend events to educate physicians on BELBUCA. These expenses were included in the 2017 budget, but pulled forward into the second quarter to continue the momentum of BELBUCA education and awareness. As such, we anticipate third quarter expenses returning to first quarter levels of approximately $5 million. General and administrative expenses were $7.7 million and reflected higher patent litigation expenses, as well as professional fees associated with the reacquisition of BELBUCA. R&D expenses were $1.6 million. Overall, total adjusted operating expenses for the second quarter were $16.4 million, $0.1 million less than 2016 second quarter and yielded a net loss of $12.6 million or $0.23 a share. The next column to the right under the adjustment heading, Deferred Income, represents the recognition in the first quarter of the termination of the licensing agreement around BELBUCA with Endo and the recognition of $20 million from deferred revenue on our balance sheet to contract revenue on our P&L. The next column to the right shows the impact of the Endo transaction explained earlier, with the fair value based off the inventory on the cost of sales line at $1.135 million and the amortization in G&A of the intangible of $1.125 million per quarter. The total impact of these 2 noncash adjustments is $0.04 a share. There is another $1.1 million of fair value from purchase inventory that we anticipate will be sold by the end of 2017. The far right-hand column represents the adjusted P&L, with the total impact summation of the BELBUCA purchase for a loss per share of $0.27 this quarter. Moving to the next slide. Q2 GAAP versus non-GAAP 2017 versus 2016, we see that the non-GAAP earnings excludes the noncash items of $1.135 million of fair value in cost of sales, $1.125 million of intangible amortization in G&A and $2.9 million of stock comp for a total loss of $9.7 million or $0.18 per share compared to 2016 non-GAAP earnings with $3.3 million in noncash stock comp or a loss of $0.24 a share. On the next slide, you will see the BDSI year-to-date 2017 financials. I will focus on the far right-hand column labeled Adjusted P&L. First, I want to remind everyone that beginning January 1, all revenue for both BELBUCA and BUNAVAIL is based on the sell-in method which records revenue when we sell product from our distribution center to our wholesalers, versus the sell-through method which we had been using through 2016. Year-to-date net revenue for 2017 totaled $38.2 million, including $15.7 million of product revenue, $11.1 million for BELBUCA, $4.6 million for BUNAVAIL, of which $1.7 million was recognized in January as a result of moving to the sell-in method. $2.3 million of royalty revenue for BELBUCA and BREAKYL and $20 million of deferred revenue that was recognized as part of the Endo reacquisition -- as part of the Endo BELBUCA reacquisition. That revenue compares to $8 million for 6 months of 2016, mainly $4.2 million of BUNAVAIL revenue and $2.5 million of the upfront payment for U.S. marketing rights for ONSOLIS with Collegium. Total year-to-date operating expenses were $33.5 million and were $1.5 million less year-over-year versus 2016 operating expenses, due primarily to the reduction in R&D slightly offset by the amortization of the BELBUCA intangibles. Year-to-date sales and marketing expenses were $11.9 million, $1.1 million less than 2016 year-to-date expenses; while year-to-date general and administrative expenses were $17.4 million, $15.1 million excluding the amortization expenses of $2.3 million, but $1.6 million higher than 2016, reflecting the increase in patent litigation expenses and the onetime cost for professional fees associated with the reacquisition of BELBUCA. R&D expenses for the period were $4.3 million or $5.1 million less than prior year's 6-month expenses which mostly supported the Clonidine program. 2017 net earnings year-to-date are $33.4 million or $0.61 per basic share and $0.60 per diluted share compared to a loss of $35.2 million or $0.66 per diluted share in 2016. Moving to the GAAP versus non-GAAP slide of 2017 versus 2016, we see that non-GAAP earnings year-to-date excludes the noncash items of $2 million of fair value in cost of sales, intangible amortization of $2.25 million and $6 million, not $2.9 million listed there, of stock comp for a net income of $46.6 million or EPS of $0.83 per share. That is compared to 2016 non-GAAP loss less $7.5 million of noncash stock comp for a loss of $0.52 per share. Our cash balance of $27.5 million represents a $7.7 million net cash reduction to our first quarter balance. With the continued profitability of BELBUCA, we continue to forecast a cash runway to the third quarter of 2018 based on our current operating plan and objectives. Now let me turn it back over to Mark for the Q&A session.

[Mark Sirgo:]

Thank you, Ernie.

[Operator:]

[Operator Instructions]. We'll take our first question from Matt Kaplan with Ladenburg.

[Matthew Kaplan:]

Nice results. Just first off, I guess, talking about some of the things that you see which can be the most meaningful to grow BELBUCA. Can you touch on when -- I guess, will you gain access to Medicare starting January '18? Is that -- what are the -- what's your visibility to that?

[Mark Sirgo:]

Well, it'll start on January 1, but we don't have any visibility yet on what plans will actually be on formulary. But as I mentioned in my formal remarks, this is Mark, Matt, we'll know in the October time frame which contracts will have been accepted and which would not.

[Matthew Kaplan:]

Okay. And in terms of would it reflect the commercial percentage of makeup milieu that you have right now? Or would it be totally different in terms of the contracts?

[Mark Sirgo:]

Yes, it -- there is no way to predict whether it'll match against the commercial coverage we've got currently or not.

[Matthew Kaplan:]

Great, okay. And just in terms of the Canadian market opportunity for BELBUCA and the potential impact for BDSI, can you walk us through that?

[Mark Sirgo:]

Al, you want to take this question?

[Albert Medwar:]

Sure. Matt, so you're referring, of course, to the deal with Purdue Pharma. So the Canadian market's the second largest market for opioid products for the treatment of chronic pain. It's -- I can't, at this point, give you an estimate as our partner's just kind of getting engaged with things at the moment. But I believe Butrans sales are somewhere in the range of $12 million to $15 million in Canada. So the market size is considerably smaller than the U.S., but still it is an important market. But right now, I think the best kind of gauge for that is to look at Butrans sales. And we should be in a position to do that or do or better in Canada -- than that in Canada.

[Matthew Kaplan:]

Okay, that's helpful. And then, in terms of, I guess, maybe a question for Ernie. When you back out the cost of goods associated -- the charges associated with inventory acquisition with the BELBUCA coming back to you, you come out with roughly 35% cost of goods for the quarter. How should we think about that going forward?

[Ernest Robert De Paolantonio:]

Well, the cost of goods for BELBUCA, in particular, should improve as we get into our high-speed packaging line. So for pure cost of goods, that number should go down, Matt and our gross profit will improve for BELBUCA.

[Matthew Kaplan:]

Okay. And BUNAVAIL should stay about the same?

[Ernest Robert De Paolantonio:]

Well, yes. BUNAVAIL cost of goods for the period did go down as well for the fifth quarter in a row.

[Operator:]

We'll take our next question from Timothy Lugo with William Blair.

[Timothy Lugo:]

Just to follow up on that question of gross margins for BELBUCA, will there be -- will the improvement be through the new line? Or will it also be -- should we also expect increased dose strength kind of mix?

[Ernest Robert De Paolantonio:]

Yes, I mean -- yes, absolutely, Tim. The increased dose strength is more profitable and the new line will bring down the cost as well with more favorable yields.

[Timothy Lugo:]

Okay, great. And with Opana still holding about 6,000 weekly scripts, are we already seeing that impact on BELBUCA? Or should we expect further ramp when that product is, I think, officially pulled sometime in September?

[Mark Sirgo:]

Yes. I think it's a little early, yet, Matt. I mean, they're not stopping shipping until August 31 being 3, 4 weeks away yet. But -- and we were starting to get anecdotal reports from offices that indicate they're switching patients certainly off of it. And we're hearing from the same offices that we're getting some of those patients. So there doesn't seem to be yet a consistent profile what that patient looks like. But I think we're in the early phases of seeing people being transitioned. So we don't really have a good way to yet project what that ultimately might look like for BELBUCA. I don't know, Scott, if you had anything you wanted to add.

[Scott Plesha:]

No, I would just echo -- this is Scott Plesha, the Vice President of Sales and Marketing. I would echo what Mark shared. We're aware of offices, particularly offices that are already BELBUCA supporters, that are more comfortable switching patients from Opana ER over to BELBUCA. If you think about it, an office that maybe hasn't prescribed BELBUCA yet would maybe be less likely to do so and that's bearing out. Now, from there, it -- there's obviously a PA process that may require step-through and maybe Opana is that product. So there are a lot of variables going into it, but we're aware of offices that are being successful switching patients and actually seeing really good results, so -- but we're encouraged.

[Timothy Lugo:]

Okay, understood. And maybe a question for Ernie again. Can you just go over the idea behind the changes to rev rec?

[Ernest Robert De Paolantonio:]

Sure. Before you have history of returns, you have to recognize revenue when there's no further possibility that the product will be returned to you. And we did that using third-party information or data in the field on scripts. So what happens is a product is sold, it gets deferred on our balance sheet until we get the scripts and then it's pulled through. When you finally have enough history of returns, you are then allowed to book revenue on shipments from your distribution center which is what we're doing now.

[Timothy Lugo:]

So that will be in Q3? That will...

[Ernest Robert De Paolantonio:]

No, that occurred in January, Tim. That was the $1.7 million of BUNAVAIL that was recognized immediately from the balance sheet in January.

[Operator:]

We'll take our next question from David Amsellem with Piper Jaffray.

[Sameer Kandola:]

This is Sameer Kandola on for David. Just a few quick ones here. So given your heightened focus on growing BELBUCA, do you still see BUNAVAIL as a core asset? Essentially, would you consider divesting it or partnering U.S. rights? And then I can add my follow-up after that.

[Mark Sirgo:]

Yes. It is something, I think, that provides us with some optionality at this point in time, as we mentioned in the formal comments. We've had to make the decision to provide less emphasis to it as we reacquired BELBUCA and, I think, for the right decisions which I won't go back over. But having said that, we want to maximize the value of that asset. And if it's in our hands, that's fantastic. If it's in somebody else's hands, that could be good as well or if it's copromoted. So we certainly are open-minded and certainly considering other options for BUNAVAIL at this point in time. But as I said in my formal remarks, our goal is to stabilize it which we think we have and then be able to grow it through better managed care positioning. So we'll continue to do that as we consider other options.

[Sameer Kandola:]

All right. Got it. And then what is the extent to which patients are subject to restrictive prior authorizations in order to get access to BELBUCA? And could you also just help us think about gross net trajectories for BELBUCA in 2018 versus 2017?

[Mark Sirgo:]

Sure. Mike, if you can take that. Mike Bullock, Head of Managed Markets, if you can take that question, the first part, at least?

[Michael Bullock:]

Yes. So I don't know if I can give you -- this is Mike Bullock and I don't know if I can give you an exact percentage as far as what percentage of patients actually have hurdles. What we do see in general is, in this part of the learning process for payers around the value of buprenorphine and BELBUCA, is we do see payers that require patients to step through, as you would expect, short-acting NSAIDs or opioids and then through a C2 before getting to BELBUCA. So that's the part that we're working on to help payers understand how to better position BELBUCA in the environment that we're in as far as the opioid epidemic goes. But it's not uncommon, I would tell you, to see those types of criteria with payers. But from a percentage-wise, I can't give you a percentage. But the good news is that we do have pretty good access, as it stands today. Most physicians are very successful working through those prior auths [ph]. And the patient history is fairly common that they have already tried one or more long-acting C2s before they get to BELBUCA. So hope that gives you some color to what we're seeing in the field.

[Mark Sirgo:]

Yes and Mike, I would add that the great thing is we have some great clinical data that supports our product being used after patients fail on hydrocodone, oxycodone and morphine. And then tramadol obviously is not a C2, but we do have some really nice data within our FDA package that we're able to leverage to promote. And then on gross to net, Ernie, you want to take that?

[Ernest Robert De Paolantonio:]

Yes. On the gross to net, we may see some shifts. Right now we have a little bit higher returns rate based on the initial assessment of it. That'll come down. And then, as we get into Medicare and some of the managed care contracts, that piece will go up. But overall, we expect the gross to net to remain at the same level as -- that it is right now.

[Operator:]

We'll take our next question from Scott Henry with Roth Capital.

[Scott Henry:]

I've been juggling a couple calls, so hopefully my questions are not repetitive. For starters, the $6.6 million in BELBUCA, obviously a very good number. Any stocking in that number? As demand goes up, any kind of added push to that?

[Ernest Robert De Paolantonio:]

Well, that does represent the sales side of the 3PL, Scott. However, in looking at what's going out through the P&L versus what's getting pulled in, I don't see anything that is over possibly a couple of weeks of stock that's out in the field which is pretty normal.

[Scott Henry:]

Okay. And then, given the backdrop of the more severe opioid products we have right now, I'm wondering if -- do you think there will be increasing pressure on payers to cover lighter opioids or alternatives to some of your more addictive opioids? And should that really give a tailwind to BELBUCA?

[Mark Sirgo:]

Scott, this is Mark. I'll start with an answer and I think the answer is absolutely, but it's going to come through education, as we've already pointed out. When you have managed care plans and as you're stepping through to Category 2 opioids to get to our product, that makes little to no sense. So we're beginning that process, as Mike Bullock mentioned, with the payers. We've got to do the same thing with certain other institutions, certain other states and Medicaid and so on. So we've got work to do. But we've got, I think, the right campaign and place in which to do. We've got the right people around it. And there is obviously so much pressure around this situation with this opioid crisis that once it -- once we start to gain that momentum which I think we're in the very early phases, I think it will really take hold. So I mean that's why we're so excited about this opportunity, because we think it fits perfectly with the situation that we're faced with. And so we remain optimistic about it, as we should be. Scott, I don't know if you wanted to add anything to that.

[Scott Plesha:]

Yes, Scott, this is Scott Plesha again. So I like what Mark said. I've spent a lot of time in the field and I will tell you that physicians believe that the payers are a little bit of a problem right now. Having people fail fentanyl before they get to buprenorphine just really doesn't make a lot of sense in today's environment. And I think a lot of that's going to be changing over time. I just -- and I think, if you look at the market though and you see a declining market in the long-actings and see that our molecule's growing and our product specifically growing in the space which with even a much smaller sales force to what -- with what the other long-acting opioids have, it says something about the molecule and the acceptance out there right now and the pressures. And I think doctors are more and more trying to do the right thing and, I mean, in some ways are being forced by some of the regulations and whatnot. But once the payer side starts falling into place, I think that'll allow us even a greater momentum going forward.

[Mark Sirgo:]

I think the good news, Scott, is that we're not seeing any of that benefit right now. This is just blocking and tackling in the field with the differentiated product in offices that are already familiar with buprenorphine. So the opportunity outside of those that don't prescribe buprenorphine and don't know much about it is -- there's so much headroom. And as we already talked about, whether it's FDA, DEA, HHS, CDC, Department of Justice, they're all over this. And once they understand that this product's available, I think the tide really shifts.

[Scott Henry:]

Okay, great. And the BUNAVAIL number of $1.3 million, is that a representative run rate going forward? I mean, is that -- it looked a little light, but trying to get a sense if that's a good number going forward.

[Ernest Robert De Paolantonio:]

Yes, I -- Scott, I think it is a little bit light. I think you'll see it pick up a little bit, but it'll be in the same general area.

[Scott Henry:]

Okay. And then final question, I guess, one of the key steps for any emerging sales organization, in my opinion, is having gross profit being greater than your selling expenses. It looks like you may be there if you strip out kind of the bolus you had in 2Q. I think there was about $2 million in added marketing expenses. I guess, the question is, do you think you're there already? Or you would certainly expect to be there in third quarter?

[Ernest Robert De Paolantonio:]

Yes, Scott, it's Ernie. I'll take that. If we had stripped out the additional expenses this quarter, we would have been there. To your -- and to your point, we expect to be there by the end of the year -- or through the end of the year as the expenses now go back to budget levels. For the marketing expenses, we do not anticipate it being over budget. It was just the timing.

[Operator:]

We'll take our last question from Ken Trbovich with Janney Montgomery Scott.

[Kenneth Trbovich:]

I was wondering if you guys could maybe go back and revisit the issue on the Medicare coverage and give us a clear understanding of sort of where you sit now, where you hope to be, if you secure some wins in the fall and then what that might look like with some of those midyear changes next year. Or is that even a possibility if midyear changes next year, so that we end the year at a different number maybe than when we began?

[Mark Sirgo:]

Yes. So Ken, I've got Mike on the call, that's why I wasn't sure initially, but he's available. So Mike, why don't you start in responding to Ken's question?

[Michael Bullock:]

Yes. So again, this is Mike Bullock. Part of the issue that we run into is just the timing of when we can bid these things. So if you're familiar with this bid cycle for Medicare, they're a year in advance. So part of the challenge that we had when we reacquired the product is that due to the win and their launch of the product, they missed the bid for 2017. It was no fault of theirs, it's just due to the timing of the launch. So the advantage we have this year heading into 2018 is we bid all those contracts and as Mark had mentioned, we'll be getting responses to those offers between now and October. And certainly, our position will improve. We can't predict which ones just yet, but -- so our position will, as of January 1, 2018, begin to improve the access that we have in Medicare. So it's -- that's our expectation that it will get better. To what extent, we'll see over the next couple of months, but as far as the timing of that, we're looking forward to January 1, 2018.

[Kenneth Trbovich:]

Got it. And then just to be clear, am I misunderstanding, then, to suggest that you're at 0 now? What would that goal be? Is 40% sort of the goal or 60%? Where do you see the goal? And it doesn't have to be an '18 goal. Just where do you think it's a proper level for coverage to be appropriately covered on the Medicare plan?

[Mark Sirgo:]

Mike, let me start. So Ken, first of all, we actually are getting prescriptions approved and filled currently through Medicare and -- up to, I think, there's the 70% level, even though we're not on formulary. So that's a very, very good sign. And I think it points to what I said in my formal remarks about the attractiveness of buprenorphine in this older population. I mean, Mike, you can address the number of plans that we've approached and we can't predict how many of those we'll actually get true coverage with. But having said that, even though we don't have coverage with any of them now, we're still getting prescriptions approved. So I don't know if you can provide any more color, Mike or not on...

[Michael Bullock:]

Yes. Yes, so a little bit color on that is when you look at the Medicare opportunity and then the number of scripts that funnel through that channel, there are over 400 different types of Part D providers that are out there. The vast majority of prescriptions go through about 7 payers. Big ones that you know the names of, United Healthcare; SilverScript which is CVS/caremark; and a few others that make up those 7. So we certainly bid for every one of those plans and more. So what -- how many of those we get is to be determined, but to Mark's point, our access right now is very good. The last data point that we had which was June, we had over 73% approval rate and over 1,400 scripts go through Medicare year-to-date. So this -- our access will only improve as we get into the next year.

[Scott Plesha:]

Yes, Ken, I would add, this is Scott, we did grow 500 prescriptions from Q1 to Q2 within Medicare without having any plans on -- without being on formulary. So we're growing there. I think that can be accelerated with some wins, though. Obviously, it just lowers the bar for the PA process, usually.

[Kenneth Trbovich:]

Sure. And does any of the success that you had last year with BUNAVAIL carry over to these efforts that you now have with BELBUCA?

[Michael Bullock:]

Yes, I'll take that one and I will say not necessarily, no. What it does do is give us an opportunity to go in and talk about BELBUCA. But they are separate products bid separately, of course, different categories, different disease states that they treat. So they're treated separately by the payers.

[Kenneth Trbovich:]

Okay. And then just last question on the sort of managed care coverage. Can you give us an update with regard to VA or what the status is there?

[Mark Sirgo:]

Yes, so...

[Michael Bullock:]

Yes. The one thing I can tell you is that it's -- go ahead, Mark.

[Mark Sirgo:]

No, go ahead, sorry.

[Michael Bullock:]

No, I was just going to say that it's ongoing. So we've had a lot of discussions with the VA and we're still in conversations with them. When they'll have an answer is, we expect, sometime between now and the end of the year.

[Kenneth Trbovich:]

Okay. And then last question, just on ONSOLIS -- sorry, Mark. Go ahead.

[Mark Sirgo:]

Well, I was just going to -- I want to reiterate something I said in my formal remarks that the other reason we're encouraged about Medicare, given we can get proper coverage there, is that BELBUCA -- or Butrans had done so well, continues to do well, that it got 12% at overall long-acting opioid market. They had 156,000 claims basically in the last 12 months. So it's clear that it's recognized as a good product for that patient population, as it should.

[Kenneth Trbovich:]

Got it. And then just my just last question on ONSOLIS. I was on the Collegium call earlier and they mentioned sort of planning for midyear launch. Can you help us understand sort of two things? What's the critical path here for the filing of the supplement? And then, from Ernie's perspective, should we be dropping that approval milestone in the second quarter or the third?

[Mark Sirgo:]

Yes. So this is Mark, Ken. So we're in the process right now of manufacturing the stability batches -- commercial stability batches for the product. And once we've got the right timing on those batches, then we submit that data to the agency. So that's why there's an expectation that we'll see an approval in the first half of next year. And Ernie, you want to comment on...

[Ernest Robert De Paolantonio:]

Yes, we have it second quarter. Ken, in the second quarter. So the first half of next year.

[Operator:]

It appears we have no further questions. This does conclude today's conference call. We thank you all for your participation and you may now disconnect.