BioDelivery Sciences International, Inc.
Q3 2016 Earnings Call Transcript

Published: 12 Nov 2016

[Operator:]

Good day and welcome to the BioDelivery Sciences Third Quarter 2016 Earnings Conference 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 for BioDelivery Sciences. Please go ahead, Sir.

[Al Medwar:]

Good morning and welcome to the BioDelivery Sciences third quarter 2016 earnings conference call. Leading us through the call today are Dr. Mark Sirgo, President and Chief Executive Officer; and Ernie De Paolantonio, Chief Financial Officer. I will now read the company's Safe Harbor statements. Certain statements of 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 subject 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, would, could, should, believe, 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 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 and the clinical trial for and FDA review of BDSI's products and development may differ significantly from those set forth in the forward-looking statements. 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 statements. And with that I'll turn the call over to Mark Sirgo. Mark?

[Mark Sirgo:]

Thank you, Al. Good morning, everyone, and thank you for BDSI's third quarter 2016 financial results conference call. Since our last call, we have continued to achieve meaningful progress throughout our business, particularly regarding managed care contracting for BUNAVAIL. The third quarter also marked the first quarter since we initiated a series of decisive actions aimed to bringing our commercial spending more in line with our revenue, without sacrificing the products longer term growth potential. We remain confident in our BUNAVAIL strategy, as we focus on bringing BUNAVAIL to profitability by the end of 2017. On today's call, we'll provide you with an update on how we're progressing with our BUNAVAIL-related initiatives. In addition, I'll give you a brief update on the BELBUCA launch. We'll then look at our pipeline development and finally we'll review the financial outlook for the company, along with our key business value drivers for the next 12 months. Then I'll turn things over to Ernie to go over the details of our financials third quarter. Following that we'll take your questions. Want to begin with BUNAVAIL. To reiterate the strategy we are pursuing with BUNAVAIL is focused on progressing the product and profitability by the end of 2017, following our consolidation effort that we implemented in May of this year. We will get BUNAVAIL to profitability by focusing first on increasing BUNAVAIL's top-line sales. These sales would be driven through improved managed care access and formulating status and new patients entering treatment for a recent implementation of the ruling from the Department of Health and Human Services to increase the patient cap. In addition, we will remain focused on improving the bottom line with the confidence with both the decreased commercial spending and improved profit margin by reducing our cost of goods sold and improving our gross to net for BUNAVAIL. To reiterate what I said on our last call based on our consolidated commercial structure, we estimate that we'll need to reach an annual run rate of approximately 43 units subscriptions per week to achieve BUNAVAIL profitability. At this point this means that we need approximately an incremental 2,000 prescriptions from our current prescription level to achieve this goal on a weekly basis. This represents achieving a market share for BUNAVAIL of approximately 3%. Let me start by discussing the steps we continue to take to increase top-line BUNAVAIL sales by reviewing the new managed care wins we have secured and announced since July. Most recently we announced that BUNAVAIL has been given preferred status along buccal film on Texas Medicaid. While modest inside is another sign that our message behind BUNAVAIL differentiation and our version platform are making an impact. In total, the six months recent contracts we secured since July, combined will provide BUNAVAIL potential access to an approximately an additional 0.5 million prescriptions annually. For the contracts, put BUNAVAIL in a position where one of two preferred branded plots and in one plan, the buccal film will move to non-preferred status in January. This particular contract gives us access to approximately 60,000 prescriptions per year. The other two contracts at BUNAVAIL along with both branded Buprenorphine Naloxone products. While a number of the contracts earlier effect during this quarter, trading at an implementation date of January 1, 2017, which we believe will help drive significant sales in the first half of next year. Now we're beginning to see the initial impact the first contract. In which this plan, we shared a preferred position with the buccal film. We have seen prescription volume from the plan grow to nearly 540 prescriptions in the month of September. Put this into perspective, we had only 20 prescriptions in June, the month prior to the implementation of the contract. Each of these new managed care contracts represents important contracts for BDSI. In addition, these contracts we expect additional growth behind our existing commercial contracts, the increased in the patient cap, and future managed care contract wins through the end of 2017. Speaking at a cap, let's move on to the change the department Health and Human Services, or HHS, recently implemented that will allow eligible physicians to treat up to 275 patients from the previously allowed 100-patient limit. As a reminder, this change took effect on August 8. As we announced at the end of September, according to the Substance Abuse and Mental Health Services Administration or, SAMSA, 1565 commission applied for and were granted waivers [indiscernible] for the treatment of opioid dependence at the increased limit. HHS had estimated that between 500 and 1800 practitioners would request approval within the first year resulting in an estimated range of 10,000 to 90,000 additional patients. This could result in over 0.5 million additional prescriptions. So we're well ahead of the prescription numbers at this point. Close on the cap of the subject, we anticipate that the most significant impact in the marketplace and the cap lift will occur in 2017 and beyond. Also further supporting prescription growth in the categories, the Comprehensive Addiction and Recovery Act or CARA, which President Obama signed in July. This further expands access to CARA, including allowing nurse practitioners and physician assistants to prescribe Buprenorphine for opioid dependence. At the moment, there's no set date when NP's and PH will be able to apply to receive a waiver to prescribe Buprenorphine, but we believe this will come sometime in 2017. We are very pleased with all of the initiatives that have recently been enacted to address the national opiate epidemic and the limitations on access to care and treatment with Buprenorphine. We're excited about the potential impact that the entry of new patients into the marketplace, based on these government initiatives could have on BUNAVAIL and we're focusing our efforts on leveraging these positive developments. Bottom line is that there's great momentum and potential growth behind the use of Buprenorphine products to treat opioid addiction. And as physicians and managed care providers are learning more about how BUNAVAIL may provide a solution to the challenges they are facing in this category, we believe the true potential of the product will be more fully realized. Now I'd like to spend the next few minutes reviewing the steps we've taken to improve the bottom line. We're now operating more efficiently after completing our initiative to bringing our expenses more in line with our revenue. So I said earlier, the third quarter was our first full quarter with these changes implemented, and I'm pleased to report that we have performed steadily in the pace of our cost reductions and internalization of our sales force. Additionally, we decreased our marketing expenditures to focus on initiatives that have demonstrated a favorable impact on sales especially to our [speakers] program. As a reminder, following this restructuring, our current sales force now covers 85% of the overall market. As we said on our last call, these adjustments will lead to a $20 million savings through 2017. To support what I said earlier, regarding our performance remaining stable during this period, importantly in the face of the reduced cost structure, we maintained and even saw a small increase in total prescription sales for Q3 as compared to Q2, and importantly increased our BUNAVAIL prescribers by nearly 300. Beyond this, BUNAVAIL sales have been encouraging over the last several weeks. We continue to believe that our representatives covering these top territories will not only improve their existing business, but continue to add new prescribers that will support future prescription growth, particularly through the new managed care contracts. Now in addition to reducing commercial expenses related to BUNAVAIL, we're also focused on further improving our operating margins. As you will recall in the second quarter, our new high-speed packaging equipment went online. This technology has and will continue to be important in driving down our costs of goods sold. In the third quarter, our cost of goods sold decreased by 4%, versus the second quarter and have decreased 17% year to date and we remain confident that these cost reductions will continue through the end of 2017, up to an additional 30%. So in summary, we recognize that we face meaningful challenges with BUNAVAIL. However, we remain encouraged by the initial results of our consolidated and highly focused commercial effort and growth initiatives. We continue to see a number of positive signs that are reflected in part around our new managed care contract for BUNAVAIL and believe that we have the right plan in place to support prescription sales growth, particularly as we move into the first quarter of 2017 from new managed care contracts and supported by an expanding market, due to the lifting of the patient cap and future expansion of the prescriber base include PA's and NPs. We remain confident that these drivers of prescription growth along with the actions taken to bring our commercial expense more in line with our revenue and the improvement of our operating margins for BUNAVAIL should allow us to move to product to profitability by the end of 2017. That includes my formal remarks on BUNAVAIL so let me now move to BELBUCA. It continues to be a challenging time in the pain space for treating chronic pain with opioids, as health care providers attempt to adapt to the revised [CAC] guidelines that we issued in March, along with the increased scrutiny over the use of opioid in general. I spoke the macro environment and we'll continue to make progress in the BELBUCA launch and have achieved broad availability to BELBUCA to commercial payers while they continue to work on improving access with Medicaid and Medicare. In addition, despite the challenging launch up to point, BELBUCA prescriptions continue to grow, reaching a high of 1537 last week, according to data from Symphony Health. Now feedback on BELBUCA from the marketplace since launch has indicated the NOG's need the patients are being met and that includes both opioid naive and opioid experienced patients. There's also positive receptivity to the buccal film. So certainly reasons for optimism around BELBUCA, despite the macro environment at this early stage of the launch. So, yes, the launch has been more challenging than expected. But why do I believe BELBUCA, nonetheless, is positioned for growth moving forward? It's because BELBUCA provides a logical option, addressing two of the most important concerns doctors have about prescribing an opioid, which in fact had been the impetus behind the recent efforts of the government to conserve opioid misuse, abuse and overdose. The first is the fear of addiction. The second is the risk of overdose. Now there are more than 2 million Americans addicted to opioids. In addition, there are nearly 19,000 overdose deaths, specifically related to opioids each year. These are staggering numbers. So how does BELBUCA could potentially help address these two major concerns? It's based on the fact that Buprenorphine molecule, which is a partial immune opioid agonist is different from all other opioids, which are full use agonist. And that's significant difference plays a key role in its beneficial features. First, Buprenorphine is the only c3 opioid approved to treat client pain. C3 status infers less abuse and addiction potentially as defined by DEA over the c2 opioids and include hydrocodone and oxycodone, morphine, fentanyl and the like. Second, according to well-established medical literature, partial opioid agonist like Buprenorphine have been shown to have a sealing effect on respiratory depression. Please be reminded that what kills people in an overdose with an opioid is typically respiratory depression, that is you stop breathing. With Buprenorphine there's a limit or sealing effect to how much respiratory depression you can cost. So my point of view is that if a health care provider is considering prescribing an opioid for chronic pain, particularly in the current environment, as concerned as they should over the potential for addiction and respiratory depression, doesn't really makes to start with the opioid that can thirst a potentially more favorable safety profile around these two concerns. Additionally, BELBUCA's established tolerability with rates of side effects comparable to placebo and a wide range of doses to treat opioid naive and opioid experienced patients. Now we as does our partner Endo continue believe that BELBUCA offers a compelling and differentiated product profile and continue to believe that BELBUCA has the opportunity for growth going forward. But continued education regarding Buprenorphine as a molecule, is paramount. With that I'll move on to our pipeline beginning with clonidine topical gel for the treatment of painful diabetic neuropathy. We continue to expect to get availability of top-line data in December, which is ahead of our initial projections. As I've said previously, this is a market with a high-end met need and significant market opportunity. Over 29 million people in the United States have diabetes, with at least 50% of patients with diabetes having painful diabetic neuropathy according to the medical literature. Sales with current [indiscernible] with the treatment of neuropathy paying total over $3 billion in the United States, and our own marketing research indicates the physicians are only somewhat satisfied with current treatment options and only about half of patients with the painful diabetic neuropathy are getting adequate pain really for current treatment. On our previous study of clonidine topical gel, it was determined there was significant variability in base-line pain scores that negatively impacted the final results. We have subsequently taken steps to address this in a number of ways, including use through the use of a proprietary algorithm to identify and exclude patients that fall outside of pre-determined pain score variability specification to a qualifying baseline period. The theory here is that subject with less variability in the pain score reporting are generating more reliable data. Additionally, in the current study, we're utilizing a difference statistical method known as the mixed model repeated measures or MMRM, instead of last observation carried forward, LOCF, that we used in the prior study. Since MMRM takes into account all pain scores over the 12-week treatment period and not just based in the 12-week score, like LOCF, does, it also works to reduce variability. So the main message here is that we believe the changes made in the current clonidine topical gel study will provide us the best chance of success, if in fact success can be achieved. As we believe we have addressed in a positive way what led to the failure of the previous trial. Now should we meet our study objectives, we would immediately revisit our partnering strategies around this asset. And I said on our last call, clonidine topical gel had previously generated significant interest from potential partners. Now in regards to our 30-day sustained release Buprenorphine injectable product, we are working diligently toward the submission of our R&D by year end. A pre-clinical study to characterize the time for elimination and the formulation of polymers at the injection site has been complete with favorable results. The FDA also requires demonstration of a minimum toxic dose in animals, which has now also been achieved and the study is nearing completion. In addition, we continue to move forward with the activities to support the initiation of the first-in-man study, which we expect to begin during the first quarter of 2017, with results available in the second quarter. This will be important value-driving events and will confirm whether we have met our desired 30-day formulation. As you will recall, this product is being developed for both pain and opioid addiction, with the biggest challenges that this dosage form could potentially overcome or currently dosage forms for compliance and diversion. As such, there's significant interest in this approach in the addiction treatment communities. Now let me briefly turn to the financial outlook for the Company. We continue to believe that under our current operating plan, our cash run rate extends into the third quarter of next year. However, this could be extended even further when we consider what's in that operating plan. For instance, we have $14 million in the R&D budget dedicated to the continuance of the clonidine program, should we have a positive outcome in the Phase 2b trial. Clearly, if there's a negative outcome, we would not be spending the $14 million. That alone is another quarter of run rate. Even if the data is positive, we don't have to move forward aggressively with the remainder of the program. And as already stated, we would quickly engage in partnering discussions. Also we've got another $5 million in the R&D budget, that is dedicated to a product that we have yet to disclose publicly, because we have not finalized plans to move the home grown asset forward. These expenses could also be suspended. Overall, we had capital allocated in the 2017 budget, that is not a fixed cost and by delaying or foregoing those expenses, we could extend our cash run rate well into the fourth quarter of next year. As such, at this time currently given the equity markets, we do not have any immediate plans to raise additional capital. With that I may now focus on our respective key value drivers over the next few quarters before turning things over to Ernie for the review of the financials. For Buprenorphine is on stretch, we are focused on bringing this product to profitability by the end of next year, a significant but achievable objective. In addition to the progress we're making with BUNAVAIL, we remain optimistic about BELBUCA and its prospects for future growth on attributes that clearly differentiate it from the c2 opioids. Importantly, we are only three quarters into the launch and like any launch there's significant educational effort, particularly as we operate against the opioid head winds. For financial perspective as a reminder, we received a mid to upper teens royalty from Endo on sales of this product. Now I did not discuss ONSOLIS, which we licensed in the second quarter of 2016, but we expect to return that asset to the marketplace by mid-next year. And note we have an upper team royalty on that product, net sales. Finally, our own pipeline remains on target and meet our objectives for this year and in 2017. Specifically as I stated earlier, we expect top-line data in December from our Phase 2B study of clonidine topical gel and we anticipate the results of our single dose PK study of our 30-day [indiscernible] buprenorphine injectionable product by the second quarter of 2017. So before I conclude my formal remarks, I'd like to also welcome Tim Tyson to our board as an independent director. Tim's corporate career spans over 30 years in the pharmaceutical industry. And Chairman and CEO of Avara Pharmaceutical Services who recently started as Chairman and CEO of Aptuit. Previously Tim served as COO, President and CEO of Valeant Pharmaceuticals and also ran multiple divisions of GlaxoSmithKline, including global manufacturing and supply, [indiscernible] dermatology, [indiscernible] pharmaceuticals, also responsible for managing all sales and marketing for GlaxoWellcome GS operations during his 14 years there is inside some guidance will be a valuable to cost all assets in the business as we continue to progress forward as an organization. So with that I'll turn things over to Ernie, and then we'll open up for questions. Thank you. Ernie?

[Ernie De Paolantonio:]

Thank you, Mark. Good morning, everyone. I will now review our key financials for the quarter ended September 30, 2016. For a more thorough review of our third quarter financial results, please see our 10-Q, which we will file this morning. Before we get into the numbers, I want to remind everyone that BUNAVAIL revenue is based on third-party pull through data that we received on a one-month lag basis. For the third quarter of 2016, BUNAVAIL revenue includes the months of June, July and August, but not September. Second, keep in mind that we get paid one quarter in arrears on our BELBUCA royalty, so that royalty booked in the third quarter for BELBUCA sales are based on second quarter BELBUCA sales and not the third quarter. Total net revenue for the third quarter of 2016 totaled $3.6 million and consisted of $2 million of BUNAVAIL revenue, $1.1 million of royalty revenue for BELBUCA and Breakyl and $0.5 million of R&D reimbursement for ONSOLIS in the U.S.. BELBUCA royalty from Endo totaled approximately $0.3 million, and was partially offset by the remainder of the deductions in stocking fees associated with the launch. You will recall we also reported launch-related deductions and stocking fees in the second quarter as discussed on our previous earnings call. Importantly, these fees and expenses have now been totally accounted for and will not impact quarterly royalties going forward. Comparing third quarter revenue to revenue in the second quarter that was $5 million and included $2.1 million of BUNAVAIL revenue, $0.4 million of royalty revenue from Breakyl and $2.5 million from the upfront payment from Collegium Pharmaceutical for the licensing rights to ONSOLIS in the U.S.. Total operating expenses in both the third and second quarter of 2016 were $16.5 million. Sales and marketing expenses in the third quarter of 2016 were approximately $5 million or 40% less than the same period of 2015, and approximately $2 million less than the second quarter of 2016. You'll recall that we expect to reduce commercial expenses by approximately $20 million by the end of 2017. I am pleased to report that we remain on target to accomplish this objective. Expenses in the third quarter included costs associated with the digital direct to patient marketing program for BUNAVAIL, and one-time expenses from the conversion of the sells force from Quintiles. General and administrative for the third quarter were $6.8 million versus $5.7 million in the second quarter of 2016. The increase is primarily attributable to legal expenses. R&D expenses for the third quarter were $4.4 million and $4 million for the second quarter of 2016. Net loss for the third quarter ended September 30th, 2016, was $16 million, or $0.30 per diluted share compared to a loss of $16.4 million or 3 $0.31 per diluted share in Q2. Net loss, excluding non-cash stock compensation expense of $4.1 million, was $11.9 million or $0.22 per diluted share in Q3, versus $13.1 million, excluding the $3.3 million of stock compensation expense or $0.25 per diluted share in the second quarter of 2016. Now for third quarter BUNAVAIL financials in more detail. While BUNAVAIL met revenue in the third quarter was $2 million and similar to our first two quarters of the year, dollars per script in the third quarter was $71, which for the second consecutive quarter, was higher than our earlier estimate in May of the upper 60s. The slight reduction in revenue prescript from the second quarter was due to a one-time true-up in our Medicaid expenses associated with Tenncare. As for the cost of manufacturing, again our unit cost of BUNAVAIL has continued to decrease quarter over quarter, decreasing 17% since the beginning of 2016. The unit cost reduction is being driven by the integration of our high-speed packaging equipment and waste and yield improvements. Additionally, we have initiated other yield improvement projects that should improve our unit cost by an additional 30% by the end of 2017. Versus the second quarter, BUNAVAIL gross profit held steady in the third quarter, as both the percent of net revenue, approximately 20%, and total dollars, approximately $.4 million. Gross profit percentage has improved 12 percentage points since the first quarter, and reflects the improvement in both our gross to net percentage and our manufacturing cost structure. Now turning our financial results for nine months ended September 30, 2016, revenue for the nine months totaled $11.6 million, including $6.2 million of BUNAVAIL revenue, $2.5 million for the milestone payment from Collegium, $2.4 million of royalty revenue from both BELBUCA and brakeel and $0.5 million from R&D reimbursements versus 2015 nine-month revenue of $16 million consisting primarily of $11.8 million related to BELBUCA including the $10 million milestone for the FDA acceptance of the NDA, $2.7 million for BUNAVAIL, $0.9 million of R&D reimbursement revenue, and $0.6 million of brakeel royalty revenue. Net revenue for BUNAVAIL for the first nine months of 2016 at $6.2 million, reflects a 133% increase versus 2015 net revenue of $2.7 million for the same time period. Operating expenses for the nine months ended September 30, 2016, were $51.4 million, versus $56.7 million for 2015. 2016 sales, marketing and other commercial expenses were $18.2 million, versus the $21.3 million in a corresponding period of 2015, representing the 15% decrease. 2016 General and administrative expenses were $18.7 million, versus $19.1 million in 2015, while R&D expenses were $13.8 million in 2016, compared to $15.5 million for 2015. Net loss for the nine months ended September 30, 2016, was $51.2 million, or $0.96 per diluted share, compared to the $47.8 million or $0.92 per diluted share for the nine months ended September 30, 2015. 2016 loss, excluding $11.6 million of non-cash stock compensation expense was $39.6 million or $0.74 per diluted compared to $35.1 million or $0.67 per diluted share, excluding $12.7 million of non-cash stock compensation expense for 2015. This difference in the nine-month earnings year-over-year is related to the $10 million milestone payment received in relation to the BELBUCA NDA acceptance in 2015, offset partially by higher BUNAVAIL sales, royalty income, and lower operating expenses. Finally, our cash balance of $44.7 million at September 30 represents a $12.8 million net cash reduction to our Q2 balance of $57.5 million. Based on the ongoing reduction in commercial operating expenses initially announced in the first quarter earnings call in May, we expect our cash flow to extended to 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, take some questions.

[Operator:]

[Operator Instructions] And we'll take our first question from Ed White with FBR & Co.

[Ed White:]

Good morning, guys. Thanks for taking my question. So, first, if you can talk about net revenue per prescription going forward and how should we be thinking of that with the impact of the new contracts coming online, you know, already in 2016. And then, you know, the three for 2017.

[Mark Sirgo:]

The new contracts coming online are at a more favorable rate then what we have seen over the past and the commercial contracts should improve our net revenue prescript as such.

[Ed White:]

Okay. Great. And then just, I mean, this question is more for Al, I was just wondering if you can talk about the Internet initiatives that direct to consumer marketing. What kind of results you're seeing there and will this effort be expanded? Al Medwar

[Mark Sirgo:]

Ed, this is Mark. I would add to that at least in one of the markets, we did see substantial growth. So we're still in the process of analyzing all the data to determine what about a certain market may be more responsive to this type of media than others. Because we do think there's an impact, but it's not consistent in the markets that we were in.

[Ed White:]

Okay. Great. Thank you. And then just for looking forward to more contracts. Are there any more contracts that you're bidding on that we can see results from by the end of 2016 or that new contracts more 2017 event?

[Mark Sirgo:]

Yes. I don't, this is Mark, Ed. I don't think there are any additional ones that we'll see prior to the end of this year. But I think going into next year, there's a number of opportunities, for instance, for the Medicaid the class of trade, we're continuing to work directly with the states and their PBMs to improve access, of course and we've demonstrated that. But next year, for instance, actually it will be later this month, we'll be participating in the bidding process for the national Medicaid polling initiative, which is managed by Magellan, which is a Medicaid fee-for-service PBM. And this grouping is a buying group consisting of 13 states. So most of which fall on Magellan's PDL, the preferred drug list guidance. These are states like North Carolina, New York, Kentucky, for example. All of which are a part of buying group. So it represents the largest really Medicaid opportunities in the country. So that's coming up, the bidding this month. And that will play through during the first half of next year. And the commercial sector, where we've had these substantial wins since July, we're continuing, of course, to build on that momentum. And we hope to see some additional wins next year. We're not going to mention exactly what we're targeting for competitive reasons. But we think the message now around BUNAVAIL, which is not only the product differention, but also the standard diversion platform we're operating from is really starting to resonate and its reflective of what you've seen over the past six months.

[Ed White:]

Great. And then just my last question. As far as Tennessee is concerned, can you give any metrics as to what's going on there, so you would see any significant cost savings. But can you tell us anything as far as the prescription trends are going year-over-year and quarter over quarter in Tennessee.

[Mark Sirgo:]

Yes. We believe it's stabilized at this point. So we've seen somewhat of a steady decline, which is slowed dramatically over the last quarter or two. Now there's a lot of initiatives going on down there in the state of Tennessee. One of which is increasing the payment to physicians who are treating these Medicaid patients. Many of them have dropped out from actually participating because of the low fee they're given for the office visit. That's being investigated by Tenncare and the word is they're going to take some action around that which I think will entice some of these physicians to get back into seeing these types of patients. So it's kind of a fluid situation down there. It still represents our largest state overall, not just Medicaid, but commercial business so it's important to us. It's remained relatively, flat over the last couple of quarters we think that can, perhaps, increase as we head into the first, second quarter of next year.

[Operator:]

We'll go next to Jim Molloy with Laidlaw.

[Jim Molloy:]

Hey, thanks for taking my questions. Hey, I had a question on the royalty revenue. How much of is that is BELBUCA versus sort of the prior ONSOLIS royalty revenue?

[Mark Sirgo:]

It was approximately $0.3 million.

[Jim Molloy:]

$0.3 million. And then looking at the net sales here in the launch, we spoken about this on the fourth quarter call back in I guess February, what point does this turn around? I mean, we're sitting here flat through the year. I know there's been tremendous success on the wins and I congratulate you on that. No getting around that's huge. But when does that translate into actual revenue coming through and shareholder value being created? It's a tough question to ask and I apologize for it but the stocks has been cut in half since the start of the year, and the sales have been flat. You spend $55 million last year to sell $4 million in drug. You're on track to sell $8 million on $45 million of SG&A. It's not making sense here at this point. At what point do you look to out license this product or sell it to someone and put it in the bag?

[Mark Sirgo:]

Jim, this is Mark. Thanks for your question. You know, we've outlined a plan to get the product to profitability by the end of next year. And I think the question for investors is that a meaningful objective? We think it is. It's one we certainly we think we can achieve. I think if you looked at the way that we've gotten to where we are currently, particularly around these managed care wins, it's very telling in a very positive way. The reason that we're achieving the level of success behind the managed care wins is because the messages behind BUNAVAIL are now resonating in a significant way. So our goal of getting to profitability by the end of next year is significant. It's meaningful. It's achievable. And that's what we're working towards and we think if we can do that, that we're going to create shareholder value. If we find that we're not moving forward in a progressive manner around that initiative, then we've got other decisions we have to make, we'll have to make and we're ready to make. So what's where we are currently.

[Jim Molloy:]

At what point will you make those? What's the tell that says it's time to, we were around progress, I mean we haven't really seen a tremendous amount of top-line growth. We're seeing fantastic wins on the managed care side. No doubt about it. At what point, what's the signal for you guys on the inside to say maybe it's time to look another direction with a strategic move?

[Mark Sirgo:]

Sure. So let's just go back to May, right? We made decisions to reduce our cost structure. We've done that. We have stabilized the business around it, under reduced cost structure, we've got some significant managed care wins that are already, we're starting to see an initial impact from those. Most of them don't start until January 1. So the idea is we should see a significant increase in our business in the first quarter. Then if we don't, we'll make the necessary decisions we have to at that point. But we're monitoring this very, very closely. We understand the pressure around it and we think we're making the appropriate decisions.

[Operator:]

The next question is from Scott Henry with ROTH Capital.

[Scott Henry:]

Thank you and good morning. I guess the question with questions to BUNAVAIL, how would you expect the trajectory for 2017 to surface? I mean should we expect a step-up function as we saw when Tennessee came in, or should we look for a gradual increase for prescriptions throughout the year?

[Mark Sirgo:]

Hey, Scott, this is Mark. Good question. You know, clearly the major contracts are initiating on January 1. We mentioned the one where we've gone from 20 prescriptions to over a 500 in the month of September that started on January or sorry, July 1. But the majority of these, particularly the one where we are in a preferred position and Suboxone is non-preferred, initiated January 1 so it puts news a great position, if we can execute around that, and that's what we have to do to see a nice increase in the business in the first quarter. And with the other contracts that are also playing out then we're in a preferred position, but alongside Suboxone, we expect growth from those as well. So we should have a very good first quarter and a strong first half.

[Scott Henry:]

Okay. Great. Thank you for that color. And then there were a lot of comments on R&D for clonidine and some of the other pipeline. I guess, Ernie, would you care to give any kind of guidance on 2017 R&D, at least directionally? Should we think about it as flat for 2016 or is that up? Or just trying to get some directional guidance for that number.

[Ernie De Paolantonio:]

Hi, yes. It would depend on clonidine as Mark mentioned in his script. There's $14 million in there for clonidine. So depending on how that goes and then the timing, it would be an increase to this year, if we decide to go in R&D with clonidine for the full year. Okay. Great. And then with regards to clonidine, I know, you have data coming in December. Can you give us any color, I mean, given that's not that far away, should we be thinking about the beginning of December or the end of December, just any kind of way we can know when to expect that data.

[Mark Sirgo:]

Yes, Scott, this is Mark again. I would say the first half. Okay. Thank you for that color on that as well. That should do it for me. Thanks for taking the questions here.

[Operator:]

We'll go next to Matt Kaplan with Ladenburg Thalmann.

[Matt Kaplan:]

Hey, Mark. Thanks for taking my questions. Just digging a little bit more into the increase in patient cap and how that could impact your sales trajectory. What are your thoughts in terms of when we should start to see that impact and how you start to see it in terms of some of the sales for BUNAVAIL right now?

[Mark Sirgo:]

First of all, Scott who oversees our commercial effort and his people have the targets. We know who the doctors are that are on the that have signed up and received their certification to increase this 275 level. So, you know, we know where they are. We are calling on them, you know, in the enhanced effort around it. You know, having said that, the majority of them have just received that certification and, therefore, we would expect, you know, slowly as we move into the end of the year, to start seeing some increase there, but really as I mentioned in my formal remarks, it's a 2017 and beyond impact.

[Matt Kaplan:]

Okay. Good. And then just talk a little bit about the competitive landscape you're seeing right now. And what you're up against. Obviously ZUBSOLV and Suboxone and what kind of feedback you're getting from the sales reps and about the ability to get wins there on the frontlines.

[Mark Sirgo:]

Yes. I don't think anything has changed. You know, I was in the field just last week. And the message around the differentiation of the product, particularly lower amount of Buprenorphine to get the same plasmic concentrations as a competing products is important, resonating the discreetness and the way you can use the products is resonating. You know, the fact is these managed care contracts I think keep me going back to them, but it's given us access in some areas which we just didn't have before. But the important news is that on the one contract that we mentioned, we're now up to over 500 prescriptions. I mean physicians told us if we can get a preferred status for the past year and a half, that they'd write the product. And we're seeing them write it. So I think so the messages around the differentiation have always been positively, we've struggled to get people to switch our patient, okay, but the new patients coming in. We've got good access to and I think we're now starting to see with these plans, we're getting preferential treatment. We're seeing growth. So I think it's just a matter of the fact that we're now nearing the end of year two and this marketplace. People better understand the product, the solutions that we're providing for the challenges that they're facing. Diversion has become a major issue in this category and physicians and certainly managed care providers have taken notice and they're starting to make some changes because of that. So it's, I think things, that's why we're optimistic about this next year.

[Matt Kaplan:]

Okay. Very good. And then you quantified some of the managed care wins you've gotten since July. Can you give us a sense in terms of the number of, you still have out in front of you that you're in later stage discussions with and could get over the goal line and perhaps the next six months.

[Mark Sirgo:]

Yes. I think I mentioned on an earlier question at least for the rest of the year, we don't expect any significant adds. But as we head into next year, the year of the bidding cycle is back into play around a number of these Medicaid opportunities for one. And we continue to look at the commercial area for plans where we can either be added to a formulary or improve our position on the formulary. So I can't give you any more specificity than that. But it's an active program.

[Operator:]

And next is Tim Lugo with William Blair.

[Unidentified Analyst:]

Hi, this is Roger for Tim. Thanks for taking the question. Maybe some color on the patient cap. Do you know approximately what percentage of physicians that have applied have already prescribed BUNAVAIL in the past?

[Mark Sirgo:]

Yes, Roger, Mark here. I'm looking at Al and Ernie. But I don't think, we don't have that information at this point in time now.

[Unidentified Analyst:]

Okay. And then just some additional color on the two managed care contracts that go into effect in Q4. Where in the quarter is that? And could you expect based on where they are if we could probably see the same increase that you're seeing in the one that's instituted in July?

[Mark Sirgo:]

Yes. So those initiated October 15. So just really getting under way. And I can't really give you any projections in terms of what impact we think that we'll have. We certainly modeled what we believe will occur. And it's not insignificant and keeping in mind that we're now in a preferred status, no prior authorization that these physicians have to go through, in their plans, whereby much as the one initiated in July. They've indicated that they'd be more apt to write the product, if the prior authorization was removed. So with that in place, we expect to be able to make good headway with each of those.

[Unidentified Analyst:]

Great. And then on BELBUCA, can you just talk about some of the optionality that may exist with your partners, management changes. Is there anything contractual that says that they could not return the product back, just a little bit of color on that would be great. Thanks.

[Mark Sirgo:]

Yes. And contractually they're able to basically outlicense or license, sublicense, whatever you want to refer to it as, as they see appropriate. Having said that, we have a great relationship with them, including the current management team. It's a close contact, good sharing of information. We're not in the dark whatsoever in terms of their thinking. And we remain in close contact with them as they pointed out yesterday. They're reviewing all lines of their business. They're reviewing each product within each line of business. BELBUCA being one of those. So as they get to their decision points we'll be close in terms of that communication with them around that. So, yes, I think that's important, right? We feel like we're clearly in a partnership with them. They're going through some challenging times, of course. But the good news is the communication is good and I know they're mindful of how important the product is to us and I think they're doing all the right things in that regard.

[Unidentified Analyst:]

Great. Thanks for all the questions.

[Operator:]

Our next question is from Ken Trbovich with Janney.

[Ken Trbovich:]

Thanks for taking the question. I guess I want to start by stepping back, Ernie, you kind of us hit us with the fire hose on all the details. Can you step back and clarify specifically the comments with regard to cost of goods sold. I thought I heard you say the cost of goods sold are expected to improve by an additional 30%. It wasn't clear to me, though, after that. You made a statement of where the COGS are now and that part I guess I just missed in the speed.

[Ernie De Paolantonio:]

I'm just going back. So, yes, where we are right now is that we've improved by 17% since the beginning of the year. And we have yield and improvement projects that have started, that will go through the end of this year and into the beginning of 2017, which would improve our cost of goods by an additional 30%. So if you were to, you know, take a look, our costs from the beginning of 2017 will be cut I'm sorry, 2016, will be cut in half through the beginning of 2017 through these improvements.

[Ken Trbovich:]

Got it. Got it. Is there a way to look at that in a different way, just to talk about what that sort of translates to into terms of gross margins? I mean does that translate to a 50% gross margin or a 70% gross margin? I mean what's the sort of target by the end of 2017?

[Mark Sirgo:]

We'll be pretty much in the 50 to above gross profit, 50 to 60.

[Ken Trbovich:]

Got it. Okay. And then, Mark, can you just clarify with regards to TennCare, can you remind us again, is that a two-year contract in terms of the duration?

[Mark Sirgo:]

Yes, yes, a two-year contract.

[Ken Trbovich:]

Okay. And then with regard to these contracts that you've secured, the six that you secured thus far, can you remind us on those? Are they each one year or they vary by contract?

[Mark Sirgo:]

Yes. They're two years.

[Ken Trbovich:]

They're all two years. Okay. So that improvement that you were discussing in terms of the outlook potentially, it's not as if you get the benefit for a few quarters and it goes away. Obviously the business that you secured, you 'd expect it to hang on to for a period of time?

[Mark Sirgo:]

Correct. Correct. And just to reiterate what I said on my formal remarks, we're looking at with the ones we captured since July, over 0.5 million prescriptions we didn't have access to before before. In addition to the fact we think that Kaplans is going to generate 0.5 million prescriptions over the next 12 months. So we're not going to give specificity necessary around any given contract, we've got access to a lot of prescriptions that we didn't in 2016.

[Ken Trbovich:]

Got it. And then with regard to the pipeline, I guess the question that I've got is the, once you've got the PK data for the Buprenorphine 30-day injection, what's the sort of clinical path from there forward? It seems like obviously this has been a program that's kind of been in the skunk works for a while. And progressing to a point at which it's going in demand. It seems like the path forward after that might be fairly quick. I just want to get a better sense for how you see that playing out.

[Mark Sirgo:]

Yes. So we go from single dose, which is the first study we hope to initiate first quarter, if that turns out the way we anticipating and we move immediately to multi-dose, which we hope to complete before the end of next year and from that point we're into the clinical trials for each indication, which would initiate probably first quarter of 2018.

[Ken Trbovich:]

And would the expectation be that a single study in each indication is all that's necessary? Or you haven't yet had discussions with the agency that would give you comfort around that?

[Mark Sirgo:]

Yes. We've not progressed that far with the agency. It's certainly a probability that we'd only need one.

[Ken Trbovich:]

Got it. Okay. I think that's it for my questions. Appreciate it.

[Mark Sirgo:]

You're welcome.

[Operator:]

And our next question is from Chiara Russo with Cantor.

[Chiara Russo:]

Hey, guys. Good morning. Thank you for taking the questions. Just a couple of quick hits I think. With BUNAVAIL, have you guys seen any changes or could you perhaps give us a little bit more color around the mix of payers for that product. Do you see that doing any types of shifts?

[Mark Sirgo:]

Good question, Chiara. I think it's going to remain fairly, fairly balanced, at least over the course of 2017. You know, we've added a couple of Medicaid contracts, as you know, on the commercial we've added these sfive of the six plans that we've added since July are commercial in nature. So I think overall I see us moving more towards commercial as we get into 2017. But we're still bidding on a fair number of Medicaid contracts as we head into next year as well. So a little tough to tell at this point exactly how 2017 will look but just based on the commercial contracts we've signed, we'll certainly be moving more in that direction, which is where more of the patients reside anyway. You know going back it's roughly about 55% commercial, about 25% or so on the Medicaid side of things and the rest cash pay.

[Chiara Russo:]

Okay. Awesome. Thank you. And then I'm just kind of looking at the contracts that you have signed and I mean, obviously the one from July, from the summer, you were moved from non-preferred to preferred and you share that position with Suboxone and you had approximately 210,000 scripts there. I was wondering if you'd gives us a comment sort of what type of percentage of those scripts you were able to capture from that plan.

[Mark Sirgo:]

Yes, so that's the one that in the month of September, we were at about 550 prescriptions, compared to about 20 prescriptions before that plan was enacted back in July. So we're not going to put out an exact percentage of share that we think we're going to achieve from that plan. I mean, we certainly have modeled something. But for competitive reasons, I don't want to put that out there but we're obviously making good progress behind that plan. It's in a part an area of the country that we've had a bit of success in, even prior to. So we expect to continue to grow in that plan.

[Chiara Russo:]

Okay. Awesome. Thank you for that. And sort of lastly, just going back to sort of the BELBUCA Endo partnership, if Endo decided to give the product back, would that be something that you would be willing to take out commercially yourselves? Or do you think you would look to go ahead and partner that again?

[Mark Sirgo:]

Yes. So I think we're not really in a position to speculate. You know, when Endo gets to their decision point, we may or may not have one to make ourselves. But I think as I mentioned, we're in good close communication with them. And as things progress, they'll update, we'll update. So don't want to speculate on any outcomes at this point.

[Chiara Russo:]

Okay. All right. Great. Thank you so much, guys, for the question.

[Mark Sirgo:]

You're welcome.

[Operator:]

There was no questions remaining in the queue, this will conclude our call for today. Thank you for your participation. You may now disconnect.