BioDelivery Sciences International, Inc.
Q1 2016 Earnings Call Transcript

Published: 10 May 2016

[Operator:]

Good day, everyone, and welcome to today’s BioDelivery Sciences first quarter 2016 earnings call. Just a reminder that this call is being recorded. And at this time, it’s my pleasure to turn the conference over to Al Medwar. Please go ahead, sir.

[Albert Medwar:]

Good morning. This is Al Medwar, Vice President, Corporate and Business Development for BioDelivery Sciences, and welcome to the BioDelivery Sciences first quarter 2016 earnings conference call. Leading us through the call today are 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 from Mark and Ernie. I’ll now read the company’s Safe Harbor statement. Certain statements of BDSI’s management made during today's call or in responding to question 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, projects, expectations, and intentions and other similar statements about the future. Forward-looking statements are typically identified by words such as project, may, will, would, could, 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 risk 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 and the clinical trials for and FDA review of BDSI’s products in development, may differ significantly from those set forth in the forward-looking statement. The risks and uncertainties relating to forward-looking statements are also subject to change based on various factors, 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’re 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 statement. And with that, I’ll turn the call over to Mark Sirgo. Mark?

[Mark Sirgo:]

Thank you, Al. And good morning, everyone, and thank you for joining BDSI’s first quarter 2016 financial result conference call. Overall, while we faced challenges in the first quarter, including prescription growth for BUNAVAIL, we continued to make progress in a number of key areas. We believe we remain well positioned to drive long-term value for our shareholders. The decisive actions we’re announcing today reflect our commitment to delivering on this important objective. Today, I will share with you how we are proactively addressing the challenges with BUNAVAIL in the near term without sacrificing its longer-term value. In addition, I’ll provide an update on the early results of Endo’s launch of BELBUCA as well as our own pipeline activity and progress. I will finish with a brief overview of our financial outlook for the remainder of 2016 and 2017 before turning things over to Ernie to go over the details on our financials for the quarter. At that point, we’ll take questions. So let me start with BUNAVAIL. We have spent a considerable amount of time evaluating BUNAVAIL to ensure we have the right strategy in place. We continue to believe that BUNAVAIL’s position to create value in the long-term is based on its differentiated profile with significant advances made since its launch 15 month ago and the evolution of this marketplace. Despite these positive factors, we recognize that BUNAVAIL has not yielded results at the level we anticipated to this point. We believe it has little to do with the attributes of BUNAVAIL, but more with the resistance many doctors and patients have to switching from Suboxone regardless of the reasoning behind it. Importantly, we’re focused on controlling what we can control and believe that the market will ultimately evolve in our favor. As I mentioned on our year-end earnings call, we have and will continue to work to align our expenses with revenue. This will position us to more prudently deploy our resources, while allowing the longer-term initiatives that will fuel growth to take hold. To that end, today, we are announcing the following steps that we have initiated to reduce BUNAVAIL’s spending. First, we’re strategically consolidating the sales force and simplifying the structure to more effectively address opportunities in our most productive areas in the country. As such, we’re reducing the number of sales territories. And as part of this careful analysis, we selected these remaining territories based on the fact that they are generating approximately 95% of our current BUNAVAIL prescription and will cover approximately 85% of the buprenorphine/naloxone market. More specifically, these territories cover areas of the country where BUNAVAIL has gained traction among our prescribers and solid managed care access and has promising future potential. This will deploy resources more efficiently by expanding the use of BUNAVAIL among physicians who have adopted the product into their practices. These territories also represent the areas covered by strong sales performance and leadership. Representatives covering these top territories will not only protect and grow our existing, but also add additional prescribers over time that will ensure we remain competitive. Importantly, further growth in these territories will be stimulated by our focus on three important initiatives that I will discuss shortly. Conversely, we will no longer deploy resources where there has been little or no return. In connection with the reduction of these territories, we will immediately begin the transition of our top performing sales representatives to BDSI employees and end our contract sales agreement with Quintiles. This will further reduce administrative cost and removes certain inefficiencies at this stage of the launch and help us retain the top performers in our sales force. Back to the cost savings, we believe that bringing the sales representatives into our organization provides a greater sense of belonging and responsibility, which in turn will drive improved productivity. Additionally, it also gives us greater flexibility to accommodate future strategic options and better control overhead costs. Based on this change alone, BDSI will save more than $2 million in 2016 and $6.3 million in 2017. We will also be further reducing our marketing spend in 2016 and 2017, which we actually began last quarter. All told, with these changes, we will reduce our commercial spending by approximately $20 million by the end of 2017. We expect that these changes will allow us to retain profitability within the commercial organization by the end of 2017. These measures will also extend our cash runway into the third quarter of 2017. These decisions were not made lightly. They follow careful consideration for their impact on our company and how we can best drive value and remain competitive with BUNAVAIL. We believe these changes, which reduce costs while minimizing any impact on long-term growth, are in the best interest of our business and for driving long-term shareholder value. To reiterate, we continue to remain optimistic about BUNAVAIL’s favorable long-term prospects. The benefits of the drug are beginning to more widely be appreciated by both commercial and Medicaid payers as this category evolves. We also believe the initiatives we have in place, along with outside interests from law enforcement and DEA to decrease diversion, misuse and abuse, will preserve the value of BUNAVAIL and help drive improved market share. Now, let me turn to the key metrics for the first quarter regarding BUNAVAIL where we made progress in a number of areas. In the first quarter, we realized noteworthy improvements in both our gross to net and cost of goods. Our revenue per BUNAVAIL prescription increased by more than 20% from less than $60 to over $72 per prescription. This drove a 41% increase in BUNAVAIL net revenue in the first quarter versus the fourth quarter of last year. Our improvement in gross to net was driven primarily by the conclusion of the 14-day free program that ended February 1. The reduction in our cost of goods was due to an improvement in yields per batch. I'm pleased with the quarterly improvement in BUNAVAIL’s financials which we believe will continue. An example of such is our recent clearance by FDA to begin packaging BUNAVAIL on our high-speed packaging line that should drop the cost by another 20%. Now, let me provide with you an update on BUNAVAIL’s most recent prescription performance. Unfortunately, the buprenorphine/naloxone market as a whole was meaningfully down in the first quarter compared to the fourth quarter of last year. There were a total of over 2.3 million prescriptions dispensed in the first quarter of 2016, which was a 3% decrease from the prescriptions dispensed in the fourth quarter of 2015. As you will recall, the buprenorphine/naloxone market was also weak in the first quarter of 2015. We expect growth to return to the category beginning in the second order and we’re already seeing signs of that as estimated sales in April appear to be approximately 5% greater than March for BUNAVAIL. Despite the improvement in April, however, in Q1, there were approximately 28,150 BUNAVAIL prescriptions dispensed, a 4% decrease in the fourth quarter of 2015. A significant part of the fourth quarter 2015 performance was based on the addition of TennCare prescriptions. However, BUNAVAIL’s sales grew 180% over the same period last year as BUNAVAIL added over 350 new prescribers during the first quarter bringing the total prescriber base to nearly 3,000 physicians. Now, six quarters into the BUNAVAIL launch, the increasing prescriber base demonstrates the drug’s strength and its ability to grow. We expect to continue expanding these prescriber numbers going forward. We’ve talked a lot about our arrangement with Tennessee Medicaid. So I want to take a few minutes reviewing that situation, given the long-term business potential for this collaboration. Our partnership with Tennessee Medicaid represents a significant part of our strategy to grow market share. This exclusive preferred contract has allowed us to capture over 200 new writers that were not previously writing BUNAVAIL before the agreement and who began writing for BUNAVAIL in their non-cash pay patients based on their experience with their Medicaid patients. This allowed us to increase non-Medicaid prescriptions to the same level as Medicaid prescriptions. In fact, we’ve grown non-Medicaid market share three-folds since the agreement was implemented. Second, this contract has provided further evidence of the magnitude of the diversion problem with Suboxone. We believe this 60% drop in prescriptions since October of 2015 is largely due to diversion, which accounts for patient who might have previously been diverting Suboxone, then dropping out of the market when prescribed BUNAVAIL due to its lower street value. This element has not gone unnoticed from the addiction community, law enforcement, DEA and, more importantly, for our business, managed care providers. Given these dynamics, BUNAVAIL and BDSI are in a strong position to capitalize on this opportunity. We have the lowest buprenorphine containing product on the market. Delivered in a dosage form would be the technology that is very difficult to manipulate, thus potentially limiting abuse and misuse. Now, we announced recently an abstract of this Tennessee conversion data that was accepted for presentation at the International Conference on Opioids which takes place in Boston on June 5 through June 7. And our lead author is Dr. Richard Soper who is the Chief, Addiction Medicine & Chair, Board of Directors for the Center for Behavioral Wellness in Nashville, Tennessee, will be presenting the data on our behalf. In addition, the State of Tennessee Pharmacy Medicaid Director will be presenting these same findings at the Annual Meeting of the American Medicaid Pharmacy Administration Association in New York at the end of June. The data will be presented to a key audience while we are already making significant progress around the diversion issue. For instance, a highly compelling point with this audience is the fact that we will be saving the State of Tennessee approximately $14 million in 2016 as a result of the falloff in prescriptions in addition to the impact we believe it’s having on diversion. We refer to our arrangement with Tennessee Medicaid as the Tennessee Factor and it’s one of our key value driving initiatives behind BUNAVAIL. We’re leveraging findings in Tennessee with other states as well as other commercial plans to reduce overall costs and benefit society by potentially decreasing product diversion. And as a side note, one pharmacy benefit management company told us a few weeks ago that a number of its plans indicated they need a solution to the Suboxone problem. So you can see why we remain optimistic over the long term market opportunity for BUNAVAIL and our ability to improve its market share over time as this category evolves. Now, I’ll describe the immediate cost reductions that will help us bring BUNAVAIL expenses more in line with revenue, but there are other important initiatives underway that we believe will also help contribute to BUNAVAIL’s prescription growth and put it on a more favorable trajectory. First, as I described, we believe that our experience with BUNAVAIL in the State of Tennessee is applicable to other states. We will continue to share our experience. And now with published data, we will continue to aggressively pursue new contract. In this vein, we are in discussions with several states at this time, some of which may be making formulary decisions as early as July 1. While we can't predict with any certainty the ability to secure these contracts, the timing or how BUNAVAIL might be positioned, we believe we have a compelling value proposition and supporting data that demonstrates BUNAVAIL’s significant patient and economic benefit. Another opportunity is the change in the Department of Health and Human Services, or HHS, has recently proposed to allow physicians to treat up to 200 patients from the current 100 level who are buprenorphine for opioid dependence. This is one of a number of government legislative efforts to raise the cap and expand access to buprenorphine treatment. Currently, it’s estimated that less than 1 million out of 2.5 million who need treatment are actually receiving it. The proposed change is designed to strike the balance between expanding access to buprenorphine, encouraging use of evidence-based medication assist to treatment, and importantly, minimizing the risk of drug diversion. The proposal from HHS is in a typical comment period prior to introduction. Upon the lifting of the cap, BDSI will roll out our plan supporting the use of BUNAVAIL on patients entering treatment. We’re encouraged with our plan as we’ve had extensive physicians’ use of BUNAVAIL for their patients starting therapy since there are fewer obstacles compared to switching stable patients from Suboxone to BUNAVAIL. Now, HHS estimates that the lifting the cap could add tens of thousands of new patients into treatment during the first year. Importantly, the current proposed plan also necessitates that providers seeking the limit increase to affirm that they have a diversion control plan to minimize the risk that treatment is misused or diverted. This could be favorable for BUNAVAIL. As I mentioned earlier, BUNAVAIL contains the least amount of buprenorphine per dose and a delivery system that is difficult to misuse making it less likely to be misused or abused. As a matter of fact, in a recent survey we recently conducted among Medicaid physicians in the State of Tennessee, 67% rated BUNAVAIL very difficult to abuse or misused compared to only 40% for Suboxone. We would not anticipate an impact from the cap lift until approximately the fourth quarter of this year. Our third initiative involves publishing more on improving patient awareness of BUNAVAIL. As we said on our last call, physician awareness regarding BUNAVAIL is over 90% based on our market research, but patient awareness of BUNAVAIL is quite low. In the same Tennessee Medicaid survey I just mentioned, physicians indicated that over two-thirds of patients had not heard of BUNAVAIL prior to the switch to BUNAVAIL taking place. However, market research we’ve conducted specifically with patients currently taking Suboxone indicates that when the profile of BUNAVAIL is placed next to Suboxone, these patients state they would be interested in trying or learning more about it. This is an important point since patients indicate that they initiate buprenorphine treatment discussions with their doctor 87% of the time and 65% of the time they use the Suboxone product name specifically. Therefore, our plan is to pilot a highly targeted BUNAVAIL-focused, direct-to-patient digital advertising campaign. The pilot will be fielded this month in four cities and will be closely monitored over 12 weeks using a wide range of metrics including prescription generation. The four results will be evaluated in the third quarter. We will share more about the campaign and the monitoring metrics with you in the future. Now, let me summarize our current approach with BUNAVAIL. First, we understand the near-term challenges that we’re facing, but we remain optimistic about the long-term opportunities as this category continues to evolve. Patient benefits that gave us confidence in gaining market share at launch still remains. What was difficult to predict was the level of resistance to switching from Suboxone, largely due to the patient influence over that decision, which we now know, in many cases, has a diversion undercurrent. Given this, our future growth will be fueled by the initiatives and opportunities outlined today including additional and better physician managed care contracts, driven from a diversion platform, the lifting of the patient cap and the direct-to-patient initiatives. The changes we’re announcing today give us confidence we can grow the business and remain competitive with reduced commercial spending in the near term. Let me now move on to the BELBUCA launch. As you know, BDSI and our commercial partner, Endo Pharmaceuticals, announced in mid-February the commercial availability of BELBUCA for use in patients with chronic pain. Last week, Endo announced their earnings results. And while they acknowledged that although the first few weeks of sales have been slower than expected, there was a sound basis for it that I will be covering momentarily that included the somewhat chilling effect with the new CDC guidelines outlining the use of controlled substances. But, importantly, Endo indicated that healthcare practitioner receptivity has been favorable with the schedule-free message resonating well and that early physician reports suggest that pain control needs are being well met. In addition, BELBUCA is gaining prescriptions from new therapy starts in opioid naïve patients as well as switches from both long-acting and short-acting opioids. Also, repeat use is nearly matching new prescriptions which is another positive sign that the product is being well received and that the launch is moving in a positive direction. Endo also pointed out that BELBUCA has good managed-care access with two thirds of commercial patient lives having coverage. There is a strong co-pay assistance program in place and pharmacy stocking has not been a barrier. Negotiations with national plans continue and Endo stated that they had a favorable outcome with Express Scripts recently. Again, all of these are very positive signs. From a patient standpoint, early patient experience has been positive with regard to efficacy, tolerability and acceptance of the buccal film. One of the earlier challenges, which is no surprise, is that physicians need to become accustomed to the titration entering transition dosing process for BELBUCA when converting from another opioid. Also, there’s a learning curve around a new dosage form such BEMA. However, physician and patient satisfaction with the product remains high. As indicated by favorable repeated prescribing trends, we all have confidence that BELBUCA will be a success. We look forward to more accelerated growth in sales as physicians become more accustomed to the BEMA dosage form and titration scheme. While Endo hasn’t given a specific timeline with regard to an inflection point, they insist that this will occur in the second half of this year as the factors that would accelerate growth were met. I think we need to be realistic here. Opioids are not going away. They work extremely well to control pain and BELBUCA and its C3 status, along with its ceiling effect on respiratory depression, make it one of the safest choices when an opioid is being considered. Okay, let me now move on to our own pipeline. In regards to our 30-day buprenorphine injection product, our development plan remains on schedule. And we expect to file the IND for buprenorphine depot in the third quarter of this year, with single-dose human PK data by the end of the year. As a reminder, this product is being developed for both pain and opioid addiction. We are now conducting a final preclinical study to characterize the time for elimination of the formulation polymers at the injection site beyond the 30-day period of buprenorphine exposure as requested by FDA during our pre-IND meeting. We continue to anticipate that we will conduct our first in-man trial in fourth quarter of 2016, with data close to year-end. With that, I’ll turn to Clonidine topical gel for the treatment of painful diabetic neuropathy. As you know, at the end of 2015, we initiated our multicenter, randomized, double-blind, placebo-controlled study to assess the efficacy and safety of Clonidine topical gel. To date, over 50% of the targeted number of patients have been randomized into the study. We continue to expect enrollment to be completed before the end of 2016 and data should be available in the first quarter of 2017. And as a reminder, we believe this trial will be definitive in its outcome given the steps we’ve taken to ensure that the patient population is enriched and the study has been optimized to limit any placebo effect. Should the data be positive, we believe that this is a market with a high unmet need and significant market opportunities. Sales of current products for the treatment of neuropathic pain now total over $3 billion in the US. This is also a very partnerable asset. As we tested those waters two years ago, there was significant interest, both here in the United States and EU. Finally, let me provide an update on ONSOLIS. First, we secured a new manufacturer after our original manufacturer was acquired and no longer chose to do contract manufacturing for us. We are now well into transferring the manufacturing process. We’re also in very advanced partnering discussions for the commercialization and reentry of ONSOLIS. Given the timing of qualifying into new manufacturer with the FDA, market reentry will not likely be until sometime 2017. As a reminder, ONSOLIS continues to be sold in EU by Meda under the brand name BREAKYL. As it relates to other business development activity, I also wanted to mention that we have stepped up our efforts, in particular, to secure other further development stage assets in our core areas of expertise including addiction, pain, and other CNS-related diseases. And this includes our participation in the partnering forum at the upcoming 2016 Annual Bio International Convention in San Francisco in June. We already have a number of [indiscernible] meeting scheduled with both US and ex-US companies. Now, let me briefly turn to the financial outlook for the company. In addition to the savings from the actions I’ve described today, we have also completed a revision to our MidCap loan which pushes the first principal payment out to January 2017. As I previously mentioned, these changes have extended our cash runway into the third quarter of next year under our current operating plan. As such, we have no immediate plans or need to raise additional capital. So let me summarize before turning things over to Ernie. For BUNAVAIL, we’re consolidating the sales force along with our marketing efforts to reduce the commercial spend by nearly $20 million through 2017. Our overriding objective in the near term is to better align costs with revenue and reduce spending. While preserving long-term growth opportunities, we believe we can maintain and ultimately grow market share, remain extremely competitive based on five factors. One, a focused sales effort in the most growth-oriented territories. Two, using our published diversion data to secure new or improved positioning on other managed care contracts either on an exclusive or preferred status. Three, drive new business behind the direct-to-patient initiatives being followed in four metropolitan areas. Four, drive more patients to BUNAVAIL upon the lifting of the patient cap later this year. And five, to continue to drive improvements in gross to net in cost of goods. In addition to the significant changes we’re making behind BUNAVAIL, we remain optimistic with Endo’s BELBUCA launch. Endo is working through some normal early launch conditions that they described and expected. As well, there are some encouraging signs that these challenges are beginning to dissipate based on qualitative feedback they’ve received from physicians and patients. Endo noted that inflection should be anticipated in the second half of this year. Separately, our pipeline remains on target to meet our objectives this year and our business development efforts in search of late stage development assets are a major focus for the company. And finally, along with the changes in BUNAVAIL spending, we now have cash runway into the third quarter of next year. With that, I’ll turn it over to Ernie and then we’ll come back to take questions. Ernest De Paolantonio Thank you, Mark. And good morning, everyone. I will now review our key financials for the quarter ended March 31, 2016. For a more thorough review of our first quarter financial results, please see our 10-Q which we will file this morning. To review, BUNAVAIL revenue was based on third-party pull-through data that we receive on a one-month lag basis. For the first quarter of 2016, BUNAVAIL revenue includes the months of December of 2015 and January and February of 2016, but not March. Revenue for the first quarter of 2016 totaled $3 million including $2.1 million of BUNAVAIL, a 41% increase over fourth quarter 2015 revenue of $1.5 million. Other reported revenue included $0.9 million of royalty revenue for BREAKYL. During the first quarter of 2016, we had two items that improved BUNAVAIL scrip profitability. First, a 5% price increase that was effective February 1. And second, as Mark mentioned, we ended the two week free trial program and replaced it with a more limited seven-day voucher program. This significantly contributed to both a true-up and an adjustment to our gross to net expense accrual, resulting in scrip profitability of $72.58 in the first quarter versus the less than $60 per scrip profitability in the fourth quarter of 2015. Our scrip profitability will fluctuate over a range in the mid-60s for the next couple of quarters with the evolution of payer mix into the more profitable commercial and cash sectors. As it relates to the cost of manufacturing, our cost and yield efficiencies from the fourth quarter of 2015 have continued in 2016 and are reflected in a lower unit cost of production. And on April 20, our high-speed packaging line qualification was completed. We will release product during the second quarter that will represent a 22% reduction in BUNAVAIL cost of manufacturing. So to recap, the savings from the voucher program, manufacturing process improvements and efficiencies and the high-speed packaging validation all represent a significant contribution to BUNAVAIL’s improved profitability going forward. We also continue to work on other programs that will enhance yield improvements and drive cost out of the manufacturing process. Finally, since our launch, our cost of manufacturing has improved by 30%. Total operating expenses for the first quarter of 2016 were $18.4 million and include $4.1 million of non-cash related stock compensation expense. Other expenses were $6.3 million of BUNAVAIL-related sales, marketing and other commercial expense, $6.7 million of general and administrative expense including legal, accounting and professional fees, and R&D expense of $5.4 million which reflect the ongoing development programs for BUNAVAIL, buprenorphine depot and Clonidine topical gel. Year-over-year operating expenses for the first quarter of 2015 were $19.7 million, including $3.4 million of non-cash stock compensation expense. $6.7 million were related to BUNAVAIL startup commercialization costs, $6.5 million for general and administrative expenses, and $6.5 million was for R&D. Net loss for the first quarter ended March 31, 2016 was $18.7 million or $0.36 per diluted share. Net loss excluding the $4.1 million in stock compensation expense was $14.6 million or $0.28 per diluted share. Net loss for the first quarter of 2015 was $8.2 million or $0.16 per diluted share and net loss excluding stock compensation expense of $3.4 million was $4.8 million or $0.09 per diluted share. Our cash balance of $69.4 million at March 31 represented a $14.2 million net cash reduction to our fourth quarter balance. With the reduction in commercial operating expenses going forward, based on today's announcement, our commercial operating expense will be reduced by a total of approximately $20 million through the end of 2017 and will lower our cash utilization by approximately $3 million per quarter. In addition, we have extended the interest-only period of our $30 million loan with MidCap from June of 2016 to January of 2017, further improving cash flow during that period. The loan’s principal amount will then be amortized over the remaining 23 months of the loan. We expect our cash to extend into the third quarter of 2017 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 go first to Scott Henry at ROTH Capital.

[Scott Henry:]

Thank you and good morning. I guess I'll start with BUNAVAIL. Mark, in your prepared remarks, you commented on reaching profitability by the end of 2017. The question I would have is, what sort of volume increase would be necessary to get to that profitability? Just trying to get an idea of what revenue run rate we need to reach, so we can gauge progress towards that goal?

[Mark Sirgo:]

Scott, clearly, we’re reducing our sales effort, so we’ve got fewer people. So we’ll downsize the volume that would normally be necessary to achieve profitability by the end of 2016 – I’m sorry, 2017. Obviously, there’s a number of factors that were taken into consideration around that, which is, the fact that we’ve got to improve the payer mix, as we focus on gross to net we increase our managed care contracting. As we already pointed out, continued to decrease cost of goods, while keeping expenses in line with our revenue. So we think, behind the focused sales effort in the most productive territories, with the other initiatives going on in the background that this could be achieved by the end of 2017.

[Scott Henry:]

Again, I guess what I’m really digging at is how high would revenues have to be to achieve that profitability? Are we looking for a $20 million revenue breakeven? Just trying to get any – any color you can give to that?

[Mark Sirgo:]

Ernie, do you want to cover that?

[Ernest De Paolantonio:]

Hi, Scott. Scott, again, we’re not going to give guidance. But you wouldn't be that far off.

[Scott Henry:]

Okay, all right. Fair enough. And I guess, Mark, with all of the things going on in the market, all of these different dynamics, when would you expect to see an inflection point in the prescription data? Is it second quarter or third quarter? I would imagine, at some point, we’ve got that 200 prescriber limit coming in and how would you – would that help provide an inflection point?

[Mark Sirgo:]

Well, I think the prescriber limit will, for the reasons we stated. But that’s not likely to start having any kind of an impact until around fourth quarter of this year. So I would expect in the second half of the year, we’re going to start to see an improvement in growth with BUNAVAIL based on the direct-to-patient initiative. We’d like to think we’re going to secure some other managed care contracts, as I’ve alluded to, and also potentially improving our position on others as negotiations continue. So it’s really going to come from a combination of factors. But, clearly, we should start to see an improvement in the second half. And then really fueled by this Health and Human Services initiative that will begin sometime fourth quarter, but really have a major impact in 2017.

[Scott Henry:]

Okay. And given the success you had in Tennessee, would you expect to roll additional states in 2016?

[Mark Sirgo:]

In 2016?

[Scott Henry:]

Yes.

[Mark Sirgo:]

Yes, okay. Yeah. Well, we’re in front of several states, as we speak. So if we’re successful, the answer is yes.

[Scott Henry:]

Okay, great. And final question just for Ernie, on the model, I noticed there were not any license milestone revenues in first quarter. Should we expect that – is there any amortization left or should we zero that out pending…?

[Ernest De Paolantonio:]

Yes, zero that out, Scott. That’s all been taken into account last year.

[Scott Henry:]

Okay, perfect. Thank you for taking the question.

[Operator:]

And we would go next to Tim Lugo at William Blair. Sir?

[Tim Lugo:]

Thanks for taking my question. For the expense, I guess, reorganization, is that $3 million per quarter going to kick in in the third quarter and the second quarter will be gradual throughout 2016 and then maybe a little bit more in 2017? What’s the – how will that expense flow through?

[Ernest De Paolantonio:]

Yeah. Hi, Tim. It’s Ernie. That will start to kick in in the third quarter.

[Tim Lugo:]

Okay. And it sounds like BUNAVAIL financials are improving with the high-speed line, 22% cost decreases in cost of goods, and potentially, I guess, higher per script number. Can we see gross profits for BUNAVAIL in Q2, Q3? Do you see that coming soon?

[Ernest De Paolantonio:]

We actually had gross profit through BUNAVAIL in Q1, Tim. So, yes, with the payer mix, the lower gross to net, and the lower cost of goods, that’s where we’re headed.

[Tim Lugo:]

Okay. So, in general, you’ll be generating gross profits starting soon?

[Ernest De Paolantonio:]

Well, again, we generated them in the first quarter. So, yes.

[Tim Lugo:]

Okay. All right. And are you going to look into maybe adding some abuse-deterring language on to the BUNAVAIL label? It sounds like the Tennessee experience could be pointing in that direction or at least some diversion language?

[Mark Sirgo:]

Yeah, Tim. This is Mark. Good question. As you probably know, the FDA issued recent guidance and made some changes to what’s required. So they reestablished what they need, set a pretty high bar. It’s something that we’re considering. We’ve got a lot of information, as you know, already. We don’t need all the requirements at this point. So it’s going to take some additional work in that regard. But I will say that the data that we already have, some which is published, we certainly use it in our managed care meetings and it’s certainly resonating. I think it’s clear that the ability to manipulate this dosage form is very difficult. The fact is, and it’s undeniable, it’s the lowest buprenorphine-containing product. So those two combination of things really do make it a relatively unattractive product for people who are looking to misuse and abuse and divert such a dosage form. So we think we are well-positioned already without that information. The decision to whether to pursue the additional work that would be required is still under consideration.

[Tim Lugo:]

Okay.

[Operator:]

And moving on to Jim Molloy at Laidlaw.

[Jim Molloy:]

Thanks for taking my questions. Can you say what the – did you say what the new sales number is currently, the current number of territories as well? And what percentage of your sales reps are currently profitable, paying for themselves, and at what point do you think you’ll get to all of them or 50% of them?

[Mark Sirgo:]

Yeah. Jim, this is Mark. So for competitive reasons, I’m not going to be able to give you a lot of color on any of your questions there. Clearly, the goal is always to get each representative to profitability as soon as possible. So that’s certainly our target. We certainly feel, with the group that will remain, basically the changes that we’ve made, will put ourselves in a good position to be able to achieve exactly what you’ve outlined there. But, again, for competitive reasons, we can’t give you a whole lot more color than that.

[Jim Molloy:]

Endo highlighted on their call recently, the BELBUCA sales, some challenges they have with the launch of the BELBUCA and certainly the challenges with BUNAVAIL are well documented, is there a fundamental problem with the underlying delivery of the buccal delivery technology that patients just don’t want to or don’t like it?

[Mark Sirgo:]

Yeah. Jim, I think there’s been no pushback on the dosage form whatsoever. In fact, it’s been well received. So I think the biggest challenge right now, it’s not uncommon when you introduce a new product, particularly an opioid, it’s just the fact that you have to down-titrate these patients that are already on an opioid for a brief period of time before you can transition them over to buprenorphine. So physicians are getting comfortable with that process, but it does take some time and a while to establish with several patients before they get that comfort level that allows them to move to new patients more readily. So it’s just the training period, is what it amounts to, that they are going through right now. And I think that has more to do with the slightly slower uptake than anything else. And it is actually something that Endo had outlined at the outset. So I think the other thing is just that this launch has gotten across via the CDC guidelines which should actually be interpreted positively for BELBUCA because it does offer, as I mentioned – I think it’s the safest alternative if you choose to use an opioid. But because of the timing of when those came out, it sort of put a chilling effect, particularly upon the primary care space, not so much pain specialists. And I think that will dissipate as it typically does over time. So I think BELBUCA is well-positioned as a Category 3 controlled substance, to really take hold in this marketplace. They’ve indicated an inflection point they would expect to see sometime in the second half. So I think they are going through normal launch challenges right now, but I think they’re working through nicely.

[Jim Molloy:]

Looking at the R&D, $5.3 million for the quarter, on track for $20 million plus, is there room to manage that number down as well?

[Mark Sirgo:]

Well, I think, we really don’t have the typical amount of trials ongoing as we normally would. So I think the spending is really behind the Clonidine program primarily, which is – we’re in the middle of that Phase IIb trial, but there’s no way to alter that in any way, shape or form. And the buprenorphine depot program, it’s really just getting underway. We haven’t gotten into the clinic yet, as you know. It’s still finishing up the preclinical. So not really a lot that we can manipulate there.

[Jim Molloy:]

Last question. Given the challenges with this launch and challenges of the marketplace, and Endo has seen there, is there – are strategic alternatives for the company kind of being envisioned or discussed?

[Mark Sirgo:]

Well, Jim, I think what we’ve outlined, I think we’ve got a good game plan. It took a lot of thought over a reasonably long period of time to determine how we wanted to manage BUNAVAIL going forward. And I think we’ve got a solid plan in place. As far as BELBUCA is concerned, I think it’s well-positioned. So I think the future is actually quite bright. And I think the opportunity to increase shareholder value is certainly great. And I think the second half of the year is what we expect to start seeing the benefit behind BUNAVAIL and BELBUCA.

[Jim Molloy:]

All right. Thank you for taking the questions.

[Mark Sirgo:]

You’re welcome.

[Operator:]

And moving next to Matt Kaplan at Ladenburg.

[Matt Kaplan:]

Hi. Good morning, Mark.

[Mark Sirgo:]

Hi, Matt.

[Matt Kaplan:]

So given the success you have had in Tennessee with BUNAVAIL and especially being able to, I guess, convert the Medicaid preferential status into additional scripts outside of Medicaid, I’d like to delve a little bit further into the potential for additional state contracts and where you are there because it seems to me that since October when that plan came on-board, the scripts have – and the inflection point that you had in the scripts, they’ve been relatively flat since then. So it seems to me that’s very crucial to get additional states on-board. Can you give us a little bit of more detail in terms of where you are in those discussions and how those are progressing and potential timing of additional states coming on-board?

[Mark Sirgo:]

Sure, Matt. Every state has a sort of cycle time, and so you’re not in front of all of them at the same time. So, right now, there are several states that have decision points around the July 1 timeframe. And those would be the next states that would be making a decision around BUNAVAIL. So we’d expect, by that time, to be able to announce another contract or so, if indeed it’s labeling positively for BUNAVAIL. So we’re in front of them now. We are certainly presenting this information I have described today. It’s resonating extremely well. I think we’re in an evolving category here. And it’s evolving because you’ve had new product entries. And as such, traction takes longer. It’s not always your first time in front of one of these groups that things take hold that sometimes it takes a second turn, and that’s really what we are seeing as we head further into 2016, 2017. But to answer your question, there are some near-term opportunities in front of us. We hope to be successful with that, as we are. I think we’ll have a strong second half and clearly 2017 points to a lot of other opportunities, including Medicaid Part D, VA decision, et cetera. So in any event, we think we’re in well-positioned with the now published data that we’ve got on the diversion issue. And, of course, it’s always been well received as a product that has other patient attributes compared to the competition.

[Matt Kaplan:]

And just one follow-up on that, you described decisions by July 1, is there another review cycle timing that’s – is there another one at the end of September or how does it work for other states?

[Matt Kaplan:]

Yeah. Let me have Mike Bullock who oversees our managed care group comment on that. Mike?

[Mike Bullock:]

Good morning. So a lot of these states are pulled together and many of them review categories depending on when they review certain categories. In this case, there are a number of states that are reviewing in the spring. Whatever decisions are made in those spring reviews will go into effect July 1, as Mark said. Many other states review in the fall, October/November timeframe, and whatever decisions come out of those meetings go into effect January 1. So it is somewhat cyclical, typically spring and fall.

[Matt Kaplan:]

Great, that’s helpful. Thanks for taking the question.

[Operator:]

And we’ll move next to Ken Trbovich at Janney.

[Ken Trbovich:]

Good morning, Mark. Thanks for taking the question. I’m curious, I know you are all interested in finding out more about these contracts. I was wondering if there is any way to quantify sort of the available pool of states relative to, by example, what you saw with TennCare. Is the magnitude here multiple states that potentially, in aggregate, would exceed TennCare, would be equal to or less than TennCare in terms of patient alliance?

[Mark Sirgo:]

Yes. That’s a tough question to kind of quantify. There are certain states that have more value than Tennessee and there are some with less. So I can’t pinpoint it any better than that, I don’t think. But most of the ones we’re in front of right now that have their [ph] decision points would be of the Tennessee size.

[Ken Trbovich:]

Okay. And then, just with regard to your response to an earlier question, I think I heard you say something about a VA decision, what’s the timing for VA decision?

[Mark Sirgo:]

Mike?

[Mike Bullock:]

Yeah, so there is no timing on the decision other than to say that we are in front of them as far as with the data that we continue to be in front of them as this data matures. We’re hopeful that we’ll have a decision in 2017. But it’s a process with them and they also have a bid cycle that we are working through. So what I can tell you is that we have an offer in front of them. When the decision will come is to be determined.

[Ken Trbovich:]

Got it. Okay. And then last question, Mark, I know you faced some challenges [indiscernible] and obviously for the better longer-term positioning of the company. Can you help us understand how you made those choices in terms of focusing territories as it relates to the future contract opportunities? I think, clearly, [indiscernible] opportunity with TennCare and all of the business that’s been driven there. Just want to make sure we fully understand some of the comments around what you discussed early on. I think specifically about after the realignment, still being able to reach 85% of the total market. Can you speak to a little bit of detail around how much confidence you have that the territory realignment will still enable you to have feet on the ground when you do secure new contract wins?

[Mark Sirgo:]

Well, that went into the decision-making actually in terms of where these new contracts could, in fact, take place and our conference around that. So they are in areas where we already have sales representation. We’ve got managed care access, that’s good. It could be improved by the contracts that we’re considering, that are in front of us. And so for that reason, there’s good future growth potential. So that actually went into – that aspect went into the thinking behind the territories that we selected.

[Ken Trbovich:]

Okay. So we wouldn’t necessarily expect a territorial realignment like the one that was discussed earlier this year following a contract win that essentially realignment is in place, the folks are in place and it’s a matter of executing on the business that you secure?

[Mark Sirgo:]

That’s correct.

[Ken Trbovich:]

Okay, terrific. I appreciate it. Thanks so much.

[Mark Sirgo:]

You’re welcome.

[Operator:]

And we’ll go next to Chiara Russo at Cantor Fitzgerald.

[Chiara Russo:]

Hey, guys. Great. Thanks for taking the question. Just wanted – I think two quick ones. In terms of percentage of scripts, how much of that is coming from Tennessee?

[Mark Sirgo:]

Yeah. Right now, it’s about a third of our prescriptions. And that includes not just Medicaid, but the non-Medicaid prescriptions in that state.

[Chiara Russo:]

Okay. And if you do go to other Medicaid plans in the state, I know that with TennCare you guys did a lot of – I don’t want to say sampling, but you had 14 days free, X amount of product free on those. Would you do that same route?

[Mark Sirgo:]

I’m not sure what you’re referring to.

[Chiara Russo:]

You guys get a lot of – you did like – I don’t want to say trial programs, but you did give away a lot of product to get physicians to use it, to get patients used to it, to sort of help the cost per patients, would you do the same thing with additional Medicaid programs?

[Mark Sirgo:]

No, not likely. That was really just in general at launch and through the first year to get the general physician base comfortable with the product. But we wouldn’t just reintroduce that if we want a particular contract in a particular state, no.

[Chiara Russo:]

Okay, okay. I think my last question is, in terms of the direct-to-patient marketing, I know that you’ve said that [indiscernible] roll it out nationally. I’m just wondering how you sort of define that success, what would that look like? Thank you.

[Mark Sirgo:]

Yeah. We’ve got some internal metrics on prescription growth that we would anticipate seeing that would pay – more than pay for such a program. So we’ve got that. We’ll start monitoring it starting in June because it will be a three-month program and we will see how it lines against those metrics. But it will take that period of time to give us the full color on whether it’s working or not working. And it will be prescription driven, primarily in terms of the metrics. There are other things we’re falling around it. But, in general, it will be prescription driven.

[Operator:]

And we’ll go next to Ed White at FBR.

[Ed White:]

Thanks for taking my question. I want to make sure I heard Ernie correctly. So the net revenue per prescription was $72.58. But did he say that you expect that to go down to the 60s?

[Ernest De Paolantonio:]

Yes. That’s going to go down a little bit, Ed, and that’s mainly because we had a true-up in the first quarter which contributed somewhat to the increase. Long-term, though, we expect to go back up, even beyond that. This is just a short-term reduction.

[Ed White:]

Short term meaning one quarter or short term meaning throughout the rest of the 2016 quarters?

[Ernest De Paolantonio:]

The next couple of quarters.

[Ed White:]

Okay.

[Ernest De Paolantonio:]

But we think that’s where it will – it will be about that going forward.

[Ed White:]

Okay, thanks. And there’s been a lot of questions today on Medicaid coverage. You’re in 26 states and looking to expand. But just on that front, are you expecting to have any with an exclusivity deal like you did with Tennessee?

[Mark Sirgo:]

Yeah, hi. This is Mark. When you go into these arrangements, you put a bid together that provides for an exclusivity for, oftentimes, one of two – it’s, typically, the process that you go through, so you’ve got bids for both of those things. And, obviously, you wouldn’t have put an exclusive on the table if you didn’t want that. So we prefer to have exclusive arrangements because we think what we saw in Tennessee is reflective across the country, which means there is diversion going on. We can clean that up. We can bring down the cost that these states are incurring and provide them what we think is a superior product in the process. So that’s what you see in Tennessee. So that’s what you’re going to see presented in these two upcoming conferences. So the exclusive is where we prefer to be, but there are other alternatives as well.

[Ed White:]

Okay, thank you. And my last question is, just with the BUNAVAIL prescriptions down 4% in the first quarter of 2016, with the one month lag, it looks like second quarter is down to flat as well. Can you just comment maybe there? I know you said Tennessee accounts for about one third of prescriptions. Maybe what’s going on in Tennessee, if that’s what you’re experiencing there? And if so, why? You’ve located these patients. They are on drug. And now we’re seeing – if you’re seeing a decline in the prescriptions trend, why do you think you’re seeing that?

[Mark Sirgo:]

Well, what we do know is they are not moving to competitive products at this point. There is no increase in the other products that are available to them. So either these patients are getting better and moving off treatment or we could still be witnessing some last aspects of the diversion issue.

[Ed White:]

And is that just a Tennessee phenomenon, Mark, or is that – are you seeing that nationwide?

[Mark Sirgo:]

We only have one exclusive arrangement. So that’s what allows you to really determine what’s happening within a state or within any type of payer plan. So, hopefully, we can get to the same issue with some of the commercial plans as well, and that’s why I think I creates such an enormous opportunity for us behind it. So you really need an exclusive arrangement to be able to pinpoint this. And that’s what we had in Tennessee. So we’re hoping, as we’ve been talking about this morning, to leverage that with other states and even other commercial plans. Al, did you have…?

[Albert Medwar:]

Sure, sure. Just for clarification to your initial comment around growth, if you actually look at prescriptions outside of the State of Tennessee, we were better than the market. While the market was down about 4%, BUNAVAIL was flat to slightly positive. So we know we’ve lost prescriptions in Tennessee. Mark referred to the diversion-related issue. But again, outside of Tennessee, we’ve seen some growth. And if you looked forward to the month of April, so we don’t have the full month’s data yet, we were trending about 5%. And thus, things are starting to show some increase over where they were for the first quarter.

[Ed White:]

Right. No, I did notice that through IMS scripts. All right. Well, thanks, guys, for taking my questions.

[Mark Sirgo:]

You’re welcome.

[Operator:]

We’ll move next to David Amsellem at Piper Jaffray. Sir, please check your mute button. Your line is open. And Mr. Amsellem, do you have a question? Your line is open. Hearing no response from that line, I’d like to turn the program back over to our speakers for any additional or concluding remarks.

[Mark Sirgo:]

Yes. Thank you, everybody. I think, in closing, I’d just like to say that we feel we’ve got a solid plan in place now behind BUNAVAIL. I think we’ve got encouraging signs behind the early BELBUCA launch that we’ll hear more about in the coming months. Our pipeline is on target. We’ve got a very good cash runway. We expect to have a very good second half for the company. So I want to thank everybody for listening in today and thank you very much and have a good day.

[Operator:]

And ladies and gentlemen, that does conclude today’s conference. Again, I’d like to thank everyone for joining us today.