BioDelivery Sciences International, Inc.
Q4 2015 Earnings Call Transcript

Published: 11 Mar 2016

[Operator:]

Good day, and welcome to the BioDelivery Sciences fourth quarter and full year 2015 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Al Medwar, Senior Vice President of Corporate and Business Development.

[Albert Medwar:]

Good afternoon. This is Al Medwar, and welcome to the BioDelivery Sciences fourth quarter and full year 2015 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. Scott Plesha, Senior Vice President of Sales and Marketing; and Mike Bullock, Head of Managed Markets will join us for the question-and-answer session, following prepared remarks from Mark and Ernie. I will now read the company's safe harbor statement. Certain statements of BDSI's management during today's call or in responding to questions and/or 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 project, may, will, would, could, should, believe, expects, anticipates, estimates, intends, plans, potential, or similar expressions. These statements are based upon the current beliefs an 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, and the clinical trials for and FDA review of BDSI's products in development, may differ significantly from those set forward in the forward-looking statement. The risks and uncertainties relating to forward-looking statements are also subject to change based on various factors, many of which are beyond BDSI's control. BDSI's undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable law. You are advised to review BDSI's SEC filings for Risk Factors that could impact BDSI's ability to achieve these goals described in the forward-looking statements. With that, I will now turn the call over to Mark Sirgo. Mark?

[Mark Sirgo:]

Thank you, Al. Good afternoon, everyone, and thank you for joining BDSI's fourth quarter and full year 2015 financial results conference call. The last several months have been exciting and challenging at the same time, as we continue to evolve into a fully integrated pharmaceutical company. BUNAVAIL prescriptions continue to grow quarter-on-quarter, with our preferred formulary status with Tennessee Medicaid being a significant benefit to our efforts during Q4. However, as I will share with you today, we have numerous efforts underway to enhance the sales of BUNAVAIL, and the efficiency of the sales force in 2016 and beyond. We also have the excitement around the recent launch of BELBUCA by Endo Pharmaceuticals for the treatment of chronic pain that we believe is going to be a significant asset, given current and future market dynamics. We also initiated our Phase IIB Clonidine trial, that if successful could pave the way in our efforts to meet a very significant unmet need in the treatment of painful diabetic neuropathy. We had a very successful turnout at our R&D Day that we hosted in New York City just a few weeks ago, which highlighted the potential value we can create with our marketed products as well as our pipeline. Overall, while addressing certain challenges as an emerging commercial entity, we are pleased with the progress that we are making in our business and our efforts to enhance long-term shareholder value, and we look forward to carrying the momentum we generated in the latter part of 2015 throughout 2016. On today's call, I will review our recent accomplishments, address the successes as well as the challenges and highlight the initiatives behind our BUNAVAIL launch. I'll provide the outlook on what we believe is going to be a solid BELBUCA launch by Endo, review our pipeline activity, and finish with our anticipated 2016 milestones. I will then turn it over to Ernie De Paolantonio, our CFO, to cover our Q4 and end of year 2015 financials, before going to Q&A. So let's begin with an update on BUNAVAIL's most recent performance. One is, I'll review initiatives we have underway that we believe have the potential to change the growth trajectory of BUNAVAIL in the coming quarters in a very positive fashion. There were approximately 29,000 BUNAVAIL prescriptions dispensed during the fourth quarter of 2015. This represents a 66% increase in prescriptions over the third quarter. Also, BUNAVAIL's prescriber base continues to grow, as we added 790 new prescribers during the fourth quarter to bring the total to approximately 2,600 physicians having prescribed BUNAVAIL. As we enter 2016, we continue to expand these numbers, which was one of the objectives behind our recent territory expansion and realignment. Additionally we are extremely pleased with the strong impact we are seeing from our two-year contract with Tennessee Medicaid, making BUNAVAIL the exclusive preferred buprenorphine/naloxone treatment available for opioid dependence. This was such an important initiative for us in this early stage of BUNAVAIL's commercialization and it was very strategic in nature, as we were looking at the opportunity to build a foundation for our business. I am pleased to report that we are nearing full conversion to BUNAVAIL in Tennessee. In the fourth quarter, we generated almost 8,000 total BUNAVAIL prescriptions in Tennessee compared to 400 in third quarter prior to the activation of the agreement on October 1. Although we achieved a significantly lower conversion of prescriptions than anticipated, which I'll address in a minute, we believe it translates into several major benefits going forward. Importantly, one of those benefits is the spillover prescription growth in the state from commercial and cash-related prescriptions, which have contributed to 50% of the overall growth in Tennessee since October 1. This is not surprising, when you consider prior to the Tennessee Medicaid agreement, we had approximately 73 physicians in the state writing Medicaid prescriptions for BUNAVAIL. This has now increased to over 370 physicians subsequently or an increase of nearly 300 doctors. Most of these physicians treat commercial and cash pay patients besides Medicaid. This outcome is the basis for why we would look to secure more of these types of arrangements. I'll discuss another significant outcome of this arrangement momentarily, as it serves as the basis for one of our key initiatives for driving BUNAVAIL growth throughout 2016. So we have six key initiatives in 2016 and associated metrics that we believe will drive BUNAVAIL prescription growth this year and beyond that I'd like to cover with you. First, from a sales force perspective, we've added 14 new territories, growing from 51 to 65, which allows for increased reach and greater efficiency within the sales force, by reducing drive time and increasing physician targets. In addition, previously we had five regional managers covering 51 territories. We now have eight regional managers with responsibility for 65 territories. This expansion and the efficiency it provided in each of the territories, allows us to increase the number of physicians we are calling on from 5,400 to 8,000. So what impact are we seeing from these changes? First, we are now able to cover more of the newly waivered doctors that are building their practices. These physicians see more new patients in their practices, and recall, that we capture a higher percentage of new patients compared to those needing to be switched from Suboxone. Second, the increase in managers allows each one to spend more time working with each salesperson. Their focus is to deepen as well as widen physicians prescribing BUNAVAIL. Third, we have seen our January doctor calls up over 22% from Q4 average, and our call average is up 1.5 calls per day in 2016, and we are adding between 25 to 30 new writers each week versus single digits in Q4 of last year. It's also worth noting that six of our eight managers, in addition to our Head of Sales, Scott Plesha, recently joined us from Salix, where they helped drive the success of that commercial organization. So we have an extremely experienced management team with a track record of success. Our next initiative is referred to as the Tennessee factor. The second significant finding coming out of the contract with Tennessee is that approximately 60% of the prescriptions once written for Suboxone have evaporated. In other words, they did not convert to BUNAVAIL prescriptions. This obviously had a significant impact on our anticipated business with Tennessee Medicaid, but we think there's a silver lining in this. We believe this evaporation represents the high level of Suboxone diversion occurring among these patients, which has been previously reported and documented in Tennessee as well as a number of other states. In other words, many patients are not using the medication for its intended purpose, but instead selling it on the street for perhaps in their mind legitimate or illicit purposes. And only the market leader carries the street value that supports this activity. In addition, because BUNAVAIL is the lowest buprenorphine containing product with certain properties that make it difficult to abuse, we believe BUNAVAIL is far less desirable to these individuals. But whatever one believes to be the basis for the reduction in prescriptions, what is clear is the state of Tennessee will save approximately $14 million annually due to the conversion to BUNAVAIL. Now, given the budget challenges most states are encountering around healthcare costs, this is a significant saving. It also goes without saying that no Medicaid or commercial prescription plan is interested in contributing to or paying for this potential diversion problem, and therefore we have been having enhanced discussions with providers around this very point and it's resonating. We believe BUNAVAIL provides the dual benefit of helping these patients, who are clearly seeking help with their addiction, while being a product undesirable to those who are not. The problem is, until products like BUNAVAIL became available, physicians and managed care groups did not have an option. Our third initiative involves the change. Helping Human Services or HHS has indicated they will make this year in raising the cap on how many patients a physician can treat at one time. Under current regulations certified physicians can prescribe buprenorphine for opioid dependence for up to 30 patients during their first year post-certification. And then after one year they can request authorization to prescribe the products up to a maximum of 100 patients. As a result, access to care is limited and physicians are often forced to turn away patients seeking care. Now, while we await the specific changes to the current restrictions, HHS has stated that this issue is a high priority for them and department is working to move forward as quickly as they can. We believe it will occur this year and potentially in the next several months. The latest thinking is the cap will be lifted to go from 100 to 250 patients. However, I should note that the American Society of Addiction Medicine has proposed that specialists and physicians with additional training should have the ability to treat up to 500 patients. Keep in mind, 2.5 million patients have been diagnosed with opioid addiction, however, less than 900,000 are in treatment. So this is a significant matter. Now, one of the major challenges we have with BUNAVAIL is the fact that many doctors are more hesitant to switch a patient stabilized on Suboxone to BUNAVAIL. The benefit of the cap lifting is that the majority of these patients will be new patients, and we'll have greater access to them, as we have had success with attracting doctors to BUNAVAIL to use in new patient. So let's move on to our fourth initiative that we believe will drive growth in 2016 and beyond. This involves focusing more on the patient. Keeping in mind physician awareness regarding BUNAVAIL is well over 90%. Now, based on our recent market research patients claim they initiate buprenorphine treatment discussion with their doctor 87% of the time, and 65% of the time they use the Suboxone product name specifically. In addition, in other research we've conducted with patients currently taking Suboxone, when the profile of BUNAVAIL is placed next to Suboxone, patients indicate they would be interested in trying or learning more about BUNAVAIL. All the market research we have performed with patients, leads us to believe, we have an opportunity to positively influence the conversation in a doctor's office regarding product selection, through the use of a targeted and efficient direct-to-patient campaign. Let me give you a glimpse on how we will carry it out and what we have learned about the nature and habits of these patients. Looking at the target audience of patients with opioid addiction, 24% are more likely to be heavy internet users. And these patients are 33% more likely to obtain medical information online, of which most trust and value information they receive via the internet more than what they receive from their own doctors. What is very important is that after seeing an advertisement, they are 3.5 times more likely to discuss an ad with their physician and 3 times more likely to ask for a specific product. This provides the rationale for a direct-to-patient pilot program, where the objective is to raise brand awareness and product request of BUNAVAIL during doctor visits. This will be a highly targeted digital advertising campaign and will reach patients where they are online. We will pilot in select markets and we'll run the campaign for 12 weeks starting in Q2, results in early Q3. And based on those results, determine whether to extend the campaign nationally. This is a very exciting opportunity that we believe can potentially make a significant difference in BUNAVAIL's future growth. Our fifth initiative in 2016 is focused on increasing our non-direct sales, meaning outside of retail pharmacies, which include inpatient and outpatient clinics, prisons and long-term care facilities. These opportunities not only provide immediate sales, they also provide spillover into the retail setting. Once a patient initiates in a clinic, they will eventually move outpatient and have their prescription filled in the retail pharmacy. We would likely keep these patients on BUNAVAIL. We have already closed several of these contracts this year. Finally, and not insignificant, we are looking ways to make the sales call more cost efficient, which includes the potential of acquiring another product for our sales people to sell or through a co-promoter arrangement, whereby we rather assist another company in selling their product or we promote each others product. These are discussions that we are actively and aggressively pursuing. Needless to say, we are exploring all option at this time, as we are focused on making this commercial effort more cost efficient. So let me summarize how we plan to drive BUNAVAIL sales in 2016. First, we have an enhanced sales management team driving behind an efficient territory alignment that is improving physician reach, frequency and prescribing. Secondly, we're leveraging our findings in Tennessee, with other states as well as other commercial plans. We believe they can benefit by reducing overall costs, and benefiting society by potentially decreasing product diversion. We will execute our strategic plan to capture more new patients upon the lifting of the patient cap by HHS. And based on positive results from our direct-to-patient campaign, we may expand nationally. And as just mentioned, we look to secure more transactions on the non-retail side of the business. And finally make the sales call more efficient by securing other companion products either through acquisition or co-promote arrangements. Let me now turn and provide a brief update on our managed care access. We continue to focus on the top 40 managed care accounts that drive 90% of covered commercial lives. As I have said on previous calls, we estimate that we have a third tier access to approximately 180 million commercial lives, of which 90% is unrestricted. This gives confidence to physicians that their patients will get their needed medication, and to us, that once written, prescriptions will get filled. We remain focused on maintaining third tier access, while improving non-formulary positions with key accounts, where contractual barriers do not prevent access. With regards to Medicaid coverage, we are now in 26 state formularies out of the 31 targeted. Importantly we have at least parity access to Suboxone in 19 of these 26 states, which represents approximately 35,000 prescriptions per month. Of course, the most impactful development related to BUNAVAIL launch in 2015 was the two-year contract we secured with Tennessee Medicaid, which I have already covered. So to summarize our managed care coverage, we have very good commercial payor coverage. What we are now working on, are downstream accounts of the larger PBNs, such as Express Scripts and CVS Caremark. And by downstream, I mean, for example, some of the Blue Cross/Blue Shield plans in certain states. As for Medicaid, we have several more states we hope to gain formulary acceptance to or improve current access. For competitive reasons, we are not going to disclose where we are focusing our efforts specifically, but these are all opportunities with decisions coming this year and we anticipate some positive outcomes. With that, let me move now to BELBUCA. As you are likely aware, last month following receipt of FDA approval in the fourth quarter, BDSI and our commercial partner Endo Pharmaceuticals announced the commercial availability of BELBUCA as of February 22 for use in patients with chronic pain. So let me start by discussing BELBUCA's growth drivers that illustrate why this is such an exciting and unique opportunity. First and foremost, BELBUCA is a potent analgesic, which is often overlooked, given its Class III scheduling. The approval of BELBUCA was supported by two very positive Phase III clinical studies, where BELBUCA demonstrated consistent and statistically significant improvement in patient reported pain relief at every week from baseline to week 12 compared to placebo. And in the opioid experience trial, we enrolled patients who were on doses as high as 160 milligrams of morphine sulfate equivalent. So BELBUCA can compete with Schedule II opioids, such as oxycodone and morphine, when it comes to pain relief. Second and a key value driver in our view is that, BELBUCA is designated as a Schedule III controlled substance, meaning that it has been defined by DEA, as having lower abuse and addiction potential than Schedule II drugs category, with the exception of Codeine, which is a very week analgesic, includes all opiod analgesics, such as oxycodone, hydrocodone, morphine, and hydrocodone/acetaminophen combination products such as Vicodin. And besides having lower abuse and addiction potential, the other major advantage of a Schedule III product is that it's also more accessible to prescribers, because they can call in prescriptions by phone and provide refill. Neither of these are allowed with C2 opioids. As a reminder when hydrocodone combination product such as Vicodin were Schedule III, keeping in mind FDA and DEA removed them from that status back in September of 2014, they generated over 130 million prescriptions each year. Now, this rescheduling has created a huge void in physicians' choices, prior to turning to a C2 opiod. BELBUCA can help to fill this void. Third, BELBUCA is available in a wide range of doses, from 75 to 900 micrograms, allowing for flexible dosing and for physicians to individualize titration and treatment for opioid-naive as well as opioid-experienced patients. And finally, treatment with BELBUCA may result in lower incidents of typical opioid-like side effects, such as constipation and respiratory depression. Let me now review Endo's initial BELBUCA launch effort. All of these efforts are being made behind a differentiated product, from a company that's well known and respected in pain management, with a portfolio that includes Opana ER, Percocet, Voltaren Gel, and Lidoderm. Importantly, Endo recently publicly stated that it has more than doubled the size of its pain sales force, in anticipation of this BELBUCA launch. In regards to pricing, BELBUCA is priced competitively with other branded long-acting opioids. BELBUCA is also enjoying strong patient access immediately, with Endo stating that approximately two-thirds of commercial lives are covered at launch. As far as how BELBUCA is being positioned, the immediate opportunity for BELBUCA is in patients transitioning from short-acting to long-acting opioid. Profile BELBUCA and its Schedule III designation may get a strong first choice in patients who require a long-acting opioid, a market segment with almost $5 billion in annual sales. There is also the opportunity for BELBUCA to make an impact by capturing patients who are opioid naive, having failed on a non-opioid and are going directly to long-acting opioid products. Endo has projected sales of BELBUCA of over $250 million in 2019. As a reminder, in addition to the $50 million milestone payment we received at the time of the FDA approval for BELBUCA, we'll be receiving a mid-to-upper teen royalty on net sales and the potential to receive an additional $55 million in sales milestone, based on hitting certain sales threshold. Overall we're confident that BELBUCA is in excellent hands. And having spoken to our counterparts at Endo late last week, they are very pleased with early results, particularly as it relates to reimbursement and pharmacy stocking, two things that often times impede any launch. Let me now move to our own pipeline. As we announced late last year, following our pre-IND meeting with the FDA in regards to our 30-day buprenorphine injection product that we are developing for both pain and opioid addiction, we will conduct one additional preclinical study to characterize the time for elimination of the formulation polymers at the injection site beyond the 30 day period of buprenorphine exposure. FDA requested this trial be part of the IND submission. Otherwise FDA had minimal comments in the proposed first clinical study, but provided important additional clarity on the pathway forward for development. The IND submission is now targeted for third quarter of this year. Based on this updated timing, we anticipate that we will conduct our first and manned trial in the fourth quarter of 2016 with data by year-end, based on patient recruitment. As a reminder the objective of the first human PK study is to define a 30-day product plasma profile along with its tolerability. This first set of results can provide tremendous value, since we know that therapeutic plasma concentration levels needed to treat both chronic pain and opioid dependence. Keeping in mind our mini-pig study demonstrated this 30-day profile, which is typically reflective of what would be expected to be observed in humans. Other advantages that we anticipate from this formulation is a low burst effect upon injection, single site administration, no refrigeration and small gauge needle, making for painless injection. Once we have finalized the formulation during this 30-day profile in manned, the rest is clinical execution on our part through the remainder of the clinical programs, both of which we are intimately familiar with, given our BUNAVAIL and BELBUCA experience. Keep in mind the biggest issues with current treatments for opioid dependence, are diversion and compliance. This dosage form helps to reduce both of those issues, and as such offers substantial commercial value. I would like to now provide some brief update on Clonidine Topical Gel for the treatment of painful diabetic neuropathy. As you likely know, we announced at the end of 2015 the initiation of our multi-center randomized double-blind placebo-controlled study to assess the efficacy and safety of Clonidine Topical Gel in the treatment of pain associated with diabetic neuropathy. The study design incorporate significant learnings from two previously conducted studies, and involves tightened and additional inclusion criteria, improved assay sensitivity, reduced bias and ensure compliance with enrollment criteria. We expect study recruitment to be completed before the end of 2016 and data to be available as early as first quarter 2017. The trial is positive. We believe it can be used as one of the two pivotal trials required by FDA. And it may serve as the single trial needed for a regulatory submission in Europe. So this outcome has significant value creation, if positive. Either way we believe this design will be definitive in its outcome. We provided further details on this trial at our R&D Day a few weeks ago. So I would encourage you to view our R&D Day slides posted on our website, if you'd like to learn more about it. Finally, let's look at where we are with ONSOLIS, which is intended for the management of breakthrough pain in cancer patients. In the third quarter of 2015 we received FDA approval for a new formulation of ONSOLIS. We are now in a position to move toward returning ONSOLIS to the U.S. marketplace. And as we discussed on our last call, the rate limiting factors is securing a manufacturing partner and resuming production of ONSOLIS. We are pleased to say that we have secured a new manufacturer and their efforts to make ONSOLIS, and become qualified to do so by FDA are underway. We are also well into partnering discussions with several interested parties. We believe we'll be able to announce a disposition of ONSOLIS here in the United States sometime this year. Given the timing of qualifying the new manufacturer with the FDA, market reentry will not likely be until sometime in 2017, but this will not prevent us from licensing the product to a third-party, as those discussions as mentioned are well underway. With that, let's review our anticipated 2016 milestones. Importantly, a significant milestone has already been achieved with Endo's launch of BELBUCA, earlier this year. That aside, BUNAVAIL remains BDSI's primary focus and the efforts behind it to grow sales. We are confident in our ability to grow BUNAVAIL in 2016, as the benefits of the product, including decreasing the potential for diversion, misuse and abuse are beginning to be more and more appreciated by both commercial and Medicaid payors. We are continuing to have significant discussions with managed care in general across these important issues, and expect to see positive impact in these discussions this year. In addition, our direct-to-patient product program has tremendous potential to drive sales, by getting the BUNAVAIL name and benefits in front of patients before they get to the doctor's office. We look forward to these results sometime in third quarter. The lifting of the patient cap will bring in thousands of new patients and serve as an opportunity that we are already preparing for, as we know certain doctors prefer prescribing BUNAVAIL for new patient versus switches. And finally, we have one of the best sales management teams in the business, and their impact will begin to be recognized as they have more time with their teams, implementing proven sales strategies. So a long-term goal of achieving a 10% to 15% market share by the end of 2018 has not changed, we expect to make progress in moving toward that share in 2016. And as mentioned, we have an all-on effort to enhance the efficiency of our commercial infrastructure, by adding complementary products to our sales efforts, either through M&A, co-promotes or a combination of those. And as Ernie will cover momentarily, we have already implemented steps to improve our gross to net and lower our cost of goods with BUNAVAIL, as we enter 2016. As it relates to our pipeline, again, we expect to file the IND for Buprenorphine Depot in the third quarter of this year, with single dose human PK data by yearend. Similarly with Clonidine Topical Gel, we expect recruitment in our Phase IIB to be completed by yearend, with data in early 2017. Bottomline, there is tremendous potential to enhance shareholder value between the unique combination of our marketed products and our development pipeline. And finally, before I turn the call over to Ernie to discussion our financials, let me reiterate that we continue to believe that BDSI has sufficient capital to support our current operating plan to the middle of 2017, as we closed 2015 with approximately $84 million in cash. With that, I will turn the call over to Ernie. Please go ahead, Ernie.

[Ernest De Paolantonio:]

Thank you, Mark. I will now review our key financials for the fourth quarter and year ended December 31, 2015. For a more thorough review of our 2015 financial results, please see our 10-K, which we will file this evening. Just to reiterate, BUNAVAIL revenue was based on third-party pull-through data that we receive on a one-month lag basis. For 2015, BUNAVAIL revenue includes the months of December of 2014 through November of 2015 and for the fourth quarter results, we'll include the months of September, October and November, but not December. Revenues for the fourth quarter of 2015 totaled $32.2 million and consisted primarily of the milestone payment due at BELBUCA FDA approval of $50 million. $30 million of that payment was earned immediately in the fourth quarter of 2015 as revenue, while $20 million of the payment was related to a previous granting of the patent that extends the patent life of BELBUCA from 2020 to 2027. This $20 million will be recognized equally over the life of the patent extension. In addition, this payment is potentially refundable on a prorated basis, if a generic product is launched in the U.S. during the patent extension period. Other revenue in the fourth quarter reflected $1.5 million in BUNAVAIL sales, which was a 29% increase over third quarter BUNAVAIL revenue and $0.7 million of royalty revenue for BREAKYL. I would like to mention a couple of items driving BUNAVAIL's improved margins. One there was a significant improvement in BUNAVAIL's cost of goods that began during the fourth quarter of 2015, that we believe will continue throughout 2016. This is due to an improvement in lot yields, which were at their highest levels since our launch. Also, there have no batches lost during the last six months. This falls in line with the increase in production over 2015, as the business grew. In addition, BUNAVAIL's average unit cost is at its lowest to-date, and will decrease further by approximately 20%, when we finish validation of our high-speed packaging equipment by the end of this quarter. We continue to make improvement in BUNAVAIL's cost of goods that will increase margins in 2016 and beyond in 2017. Two, gross-to-net expenses. As previously announced, we have discontinued the two-week free trial program, and have replaced it with a more limited seven-day voucher program, that will lead to significant cost savings, and gross-to-net margin improvements. In 2016 to-date we have seen lower expenses in that area versus prior quarters, that coupled with the change in our mix of business in the commercial and cash pay areas will increase our overall margins. Overall operating expenses for the fourth quarter were $18.6 million, of which $8.1 million were related to BUNAVAIL driven sales and marketing costs, and promotional ad campaign. $5.2 million was for general and administrative expenses and R&D expense of $5.1 million that reflect the ongoing development programs for Buprenorphine Depot, Clonidine Topical Gel and BUNAVAIL. Operating expense for the fourth quarter of 2014 was $17.6 million, of which $7 million were related to BUNAVAIL start-up commercialization costs; $5.7 million for general and administrative expenses; and $4.9 million R&D expenses for Clonidine Phase III program. Going forward we continue to expect total cash operating expenses to be in the mid-to-high teens range on a quarterly basis. Net income for the fourth quarter ended December 31, 2015, was $10.2 million or $0.19 per diluted share. Net income, if the $20 million for the patent extension were included, would have been $30.2 million or $0.58 per diluted share. And net income excluding stock compensation expense for the fourth quarter of 2015 of $4 million was $14.2 million or $0.27 per diluted share compared to the fourth quarter of 2014, where there was a net loss of $17.6 million or $0.36 per diluted share. Net loss for 2014 excluding stock compensation expense was $15.8 million or $0.33 per diluted share. Total revenues for 2015 were $48.2 million compared to $38.9 million in 2014, a substantial part of the revenue increase was due to the two BELBUCA related milestones paid. The first milestone was $10 million paid for FDA acceptance of the BELBUCA NDA, and as discussed earlier, the second milestone was totaling $50 million paid at FDA approval of BELBUCA, with $30 million being recognized as revenue immediately, and $20 million being deferred. BUNAVAIL revenues for 2015 were $4.2 million. Other revenues in 2015 were $1.4 million for BREAKYL royalty revenue and $0.9 million for reimbursable R&D expenses related to the BELBUCA program. Revenues for 2014 consisted primarily of $20 million in milestone payments for finalizing the two Phase III clinical trials; $12.7 million of reimbursable R&D expenses; and $2.7 million from deferred contracted revenue from the original upfront payment received in 2012. Other revenues received in 2014 were $3.4 million in product royalty revenues for BREAKYL. Operating expenses for 2015 were $75.3 million, including $29.4 million for sales and marketing expenses that included approximately $2.5 million for a post-marketing clinical study, and it reflects a full year of commercial expenses for the support of BUNAVAIL; $25.3 million for G&A, which included legal, accounting, insurance, and other professional fees; and R&D expenses of $20.6 million, primarily in the support of Clonidine Topical Gel, the culmination of the Phase III and safety studies earlier in the year, as well as the start-up of the Phase IIB study in the fourth quarter. Other R&D programs were for BUNAVAIL and injection. Operating expenses for 2014 were $72.7 million, of which $34.3 million were for R&D; sales and marketing expense of $17.3 million that reflected two quarters of start-up of commercialization expenses for BUNAVAIL and $21.2 million for general and administrative expenses. Net loss for 2015 was $37.7 million or $0.72 per diluted share. Net loss, if the $20 million for the patent extension were included would have been $17.7 million or $0.34 per diluted share. And net loss excluding $17.7 million of non-cash stock based compensation and amortization was $20 million or $0.38 per diluted share versus 2014 where there was a loss of $54.2 million or $1.12 per diluted share. Net loss in '14 excluding stock-based compensation and amortization of $7.9 million was $46.3 million or $0.96 per diluted share. The $50 million fourth quarter milestone payment led to a cash balance of $83.6 million at December 31, which we expect will extend to approximately the second quarter of 2017, based on our current operating plan and objectives. Now, let me turn it back over to Mark for the Q&A session.

[Mark Sirgo:]

Thank you, Ernie.

[Operator:]

[Operator Instructions] Our first question comes from Tim Lugo with William Blair.

[Tim Lugo:]

It sounds like you have a game plan for driving BUNAVAIL this year. However, we've all seen a sliding of scripts in the first two months of this year. Maybe can you give us an idea of what are the headwinds that you saw in January and February? And when do you expect your plan to begin to show up in the script numbers?

[Mark Sirgo:]

Scott, do you want to take that one?

[Scott Plesha:]

Sure. Tim, unfortunately the market itself was down greatly in January, and started to recover a little bit in February; we've seen versus December, it was down about 9%, and even more so within Tennessee, where a large part of our business comes from. This is actually something we saw last year as well within the marketplace. I think it's important to note there still is a nice increase year-over-year January to January. So we think that will start straightening out here in the coming months, just the market itself growing once again. And then with all of the different efforts and some of the things Mark highlighted, I think Q2 should be a time when we would see some acceleration within our growth, a little more consistent in our growth pattern there.

[Tim Lugo:]

And maybe a question for Ernie. We're calculating price per script of just under $60 in Q4. Now, that we're in the year two of commercialization where should we expect that to be trending in 2016?

[Ernest De Paolantonio:]

You're right on for the fourth quarter. It's about $60 million. We're expecting that script to go up in 2016. For 2015, that is you're right on with the $60.

[Tim Lugo:]

Do you think you will hit where your peers are? I know there's some room there?

[Ernest De Paolantonio:]

Yes, I mean with the move towards the commercial and cash pay and additional government business, yes, we will move in that direction.

[Tim Lugo:]

And maybe one last question. You talked about there are non-retail channels. How much in sales in the class do you believe currently flows through these non-retail channels, and what's the opportunity there?

[Mark Sirgo:]

This is Mark, Tim. Mike Bullock is here, too, who can help answer the question. But it's certainly a much, much smaller piece of the business, but it's one that we have got accessibility to, and therefore we're pursuing it. Mike, you've got a specific number around it or approximately?

[Michael Bullock:]

No. I don't have a specific number yet. We think it's upwards of $10 million and above, so it's not the largest opportunity we have, but yet it's one that's an opportunity that is in front of us that we're pursuing.

[Operator:]

Our next question comes from Scott Henry with ROTH Capital.

[Scott Henry:]

Just a couple of questions. I guess, first, you mentioned in the press release about potential for an induction claim for BUNAVAIL in third quarter. How much does that matter? I am just trying to get some color on how we should think about that event?

[Mark Sirgo:]

Yes, I don't think it's hurting us right now, not having it, Scott. It could be used in terms of counter detailing, if people choose to do that. We have heard a little bit of that over time, but I don't think it's been a major impediment, and that's why we haven't really spent much time talking about it. It will put us in parity with the other two products once we have it.

[Scott Henry:]

Fair enough.

[Mark Sirgo:]

But we're not seeing any major limitations by not having it.

[Scott Henry:]

That certainly makes sense. A couple questions for Ernie as well. So the $20 million that we will have to amortize, what duration are you using that on, I know it's through the extents of the patent, but how many years are you thinking about dividing that by?

[Ernest De Paolantonio:]

Its 84 months.

[Scott Henry:]

And the fact that there's some recourse on that, does that have any covenants on what you can do with the money or no covenants whatsoever?

[Ernest De Paolantonio:]

No. There are no covenants whatsoever. The money, it was ours. It was given to us in November. We collected it with no covenants on it.

[Scott Henry:]

And as well, would you care to talk about spending, how we should think about that for 2016, if not specifically then perhaps relative to 2015?

[Ernest De Paolantonio:]

Well, as we said, our operating expenses are going to be in the mid-to-high teens on a quarterly basis on a cash basis, but I think you will see them relatively similar to what they were in 2015 or actually a little bit lower.

[Operator:]

Our next question is from Jim Molloy with Laidlaw.

[Jim Molloy:]

I wondered starting off, do you have any anecdotal comments from the field on the BELBUCA launch three weeks in that you guys can pass along?

[Mark Sirgo:]

This is Mark, Jim. I think I mentioned during my formal remarks, we did speak to our counterparts at Endo late last week, and they were very pleased with the few issues that anybody had encountered in the field, and is related to reimbursement, or even have product availability in the pharmacies, which are clearly two impediments to a lot of launches. So Al, I don't know, did you have anything you wanted to add?

[Albert Medwar:]

Sure. I did have an opportunity to speak to the head of sales and marketing who had spent some time out there early on, and the one thing that sticks in my mind that he has said, that is level of enthusiasm on the part of physicians was exceptionally high, better than he has seen with products in a while now, and that physicians generally wanted to hear about the product, and get a good understanding of the administration, and had a very high intention to use the products, so it was all very encouraging.

[Jim Molloy:]

Does the buccal formulation -- I know that Endo is very clear that it may take a little bit of time to educate people. How's the inhabitant impacting the launch early on?

[Albert Medwar:]

It's really too early. Haven't heard anything, but I do know that they have put a pretty good effort into making sure that there were plenty of materials to support that, including making placebos available, instructional materials for patients, and I know they have got videos and all on their website as well. So they certainly recognize the importance of making sure that that's covered early. But no, it's too early. I've not heard anything issue-wise with it.

[Jim Molloy:]

And a question for Scott. I know you have redrawn territories and you have been making some moves on the sales reps. How has the team been responding, and when do you expect to see this impact? I know, you mentioned second quarter you expect things to improve. We're looking at scripts down nine weeks out of the last twelve, greater than the market. When do you guys start taking share? And can you tell me how many and what percentage of your reps are actually profitable now, and when will the rest of them will be profitable?

[Scott Plesha:]

So there's probably seven questions in there. So I'll kind of go through the topline on some of it. So the thing to keep in mind is we just realigned things January 1, so it will take a little bit of time for that to take hold. But as Mark mentioned, we are seeing some really important metrics improve. So our call activity -- our calls are up over 20% from when we look at what we averaged in Q4 versus January, and that's continued into February, and that was even still having a number of vacancies. We still had six or seven vacancies. And then, we've also seen a really nice uptick in new prescribers, first time prescribers. So we ended the year with about 2,548 previous prescribers. We are only adding one or two a week. Well since then, we have averaged over 28 a week through the first eight weeks of the year. So we basically increased our writer, number of doctors that have written about, just under 9% in about an eight week period of time. So now the goal is to make them adopters not just trial, so I think that will come with time. So I was sharing with Mark, when I look at the 10 territories, 10 expansion territories, eight of them were filled, and they're actually positive from December to January, and then again in February, still even with four or five days, they have positive growth going in those territories. So we are starting to see some nice uptick there. I would anticipate all of these things we have done, the work we do in January, February, March is going to pay off in the following months. It doesn't turn in a month or two unfortunately with some of these realignments. But I think we have the right management team in place. They know what we're trying to accomplish, and it's hard to tell unless we start looking at payers, and all of these different things, who's paying for themselves. Sometimes obviously different payers are more profitable than others, so the important thing is I think we can get to profitability in the future with the shares that we're talking about. So I think Q2, you'll start seeing -- again, I mentioned earlier, I think we'll start seeing some of the more consistent accelerated growth.

[Jim Molloy:]

I guess at what point, I know there's been a big effort to turn this launch around, and it's been a challenge for various reasons, at what point do you shutter this thing, because you know what, we're in the second quarter and it hasn't been turned, it hasn't worked, or maybe it has worked and things are growing. But at what point do you take the thing out and just shoot it?

[Mark Sirgo:]

So we measure the inflection points on growth on a regular basis, certainly monthly, and then quarterly. So while we do have certain internal expectations that we have set, and that's what we use to gauge our decision making around it. And as we've mentioned, we have got ongoing activities to look at ways to improve the efficiency around the sales force that we have got in place right now, so that's another effort that's ongoing. The full court press we have gotten on the managed care side with this new information, which is real, and it's going to be significant, and I believe this category is going to move in the same direction that the opioid pain market moved into, where the abuse determinant products took over, and they took over for the right reasons, and I think you're going to see the same thing happen here. So this is an evolving category, and the reason it's evolving, is because you finally have some new products in it that are stimulating some other interests that's generating data that actually is meaningful for a change. So it's easy to throw the cold blanket on this, and I can understand why some people are doing that, but at the same time, I think we have really paid close attention to what's happening out there, we're reacting to it in real time, we have got some great initiatives in place, and we're going to keep monitoring whether we're changing the infection of this curve or not, and we'll make the appropriate decisions when we get there. And everything is on the table. We're big boys here, we're focused on trying to drive shareholder value, and if we think we're not going to be able to do that, we'll be the first ones to admit it, we're not there yet.

[Operator:]

We'll hear next from Matt Kaplan with Ladenburg Thalmann.

[Matt Kaplan:]

Just following up on the BUNAVAIL, I guess, some questions for Scott. And Mark, you detailed some of the initiatives pretty well and went through those, but help us understand in terms of what's the most important things that you're actually instituting here that are going to drive sales? And then, please talk about, it looks like Tennessee as a model seems to have gone pretty well. What about converting, I guess, other states and other plans to something similar to Tennessee and where are you in that process?

[Mark Sirgo:]

Sure. So first of all, as I have talked to Scott about this, and he certainly is in agreement, it's the feet on the ground that are ultimately going to make the difference, but hopefully we're providing them with the tools they need to make that happen, and one of those is managed-care coverage, but in addition to that is what we've uncovered more recently with Tennessee, as you're pointing out, and that data is real. We're insignificant discussions with the state of Tennessee over how we can use that information in other venues, and they're very positive about it. And at this point they're very supportive of the things we want to do. So we have got a full court press on the managed-care side, both in terms of the states that we're in front of right now, and then in going back into some of the commercial plans with this type of information. So that's taking up probably the number one priority right now, because we have a little bit more control over it. The Health and Human Services, initiative of the cap, we don't have control over it, but we're putting a plan in place, as we speak, so when that does happen, we're in a position to take full advantage of it. And that will be a lot of new patients into these practices. And again, we have got much better access to new patients. Physicians really haven't been resistant to putting new patients on BUNAVAIL. Unfortunately a lot of them are at their cap, and can't add new patients. So that will make a big difference as well. So I think sort of in that order, feet on the ground, because we've got a great management team in place now, we've driving hard, we've got great materials and new information that we're using, improving our managed-care positioning with new information as well, and then when that cap lifts, which we hope is soon, we look to take full advantage of that. So Scott, do you want to add anything?

[Scott Plesha:]

Yes, I think what Mark mentioned all of these different initiatives, so even the direct sales, we talked about the opportunity, Mike mentioned $10 million, but the thing to keep in mind in those, a lot of those are inpatient or outpatient, so people may start on the therapy in that setting, and those become -- then they trickle out in the retail setting later. So it's a way to capture patients early on in the treatment, and then have almost an annuity later on there. So you can't always, you can't just assign that value to it. It's also the trickle-down effect from that, and I think all of the initiatives, what's important is I feel we have a sales force now that's in much better shape, and a lot more effective and efficient, so that when these things take place, we're in much better position to maximize the opportunity in front of us, and I think that's critical.

[Matt Kaplan:]

And I guess, a question, in terms of could you help quantify again what your non-cash expenses were for 2015?

[Ernest De Paolantonio:]

They were our stock compensation expenses and amortization expense.

[Matt Kaplan:]

And what was the total?

[Ernest De Paolantonio:]

I believe it was $17.7 million.

[Matt Kaplan:]

That's fine. I guess, what, you're about 10,000 scripts per month, something like that now with BUNAVAIL. I guess, to drive the acceleration, what should we expect to see, I guess, Scott? Help to quantify that for us, when we're thinking about the second quarter?

[Scott Plesha:]

So you're correct, we were at about 29,500 in Q4. So I don't know that we're going to give a specific number on that right now. I think that what I can say is we do expect it to increase and to grow going forward. You should expect higher, I know obviously we started out in the gate here in January a little bit lower than we exited 2015, so we have some work to do.

[Mark Sirgo:]

Yes, Matt. I think the other thing it's very difficult to measure is the infection that would occur around our ability to use the new information that we're leveraging at this point in time. So we're in front of, for instance, several states now that will make decisions between now and sometime in early June. So those sort of opportunities could change things rather dramatically. So it's really difficult to predict with any kind of certainty, and that's why we're not giving any guidance, in terms of what the growth would look like. But I think with everything that we've got in place, including the realignment in the sales force, and the management team, that we certainly expect to be able to show significant growth first quarter to second quarter, and that's something we're going to measure very, very closely. It's going to be very, very important in terms of how we view this product going forward.

[Mark Sirgo:]

Go ahead, Ernie.

[Ernest De Paolantonio:]

Matt, it was $16.7 million of stock-based compensation, and $1 million for amortization.

[Operator:]

And as we are at the top of the hour, we will take one final question from Ken Trbovich with Janney.

[Ken Trbovich:]

I am actually I guess maybe a little more convinced about the opportunity with what you described as the Tennessee factor, as opposed to sort of the traditional approach. I'm curious how far you can go with that approach, because it seems like the cost savings that you're describing for the state of Tennessee frankly are overwhelming compared to the revenues that of you have recognized thus far. I'm wondering if there's any opportunity from a contracting standpoint for you guys to calculate, for example what a state pays on Medicaid currently, and to walk in and just simply say, we'll do it on a fixed-price basis, we'll treat all of your patients, and it certainly seems like that would be an opportunity for you folks to capture the most upside. And obviously there's other variations of that where perhaps you split the savings. I'm just kind of curious, how creative you can be with state institutions, who maybe aren't used to negotiating that way?

[Mark Sirgo:]

Yes. Ken, I'll turn it over to Mike. It's a very good question. It's something that we're definitely focused on right now.

[Michael Bullock:]

Ken, you're exactly right, that's exactly what we are doing right now. For the states that are willing partners and willing to look seriously at this market for savings opportunities, and opportunities to address what we know to be the problem of diversion, so we're starting to leveraging this data with those states, with that exact story, so how many of those and how soon they come onboard and that plays out is to be determined, but our expectation throughout this year is that we'll have more states come onboard.

[Ken Trbovich:]

Sure. I get that it's not an immediate process, but I guess one of the encouraging things from my perspective was with the Tennessee process you secured the contract and almost instantly went into it. Are these contracts done on a calendar year or a fiscal year basis?

[Michael Bullock:]

Generally they are a calendar year, the timing of that was such that the contract went into place just when they turned -- in October, that was with their calendar year, so that coincidently was the timing aligned on that one.

[Mark Sirgo:]

Ken, several states have called Tennessee to acquire inquire about the information that we've generated, so there is ample interest out there.

[Ken Trbovich:]

Sure. No. It just seems like it's obvious, it's plainly obvious both in terms of the volume you picked up, obviously, in the Medicaid segment, but then the spillover, and granted the volumes might not be as high as you had hoped, but that's one way to certainly capture the benefit of that. I guess the challenge for all of us obviously is just sort of waiting and trying to guess on the potential timing. What about managed Medicaid contracts is the situation? And when we start talking about managed Medicaid or managed-care organizations, is the situation the same or slightly different, when we talk about how you might approach those?

[Michael Bullock:]

Yes. So it can vary from state to state. A lot of the timing is driven by the fee-for-service business. So in those states that have an interest, and we're working with right now, there could be a potential for that to trickle over into the managed Medicaid space. For managed Medicaid plans, that have some autonomy and how and when they develop and implement their formulas and contracts, we're certainly working with them currently.

[Ken Trbovich:]

And then I apologize. I know time is of the essence here, and we're past the top of the hour, but I do want to get back to the cost of goods on the product, because clearly one of the challenges I think we're all having isn't just the growth gross-to-net, but also on the COGS. When I look at the quarter, and I'm not sure because I'm backing into these numbers, but it looks like revenues went up $337,000 and cost of goods sold went up $621,000. So if there were one-time items that were occurring in terms of batches that were bad, because I think you said there haven't been bad batches in six months, can you help us understand what those COGS were in the fourth quarter that might have made them so high, relative to the sequential increase in revenues? And then give us a sense of what you think the revenue level is that you need to hit before COGS becomes positive?

[Ernest De Paolantonio:]

Again, there's a couple of questions there. Let me go at them individually. Don't forget we continue to pay a royalty of about of $400,000 every quarter or $1.5 million a year, as a minimum that we have to pay to CDC. Those are included in that cost of goods that you're seeing, and in the fourth quarter there were no lost batches that we had in there, and we have always said that sales would be in the $40 million, around $40 million to get to breakeven for BELBUCA, mid-$45 million or so.

[Mark Sirgo:]

I think the point is we can't extract the BUNAVAIL COGS out of that line item.

[Ernest De Paolantonio:]

That's correct.

[Ken Trbovich:]

No. Yes, I get that I can't get it purely from there, but that CDC royalty would have been the same quarter to quarter, so the only increase would have been BUNAVAIL?

[Ernest De Paolantonio:]

You also have BREAKYL cost of sales in there, which [multiple speakers].

[Ken Trbovich:]

No. That's fine. I think the guidance you gave, or the sort of estimate on breakeven is helpful, because again, I'm just trying to make sure I don't set expectations in my own modeling, that are out of line with what you think is achievable, so I appreciate the help with that, and obviously look forward to some of the opportunities on the contracting side, because clearly it seems like that would be a situation where the volume decrease would actually result in no real COGS, and yet you would have the benefit of the revenue. So it's sort of the inverse of the situation we have now?

[Mark Sirgo:]

Just one last closing comment on the COGS, Ken. First of all, it's much more, more efficient now than when we first launched, just because of the volume that we're generating on a regular basis now at the manufacturing site. The other thing is, we're now on high speed line packaging equipment, that will drop the COGS by about 20% if I'm not mistaken Ernie. So as I said in my formal comments we're taking steps not only to reduce the gross-to-net, but the cost of goods at the same time, which I think is the expectation people should have, as we get further into the launch. End of Q&A

[Operator:]

That does conclude today's conference. Thank you for your participation.