BioDelivery Sciences International, Inc.
Q4 2016 Earnings Call Transcript

Published: 17 Mar 2017

[Operator:]

Good day, everyone, and welcome to the BioDelivery Sciences Fourth Quarter and Full Year 2016 Earnings Call. Just a reminder, today’s call is being recorded. And at this time, it’s my pleasure to turn the conference over to Al Medwar, Senior Vice President of Corporate and Business Development. Please go ahead, sir.

[Al Medwar:]

Good morning. This is Al Medwar, Senior Vice President of Corporate and Business Development for BioDelivery Sciences. And welcome to the BioDelivery Sciences fourth quarter and full year 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 make during today’s call or in responding to questions and any other public documents of BDSI or statements of its management may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on management’s current beliefs and assumptions about the future but are not statements of fact and therefore involve and are subject to significant risks and uncertainties. Forward-looking statements may include, without limitation, statements with respect to BDSI’s plans, objectives, projections, expectations and intentions, and other similar statements about the future. Forward-looking statements are typically identified by words such as projects, may, will, could, would, should, believes, expects, anticipates, estimates, intends, plans, potential or similar expressions. These statements are based upon the current beliefs and expectations of BDSI’s management and are subject to significant risks and uncertainties, including those detailed in today’s conference call, as well as BDSI’s filings with the Securities and Exchange Commission. Please note that actual results, including without limitation, results of the commercial launch of BUNAVAIL and BELBUCA 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?

[Dr. Mark Sirgo:]

Thank you, Al. Good morning, everyone, and thank you for joining BDSI’s fourth quarter and full year 2016 financial results conference call. Since our last call, as most of you know, our business was significantly strengthened when we reacquired worldwide rights to BELBUCA from Endo under very attractive financial terms. Transaction was announced late last year and closed in January. As previously stated, the financial terms of this transaction did not materially impact our cash balance while positively impacting our cash flow. Furthermore, BDSI will not be responsible for any future royalties and milestone payments to Endo. I’m very pleased to report that excellent progress was made early this year in effectively, efficiently transferring day-to-day BELBUCA activities and operations to BDSI. Final agreement was signed with Endo on Friday, January 6th, and on Monday, January 9th, BDSI had ownership of BELBUCA inventory and was shipping to wholesalers. Two weeks later, our sales force was expanded, realigned, trained and in the field with customers. And by early this month, we had implemented a number of our key promotional initiatives. This covers only a small number of the actual activities involved in this transition. Accomplishing this required exceptional dedication, focus and hard work from all of our employees, and I’m very pleased with the outcome. This should provide reassurance to our shareholders and BDSI is well-prepared and has fully assumed responsibility for moving BELBUCA forward. I’d also like to thank Endo once again for their complete cooperation. Simply put, we believe BELBUCA has game-changing potential for BDSI and our shareholders. Last month, we hosted an Analyst and Investor Day in New York City to further discuss the compelling BELBUCA opportunities. I’d like to begin my remarks this morning by reiterating some of those key points we shared at that event. First, we expect BELBUCA to have an immediate and favorable financial impact on our business. BELBUCA ended 2016 with the net revenue run rate of over $20 million, after nine months in the marketplace. Importantly, we believe BELBUCA creates the potential to bring our commercial business to profitability as early at the end of the first quarter of this year. You’ll recall that we were previously focused on bringing our commercial business, which at the time consisted only of BUNAVAIL, to profitability by the end of 2017. This is clearly a very important and positive change for our business. We also inherited a solid managed care platform with BELBUCA that will allow us to drive growth in 2017 and beyond. Importantly, it’s more than just having another product. BELBUCA brings to BDSI, clearly differentiated product from other opioids that can be part of a real solution to the current opioid crisis facing our country. Finally, and most importantly, BELBUCA bring significant optionality to our business. Since announcing the transaction, we’ve received numerous calls and interest regarding BELBUCA from both U.S. and ex-U.S. companies. We intend to leverage these opportunities as appropriate for the benefit of our business and shareholders. In fact, based on the current level of discussions and prior work by Endo with caveat that certain financial terms can be reached, we expect to be in position to advance upto two ex-U.S. licensing agreements in 2017. With that, let’s take a closer look at the positive financial impact BELBUCA is expected to have on BDSI. It is most effectively done by comparing a few key metrics between BELBUCA and BUNAVAIL. First, BELBUCA is 2.5 times more profitable per prescription than BUNAVAIL. Its greater profitability is driven by a number of factors, starting with a greater number of films per prescription that is 55 films or just 21 films respectively. Second, the gross to net discount is approximately 15 percentage points lower. And third, the cost of goods is one-third that of BUNAVAIL. All this should, as mentioned earlier, help bring our commercial units to profitability as earlier as the end of this quarter. While BELBUCA is more profitable than BUNAVAIL, we are mostly excited about BELBUCA’s future prospects because of its real potential to address the key risks facing physicians today in treating pain with opioid due to the risks of addiction and overdose. As relates to addiction, BELBUCA is classified as a Schedule III drug which by DEA definition means that it’s less abusable and less addicting versus Schedule II drugs such as morphine, hydrocodone and oxycodone. And buprenorphine is the only opioid that can make this claim with the indication for chronic pain. Regards to overdose, respiratory depression is what typically kills someone from an opioid overdose. In other words, they stop breathing. Buprenorphine has been shown to have a ceiling effect on respiratory depression, which means at some point, you saturate the ability to lower the respiratory rate any further. This is another significant differentiating feature from the category 2 opioid. The key to BELBUCA’s success going forward is to better educate healthcare providers on the benefits of buprenorphine and particularly on these two key attributes. So, hopefully, you can see why we’re excited here about the prospects of BELBUCA. Moreover, as you heard at our Analyst and Investor Day, we have a solid and highly-focused commercial plan in place for BELBUCA. In order to begin this discussion on our commercial effort behind BELBUCA, it’s important to understand the prescribing trends in this market. There has been a shift in the past year in the use of extended-release opioids including oxycodone, morphine, and hydrocodone, as total prescriptions in this category have dropped by 10% among primary care physicians. However, they’ve increased 6% among pain specialists. This shift was largely driven by the new CDC guidelines issued in March of last year that focused on alternative therapies for treating pain prior to opioid and end using immediate-release opioid prior to extended-release opioid. Regardless, the treatment shift in chronic pain towards pain specialists increases the importance of the specialty. Therefore, we’ve increased the sales and marketing focus for BELBUCA on pain specialists along with the most prolific, long-acting Opioid primary care prescribers. So it’s important, simply it does not make sense for us to spend our sales and marketing resources on a wide audience of primary care specialists at this point in time. Now, digging into prescriber data a bit further. While the overall long-acting opioid market has declined in the last couple of years, the buprenorphine market tells a different story. Total prescriptions for long-acting opioids actually declined by 5% between 2015 and 2016, while total buprenorphine prescriptions, meaning Butrans, which has produced 7 to 8 transdermal patch and BELBUCA combined, increased by 8%. So, while many healthcare practitioners are decreasing their use of long-acting C2 opioids, buprenorphine continues to be an appealing and growing option for the treatment of patients with chronic pain. Trend bodes well for the future of BELBUCA. Now, within the buprenorphine market itself, BELBUCA is performing very well. Of the new to branch scripts, meaning the first time a patient is placed on buprenorphine. BELBUCA secured 21% of these buprenorphine prescriptions as of September of 2016. Looking closer to buprenorphine market, it’s also important to understand product switching data. In other words, where are these buprenorphine patients coming from? Well, not surprising, since they represent nearly 70% of market prescription, hydrocodone and oxycodone represented approximately 50% of the buprenorphine switches. However, 17% [ph] of prescription switched to BELBUCA came from Butrans, keeping in mind Butrans revenue in 2016 exceeded $250 million. This is particularly meaningful since this indicates that healthcare practitioners with Butrans experience are much likely to be early adopters of BELBUCA. And as such, this is an important contributor to our overall targeting strategy. Now, with all this data in hand, we set out to put a commercial plan in place. Our initial focus is on two groups starting with the current BELBUCA prescribers, defined as those that have written for BELBUCA within the last six months. This number totals approximately 4,400. Second group of physicians are fairly non-BELBUCA writers who are also high-volume, meaning decile 8 through 10 prescribers of both short and long-acting opioids for chronic pain, as well as Butrans. There are 2,400 of these high potential physicians. Importantly, our current sales force is 65 sales representatives and five managers cover approximately 95% of the BELBUCA prescription volume that was written in the second half of 2016. This total includes 20 sales representatives that we have recently added in high volume BELBUCA geographies of which 14 were previous high-performing Endo BELBUCA sales representatives. With that, let me move on to some of our key marketing initiatives for BELBUCA. As I speak, we’re actually making our pain conference debut as a company with BELBUCA at one of the premier pain association meetings, the American Academy of Pain Medicine Annual Meeting in Orlando, Florida. BELBUCA will be featured at our exhibit booth and our team will participate another meeting related activities. In addition, we have three scientific presentations on BELBUCA that were accepted and will be presented at the meeting. From a marketing and educational standpoint, we will be focused on buprenorphine, the molecule, and this differentiates it from the other opioids. We’ve identified the lack of full understanding of the benefits of buprenorphine as a key to the sustained long-term growth of BELBUCA. As part of this, we have partnered with the organizers of the annual pain week conference, which is the leading national conference on pain for front-line practitioners where we are participating in their PAINWeekEND Regional Conference Series. These are two-day meetings with CME credit to provide physicians, nurse practitioners, physician assistants and other healthcare practitioners treating patients with pain. As such, we have a dedicated BELBUCA symposia, each of which we expect to be attended by 100 to 150 pain prescribing physicians. These programs will run from March through June of this year and are an extremely cost-effective way to reach potential prescribers. First program was held the first weekend in March in Indianapolis where we had over 100 healthcare practitioners attend. And we have upcoming programs scheduled in April in Atlanta, Detroit, St. Louis, Oklahoma City and Raleigh-Durham. In addition, we will host sales representative sponsor speaker programs in territories to further educate on buprenorphine, the molecule throughout the year. Combined, we are confident in the ability of these programs to educate a significant number of healthcare practitioners on buprenorphine and the use of BELBUCA to help drive prescribers. As you look at prescription level so far this quarter, I should note that we have now come through what is one of the more challenging times for any pharmaceutical product that is a transition or hand off from one company’s commercial team to another. I’m pleased to report that during the first quarter we’ve stabilize the business during this transition, particularly around the all important prescription volume, which is nearly the same as when Endo vacated the selling effort in mid-December. And we anticipate early growth as we head through the second quarter with our sales force fully deployed as we continue to implement new marketing initiatives including a new and enhanced co-pay support program, our new speaker program and our new promotional campaign. So, we’re going to have a very busy second quarter, putting our brand on BELBUCA that we believe will provide an accelerate growth as we head into the second half of this year. Let me now spend a few moments on the managed care situation, extremely encouraging. Currently, BELBUCA is heavily weighted in the commercial payor space while we see approximately 56% of our prescriptions with Medicare representing 20%. In comparison to the overall long-acting opioid market, commercial and Medicare represent 51% and 34% respectively. Increasing Medicare percentage will be a focus for us going forward. This is really a timing issue. Medicare contract bids approximately a year prior to execution. As you recall, BELBUCA was launched in February of last year so it did not line up with the previous bid cycle. Subsequently, Endo submitted bid last fall. Therefore, while we can expect some adds in 2017, our anticipation is that most of the improvement in Medicare will be seen in 2018. We’re also in discussions with the VA system where like Medicare we can see advancement in contract discussions in the second half of this year. From a formulary access standpoint, we have access to greater than 70% of commercial prescriptions available in a favorable formulary position meaning BELBUCA is covered with no restrictions beyond the label or better. This represents over 1.8 million commercial prescriptions. With the recent formulary win for BELBUCA that went into effect in January with United Healthcare, we have now preferred status over Butrans under this plan. In addition, on the pharmacy benefit management side, we have agreements in place with five of the largest PBMs. So, we’ll continue to look to add to this list moving forward; even with our current coverage, we have significant opportunities to expand the business. Now, before I move on to BUNAVAIL, I’d like to mention two important performance indicators for BELBUCA that we’ll be monitoring closely as we get into the second quarter along with total prescriptions which will help us determine how our commercial plan is working. First, among current BELBUCA prescribers, increasing the average number of prescriptions, total physicians, will be critical. In addition, we need to start converting those high-value non-prescribers I discussed earlier, into BELBUCA prescribers. While we don’t have sufficient prescriber data yet as our sales team has only been in the field with BELBUCA short time, we are encouraged by the early signs and feedback we are getting from the field. In addition, while prescription volume declined by approximately 10% during the nearly six weeks when there was no promotional activity from early December until late January, we have seen weekly prescription volume stabilize since that time. Adding to this stability we are now seeing in the prescription volume, we are also encouraged by the fact we have added 345 first-time BELBUCA prescribers in the last six weeks, which should help to generate increased prescription volume as we move into the second quarter. Okay. Let me now turn to BUNAVAIL. We believe that BUNAVAIL is a terrific companion product for BELBUCA. This is truly a powerful combination for BDSI. We’re the only pharmaceutical company that’s promoting products for treating both opioid addiction and chronic pain, and we’re doing with the same molecule. At a time when there is so much attention on the opioid crisis in this country, we believe we can take our leadership position in promoting responsible prescribing. We continue to support BUNAVAIL high prescribers, which totals approximately 1,200 physicians. This covers approximately 95% of the BUNAVAIL prescriptions written over the last six months. Ultimately, outside of key managed care contracts, our sales force will spend approximately 80% of their time on BELBUCA and 20% on BUNAVAIL. Based on the profitability comparison between BELBUCA and BUNAVAIL I laid out earlier, we think this is the appropriate mix moving forward. With all that said, we did continue to see improvement in BUNAVAIL sales in 2016. We ended 2016 with nearly 115,000 BUNAVAIL total prescriptions, which is a 64% increase over 2015. In the fourth quarter of last year, prescriptions totaled nearly 30,000 an increase of 4% over the prior quarter. So, I’m going to reiterate that we strongly believe that the regulatory trends continue to support increased usage of buprenorphine and naloxone products for the treatment of opioid dependence. This includes the increase of the patient cap to allow eligible physicians to treat up 275 patients with buprenorphine products or opioid dependence from the previously allowed 100-patient limit. Also supporting further subscription growth in this category is the Comprehensive Addiction and Recovery Act, better known as CARA. This further expands access to CARA including aligning those practitioners and physician assistants to prescribe buprenorphine for opioid dependence. The bottom-line is that there continues to be great momentum behind use of buprenorphine naloxone products to treat opioid addiction, which is reflected in the sales data, which showed an increase of 7% in total prescriptions for the category in 2016 over 2015 and a total dollar sales increased of 11% to $2.2 billion. As for the new managed care contracts that began for BUNAVAIL on January 1st, we continue to closely monitor the implementation of these contracts. The conversion or change in these contracts has had a more attenuated impact so far this quarter; secondary downstream insurance plans not get accessing the formulary changes. However, we continue to have confidence in the ability of these contracts to improve access to BUNAVAIL and drive prescription volume over time. We’ll continue to support and seek new managed care contracts to place BUNAVAIL in a favorable position. We also received some good news around ONSOLIS. We received a notice of issuance of a new Orange Book list of a patent extending exclusivity of ONSOLIS from 2020 to 2027. Patent is expected to be issued next week and is part of our licensing agreement with Collegium Pharmaceuticals, publication of this patent and the Orange Book results and a milestone payment of $3 million. We anticipate that the ongoing work that will support the regulatory submission to qualify the new manufacturer for ONSOLIS will be submitted later this year, will allow ONSOLIS to return to marketplace in 2018. Now, turning to our R&D efforts, we’ll be focused on two important and exciting programs involving our sustained release buprenorphine 30-day injectable product in development for both opioid dependence and chronic pain. The first trial will assess single ascending doses of sustained released buprenorphine injection in treatment seeking opioid use disorder subjects. Study will assess the pharmacokinetics and pharmacodynamics of each ascending dose and will also include efficacy benchmarks and assessment of tolerability. We expect have the results in the first dosing cohort in the third quarter of this year followed by the higher strength cohorts. This single dose PK study will be an important value-driving event and so will confirm whether we have met our 30-day desired formulation. Once we show we have a 30-day profile, the rest of the clinical development program is execution, given that we already know the doses we are testing are therapeutic, both for opioid addiction and chronic pains. We believe this dosage form could potentially overcome the biggest challenges with current buprenorphine dosage forms, which are compliant with treatment and divergence. As such, there is significant interesting in this approach in the pain and addiction communities. With that, let me now focus on our cash position. As you know, we recently entered into a senior credit facility with affiliates of the CRG LP, a healthcare-focused investment firm to retire our existing credit facility and provide additional working capital for the Company, as we execute our commercial plan supporting BELBUCA and continue to assess additional commercial options. The new credit facility consists of $45 million drawn at closing and the ability to access additional funding of upto an aggregate $30 million in two tranches, based on the achievement of certain financial-related milestones through September 2018. Term of the loan is six years with the first three years being interest only. Ernie will provide further details on this new facility but the upfront proceeds together with funds on hand, and the revenue inflows from BELBUCA and BUNAVAIL provides us with sufficient capital to support our current operating plan into the second half of 2018. We believe we have taken the appropriate steps in a non-dilutive fashion to strengthen our balance sheet that allows us to now put our full attention on running the business. So, in closing, let me review our expected key value drivers for the next few quarters. First, as just mentioned, we anticipated the results from the first cohort of our single-dose PK study of 30-day sustained release buprenorphine injectable product in the third quarter of this year. Second, we expect that our business development activity around BELBUCA should result in upto 2X U.S. licensing agreements this year. We are also considering our options for facilitating BELBUCA sales growth in the U.S. Third, we anticipate the approval of BELBUCA in Canada in the first half of this year and continue to work to secure partners to commercialize the product in that territory. Fourth, we anticipate that the regulatory submission that will qualify the new manufacturer for ONSOLIS will be submitted later this year. Finally, and most importantly and to reiterate what I said earlier, the reacquisition of BELBUCA has given us the potential to bring BDSI’s commercial business to profitability as early as the end of this first quarter. In addition, the benefits of BELBUCA to clinicians, managed care and patients are significant, and we believe will provide part of the solution for the most critical issues basically prescribing BELBUCA for chronic pain today, risk of addiction and overdose. Collectively, these benefits and others defined where BELBUCA should become a standard of care in this space and drive long-term value for BDSI and its shareholders. So, with that, let me turn things over to Ernie and then will come back and open things up for questions. Thank you.

[Ernie De Paolantonio:]

Thank you, Mark, and good morning, everyone. I will now review our key financials for both the fourth quarter and year-ended December 31, 2016. For a more thorough review of our financial results, please see our most recently filed 10-K. Before we get into the numbers, I want to remind everyone that BUNAVAIL revenue is based on third-party pull-through data that we receive on a one-month lag basis. For the fourth quarter of 2016, BUNAVAIL revenue includes the months of September, October and November but not December. However, beginning in the first quarter of 2017, we will begin recording revenue based on the sell-through method, which is recording revenue when we sell product from our distribution center as we now have enough historical information on returns for both BUNAVAIL and BELBUCA. In addition, we will true-up all deferred sales and cost currently on our balance sheet. Finally, in the first quarter, we will recognize $20 million of deferred revenue from the $50 million milestone payment for the NDA approval of BELBUCA in 2015 as the license with Endo was terminated as part of the BELBUCA acquisition. Turning to the financials. Net revenue for the fourth quarter of 2016 totaled $3.9 million and consisted of $2 million of BUNAVAIL revenue, $1.3 million of royalty revenue for BELBUCA and BREAKYL and $0.6 million of R&D reimbursement revenue for ONSOLIS in the U.S., compared to the fourth quarter of 2015 where net revenue was $32.2 million consisting primarily of the $30 million for the BELBUCA NDA approval milestone payment and $1.5 of BUNAVAIL revenue. Total operating expenses for the fourth quarter were $16.8 million or $1.8 million less than prior year’s expenses of $18.6 million. Sales and marketing operating expenses in the fourth quarter were $5.1 million or flat to the third quarter and $2.9 million or 36% less versus 2015, reflecting the changes made in our commercial expenses in the second quarter of 2016. General and administrative expenses for the fourth quarter were $6.4 million, $0.5 million less than the third quarter and $1.2 million higher, up year-over-year, reflecting higher legal expenses. R&D expenses for the fourth quarter were $5.1 million, the same as prior year expenses and $0.7 million higher than the third quarter of 2016 with the increase due to the depot program. Net loss for the fourth quarter ended December 31st, was $15.9 million or $0.29 per diluted share, compared with gain of $10.2 million or $0.19 per diluted share in 2015. Net loss excluding stock compensation expense of $3.3 million was $12.6 million or $0.23 per diluted share in the fourth quarter versus net income of $14.2 million or $0.27 per diluted share, excluding $4 million of stock compensation expenses in the fourth quarter of 2015. Now, for fourth quarter BUNAVAIL financials in more detail. BUNAVAIL net revenue in the fourth quarter was $2 million similar to prior quarters of 2016 with dollars per script maintaining a net value of 70. Also in the third -- this is the third consecutive quarter the unit cost of sales for BUNAVAIL has continued to decrease. In the fourth quarter, cost of sales decreased by 17% over the third quarter with a total of 30% decrease since the beginning of 2016. The reduction is driven by the integration of high-speed packaging equipment and waste and yield improvement that will improve unit cost of sales by an additional 30% by the end of 2017. Gross profit income was approximately flat to the third quarter. Now turning our financial results for the year ended December 31 where total net revenue was $15.5 million and included $8.3 million of BUNAVAIL revenue, $1.5 million of BELBUCA royalty income, $2.1 million of royalty revenue from BREAKYL, $2.5 million from the upfront payment from Collegium Pharmaceuticals for the licensing rights to ONSOLIS in the U.S. and $1.1 million of R&D reimbursement from Collegium for ONSOLIS versus 2015 revenue of $48.2 million, consisting primarily of $41.8 million related to BELBUCA milestone payments including the $10 million milestone for the FDA acceptance of the BELBUCA NDA and $30 million for BELBUCA’s NDA approval; $4.2 million was for BUNAVAIL net revenue, $0.9 million of R&D reimbursement revenue and $1.4 million of BREAKYL royalty revenue. BUNAVAIL net revenue for 2016 was $8.3 million and represents a 99% increase versus 2015 net revenue of $4.2 million. Operating expenses for 2016 were $68.2 million versus $75.3 million for 2015 with the difference attributed to expense reduction in both sales and marketing, and research and development. Sales, marketing and other commercial expenses were $23.3 million versus $29.4 million in the corresponding period of 2015, representing a $6.1 million or 21% decrease attributable to the commercial reduction that took place in the second quarter. General and administrative expenses were up $0.8 million in 2016 versus $25.1 million in 2015 due to an increase in legal expenses. 2016 R&D expenses were $18.9 million compared to $20.6 million for the prior year with the difference mostly attributable to the Clonidine program. Net loss for the 12 months ended December 31, 2016 was $67.1 million or $1.25 per diluted share compared to $37.7 million or $0.72 per diluted share for the 12 months ended 2015. 2016 net loss excluding $14.9 million of non-cash stock compensation expense was $52.2 million or $0.97 per diluted share; this is compared to a net loss of $23.4 million or $0.45 per diluted share including $14.3 million of non-cash stock compensation expense for 2015. Finally, our cash balance of $32 million at December 31st represents a $12.7 million net cash reduction for our third quarter ending balance of $44.7 million. In February, we completed a $45 million loan with CRG. In addition to paying off $29.4 million from our previous loan, we also have access if we chose to an additional two tranches of $15 million or 30 additional million dollars. These milestones are based on financial requirements occurring through September of 2018. The term of the new loan is six years with interest only payments for the first three years through 2019. The new loan together with the profitability profile of BELBUCA at 2.5 times that of BUNAVAIL and one third of the manufacturing cost and that our average current cash burn is approximately 7 to $8 million or half of 2016’s average will provide us with runway into the second half of 2018, based on our current operating plan and objectives. Now, let me turn it over to Mark for the Q&A session.

[Dr. Mark Sirgo:]

Thank you, Ernie.

[Operator:]

[Operator Instructions] And we’ll go first to Scott Henry at ROTH Capital.

[Scott Henry:]

Thank you and good morning. I guess for starters, Mark, very encouraging that you expect commercial operations to reach profitability by the end of the first quarter. Could you just give me some greater color on how you define commercial operations, what’s in that number, and what’s out of that number?

[Ernie De Paolantonio:]

Hi Scott, it’s Ernie. I can take that question. In the commercial profitability, we have all the sales, marketing and direct cost, distribution cost that has to do with the distribution of our commercial products.

[Scott Henry:]

Okay. So, I mean, do you allocate any of the G&A to that? And what about stock comp, do you pull that out of it?

[Ernie De Paolantonio:]

Well, there is stock comp in that number but there is no allocation from G&A, like corporate G&A or other overhead.

[Scott Henry:]

Okay. Thanks for that clarity. And then, could you talk about R&D spend for 2017, at least relative to 2016, and should we expect any kind of patterns in that number?

[Ernie De Paolantonio:]

Yes. Again, Scott, I can take that. The spends are going to be down from 2016, roughly about a third. And that number can be modulated during the year, depending on cash flow needs.

[Scott Henry:]

Okay. You’ll probably take this question too, Ernie. I think you said there is a $3 million ONSOLIS patent team. How much of that do you get, do you have to share any of that?

[Ernie De Paolantonio:]

Yes. The majority of that is payable under a term agreement that we have with Meda.

[Scott Henry:]

Okay. A majority is payable to Meda? [Ph]

[Ernie De Paolantonio:]

Right, we do get to keep a proportion of it.

[Scott Henry:]

Okay. And then, I guess just quickly for Mark. When we think about BELBUCA, would you expect 2Q 2017 to be that kind of first stead-state run rate for that product, sounds like Q1 will have considerable noise with re-ramp up?

[Dr. Mark Sirgo:]

Yes. Scott, good question. And yes, so, it is the expectation, as I mentioned in my formal remarks. I think we stabilized the business in the first quarter, which I think was quite a feat, but very pleased with that/ I think as we head into second quarter, I think we should begin to see some growth, but continue with the stability behind some growth in the second quarter and the second half, think should really pick up.

[Scott Henry:]

Okay, great. And just final question on BUNAVAIL, I think we are expecting the category to perhaps balance from these expanded subscribers. When would you expect that to occur or do you have any comments on whether you think I should expect category expansion?

[Dr. Mark Sirgo:]

Yes. I mean, we’re expecting the expansion. I mean, it was -- it picked up towards the end of last year. I think overall, and as I mentioned, it was about 11% increased in the prescription volume. But, it’s expected to continue to increase this year, I think at about the same rate is what we’ve factored in. So, I mean, it’s having an effect, but it’s a bit slower than anticipated, but it is -- we are seeing it.

[Operator:]

And our next question is from Ed White at FBR.

[Ed White:]

Hi, guys. Thanks for taking my question. Scott asked most of them, but I just want to have a follow-up on one of the questions he asked with the $3 million ONSOLIS patent payment. You said most of that goes to Mata. Where is that recorded in the income statement, the payment? I understand where the inflow comes.

[Ernie De Paolantonio:]

Okay. So, I’ll just do both ends of it for you, Ed. The inflow will be in revenue and the outflow will be in royalty expense.

[Ed White:]

Okay, thanks. And the other question, I just want to go back to one thing that was in the 10-K just regarding R&D. It had mentioned that the BUNAVAIL R&D expenses were $5.2 million in 2006, due to the investigation of additional indications. I am just curious as to what indications you’re looking at with BUNAVAIL. And does that $5.2 million that you had spent in 2016, does that go away, should we assume that R&D for BUNAVAIL is zero in 2017?

[Dr. Mark Sirgo:]

Yes. It is Mark. So, we’ve got post approval commitments is what’s reflected in most of that number and those things will continue for the next couple of years. One is the QTc study that we’ve got to perform; one is a pediatric study that we’ve got to perform. We’ve made some headway in both of those programs. And then of course anytime we submit any new labeling changes and those types of things, it includes any clinical information; we’ve got to file a new PDUFA fee, which is generally about a little over $1 million. So, we’ll continue to see a small number of R&D going forward BUNAVAIL for the next several years.

[Ed White:]

Okay. Thanks, Mark. And then, lastly, just a bigger picture question for the CARA with the nurse practitioners and the physician assistants now being allowed to prescribe, when do you think we’re going to see that impact? Is that going to be early 2017 or is that more looking out to the fourth quarter 20’17 or even into 2018?

[Dr. Mark Sirgo:]

Al, do you want to take that?

[Al Medwar:]

Sure. Hi, Ed. This is Al. So, the training is now available for PAs and nurse practitioners. So, they have now reached a point that they can go ahead and get the training. So, you probably would -- I would expect that you would start to see some effect over the course of the year.

[Operator:]

And we’ll go next to Jim Molloy at Laidlaw.

[Jim Molloy:]

Hey, thanks for taking my questions. Could you just talk to you what sales number BELBUCA gets you to breakeven for the commercial enterprise? And is there any beyond that; is there any thoughts when the entire enterprise might hit breakeven.

[Dr. Mark Sirgo:]

Sure. So, as we said, if we’re close it, without giving the exact numbers, Jim, we mentioned, we’ll be closed to it by the end of this quarter. So, the run rate that we mentioned at the end of 2016 is close to that number. So, we’re not that far or we moved from it to begin with as we close out the year with that run rate. We’re not going to give any sort of numbers in terms of when are we going to get the corporate profitability at this point but probably as we get later into the year we’ll be able to address that. Obviously, it will be largely driven off the sales of these two products, particularly BELBUCA.

[Jim Molloy:]

Thanks for taking that question. I know that the BUNAVAIL product has been a challenge and you soon recognized that and moving the focus to BELBUCA, makes a ton sense. Is there a thought of moving BUNAVAIL off and just find a strategic partner for that and be done with it?

[Dr. Mark Sirgo:]

As I said before, strategically, we’ve always been open minded. If there is an opportunity like that presents itself, it makes sense to us, we’ll certainly seriously consider it. In the meantime, I think we’ve properly positioned it. We haven’t given up on it by any means. We think some of the market dynamics will help to drive it. We’ve got some good managed care contracts that have yet to really be the full benefit behind those. So, but, we’ll be open minded to strategic opportunities around it should they present themselves.

[Jim Molloy:]

Last question maybe on SG&A, down from 2015 to 2016; any thought on the trend on that for 2017.

[Ernie De Paolantonio:]

2017 should be in line with those two years as well, in line with 2016.

[Operator:]

And moving next to Matt Kaplan at Ladenburg Thalmann.

[Matt Kaplan:]

Just digging into BUNAVAIL a little bit. Help us to understand in terms of the -- and qualify the impact of the new contracts on potential BUNAVAIL sales going into 2017?

[Dr. Mark Sirgo:]

Yes. So, as I mentioned in formal remarks, once it kicked off in January 1st, it’s been a bit more attenuated and anticipated, but it’s because the downstream plans, insurance plans haven’t activated as quickly as anticipated. So, as they do, which we expect they will, we’ll see an improvement. Having said that, we’re not putting a lot of the commercial effort behind it Matt. So, it’s really going to be driven, the growth behind BUNAVAIL is going to be driven off of the managed care plans that we’ve got in place. So, we are putting commercial effort behind those specific plans. So, I think that’s probably about as much as I can do to comment on your question.

[Matt Kaplan:]

And I guess, what’s going to impact -- how is the uptake going to be by the downstream, I guess plans in those contracts, what drives that?

[Dr. Mark Sirgo:]

Well, we’re in constant communication with the PBM and working with some of the higher volume downstream plans to helping them educate and if need be around the product additionally. We’re making sure that they’re aware of the dynamics that have changed in the formulary. I think we continue to be amazed by the people that are unaware of the changes that take place and when in fact they are not accessing the best product in terms of discounting for their members. So, it’s a bit more education, but I think as we move in the second quarter, we should see improvement in the plans that we have outlined to kick off January 1st.

[Matt Kaplan:]

Yes. Okay. That’s helpful. And then for BELBUCA, can you talk about potential for a label change with respect to the need for a downside trading and then back upside price trading when patients transition from other operators?

[Dr. Mark Sirgo:]

Sure. That’s really not been a major problem that we’ve encountered. But, it is a methodology that’s a bit different from some of the other opioids. But there has been information that’s been submitted to the agency recently that would allow for not only the way that we’re suggesting that they titrate people now in the product, but will be a little bit more streamlined opportunity that we hope we’ll get in the label within the next six months.

[Operator:]

And our next question today is from Raju Prasad at William Blair.

[Raju Prasad:]

Hi, guys. Thanks for taking the question. Can you just give a little bit of color on script growth in Q1 2017 and how that is related to the UH formulary for BELBUCA? Is that much or can we just expect a little more of a ramp up for that formulary status later in 2017?

[Dr. Mark Sirgo:]

Yes. I think that one is just getting underway. We’re definitely seeing some benefit from it, some growth from it. But, as I said, it takes a little bit longer with some of these downstream plans to actually activate. But, we do expect because we’re in a preferred position over Butrans that that one will have a sustained benefit for us throughout this year. But things should start to pick up to a greater degree in second quarter around that particular opportunity.

[Raju Prasad:]

Okay. And regarding the recent Opana ER panel, is abuse deterrent formulation status something that you would think about doing for BELBUCA down the line? And if Opana would be taken off the market or the oxymorphone products, is that a category do you think BELBUCA could penetrate the market?

[Dr. Mark Sirgo:]

First and foremost, we’re a Category III opioid. So, we’ve already got the designation being less abusable, less addicting without having to add or change the formulation in any way, shape or form. It’s not that we wouldn’t consider it, but we don’t think that’s a priority at the moment. Having said that, part of our messaging around the opportunity with BELBUCA is indeed to either prevent people from getting C2s, it’s unnecessary since we have the same effectiveness and certainly a better safety profile to start with BELBUCA, or those patients that are already on a C2 opioid, whether it’s Opana or one of the others that they convert them over to BELBUCA. So, I think we’re not prioritizing any kind of change in the formulation right now that we’ve got. We think it’s more than adequate. And then, secondarily, I think we’re trying to secure market share from all of the Category II extended release formulation of the opioids.

[Raju Prasad:]

And just maybe one last one, 2017 milestones of upto two commercial transactions of BELBUCA. Can you assume that BUNAVAIL would be in a similar execution strategy? Are you guys looking for any partnering opportunities for BUNAVAIL?

[Dr. Mark Sirgo:]

Well, we’ve looked for partnering opportunities at BUNAVAIL and I think it’s more limited just because of the margins on the product and particularly in other parts of the world. Having said that, BELBUCA for the things we’ve indicated is a very different opportunity for us. There is a great deal of interest; the margins allow us to get into partnering discussions much more easily than we did with BUNAVAIL. So, I think we’re focused right now just on BELBUCA. If opportunities present themselves if BUNAVAIL is part of those discussions, we’re certainly considering that.

[Operator:]

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

[Chiara Russo:]

Yes. Hi, guys. Thank you for taking the questions. I was just curious, I know you said that you are sort of looking to get approval in Canada and looking for partner there. I was wondering if you could give us just a little bit more color around the Canadian market potential.

[Al Medwar:]

Hi, Chiara, it’s Al. So, the market in Canada, I mean, Canada in general is going to be considerably smaller but I mean it’s still a reasonable market for us to pursue. You’ve got some of the dynamics that are going on here in the U.S., going on in Canada. They have had access to Butrans, so they do have some familiarity with buprenorphine. So, I think it’s a reasonably decent opportunity. I mean, you often hear people say that the size of the Canadian market’s roughly about 10% of the U.S. I don’t know anything to say that the pain market here is -- would be any different.

[Chiara Russo:]

Okay. That’s helpful. Okay, I think that was kind of questions that I had right now. Thank you, guys.

[Al Medwar:]

Thanks.

[Operator:]

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

[Ken Trbovich:]

Thanks. Mark, I was wondering if you could maybe do us a favor and draw a word picture around the 65 sales reps that you’re going to have on BELBUCA and sort of how that picture would compare to what existed when Endo had 375 and whether because of that there is a natural sort of way for us to think about even the possibility of the U.S. co-promote just around geographies or physician specialties?

[Dr. Mark Sirgo:]

Yes. Very good question. Endo took a shotgun approach; they took the old fashion approach, and I’m not criticizing at all. But, they went very, very broad. I mean, they were down to the decile ones and twos in the primary care space. And unfortunately, when the new CDC guidelines came out last March, it really took away any kind of benefit with that type of an approach. Because as we’ve said, the prescribing tightened up tremendously around primary care, but a lot of that business moved over to pain specialists. So, it’s just a focus situation more than anything else in the pain space right now. It just doesn’t benefit you to have a lot of people after calling on doctors that just aren’t going to write, or they’re not going write enough to justify having that rep calling on them. So, we’ve obviously narrowed the footprint tremendously; we’ve got a very, very focused approach, as I mentioned in formal comments. We’re looking at these decile 8 to 10 prescribers that have yet to the right for BELBUCA, and we’re focused on the writers that have already begun to right BELBUCA. And as I mentioned, a lot of these are people, they’re knowledgeable about buprenorphine because they have been running for products Butrans. So, it’s certainly a much different approach than what Endo was doing. Having said that, Endo, as I mentioned, I think at the Analyst Day, they shared a lot of information with us. If they kept the product, they would have had a much different approach as well, which is very similar to where we are right now. So, we can build off this platform, once we start to see the growth we’re expecting this year. We can certainly add people; we would do that particularly in key geographies. But, I think for now, we’ve got the right plan, and we’re just anxious to now execute.

[Ken Trbovich:]

So does that mean that we shouldn’t think of this as a situation where, geographically speaking, you might have opportunities to look at co-promoters? I guess, the reason I’m asking, you talked about sort of ex-U.S. opportunity, but it wasn’t clear whether or not there is a U.S. opportunity on a co-promote side or not?

[Dr. Mark Sirgo:]

Yes. I’m sorry, didn’t really answer that part of your question, I apologize. They certainly are. It’s in two ways. One, as I mentioned, we’re covering deciles 8 through 10. There is the other 7 that aren’t covered right now. So, someone who’s got a broader reach that where BELBUCA may be a benefit to them and that opportunity may be a benefit to us, we’d certainly seriously consider it. Separately, there are areas such as long-term care with this product we believe would be ideal. But that’s another area that we’re not in right now, but other companies are. So, we’d certainly entertain conversations around an opportunities like that. So, in specialty where we’re not, we’d consider in broader areas where we can’t be such as these lower deciles, we’d consider something around that too, so absolutely.

[Ken Trbovich:]

Okay. And then, just specific to the depot buprenorphine program, I think if I heard you correctly, you said the data from the single ascending -- or the single -- I guess it was single ascending dose third quarter. Would you start the multiple ascending doses or is that any sort of an 2018 kind of timeline?

[Dr. Mark Sirgo:]

Yes, the multi is probably an 2018 timeline. We’ll wrap us this current study by the end of this year and it’s more than likely that the multiple dose will be really part of 2019 -- or 2018, sorry.

[Ken Trbovich:]

Okay. And then specifically within indication, I know you’ve talked about the idea here that there is a potential bulk within addiction and pain. Is the focus -- as we think about this program, should we think of this program primarily as being -- so for example, when you get to the point at which we’ve got to decide on a pivotal program, is it too early to think about which one would be prioritized? Certainly, I understand that the market or the awareness of buprenorphine for addiction is much higher, although obviously Purdue has had success that with Butrans in the market. It’s still a small fraction of what we see as the overall size of the addiction market.

[Dr. Mark Sirgo:]

Yes. For competitive reasons, we’re not going to share that information. But having said that, we’ll keep an eye on the competition to see how they are performing and where we are -- timing lies in conjunction with that with our depot. Secondly, we’ll obviously take a close look at how we’re doing at BELBUCA. So, I think there is a number of factors that we’re going to be considering to decide on which product goes in front of the other. So, at this point in time, we’ve not done that. Obviously this first study will be done in people with -- that are opioid dependent.

[Operator:]

And ladies and gentlemen with no additional questions at this time that will conclude today’s conference. Once again, I’d like to thank everyone for joining us today. Have a good day and you may now disconnect.

[Dr. Mark Sirgo:]

Thank you. Thank you, everybody.