Good day, and welcome to the DepoMed First Quarter 2012 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the call over to Mr. August Moretti. Please go ahead, sir.

Thank you, operator. Good afternoon, and welcome to our first quarter financial results and business update conference call. With me today are Jim Schoeneck, President, Chief Executive Officer of DepoMed; Matt Gosling, Senior Vice President and General Counsel; Jack Anders, Senior Director of Finance. Before we get started, I'd like to remind you that the matters discussed on this call contain forward-looking statements that involve risks and uncertainties, including those relating to the commercial launch of Gralise, the efforts of Santarus to commercialize Glumetza, the future filing of a new drug application for Serada and our projected revenue and expenses. Actual results may differ materially from the results predicted and recorded results should not be considered an indication of future performance. These and other risk factors are more fully discussed in our quarterly report on Form 10-Q that we filed with the SEC earlier today, most particularly under the caption Risk Factors. DepoMed disclaims any obligation to update or revise any forward-looking statement made on this call as a result of new information or future developments. As a reminder, Depomed's policy is to only provide financial guidance and guidance on corporate goals for the current fiscal year and to provide, update or reconfirm its guidance only by issuing a press release or filing updated guidance with the SEC in a publicly-accessible document or providing or updating guidance on a publicly-accessible conference call or webcast investor presentation. Financial guidance relating to current cash, cash equivalents and investments is based upon balances as of March 31, 2012. All other guidance, including guidance relating to the company's expected expense levels and corporate goals is as of today, May 8, 2012. I'll now turn the call over to Jim Schoeneck.

Thanks, Augie. I thank all of you for joining us on the call today. The first 4 months of 2012 have been very eventful. And I'd like to summarize the developments in our business. And I'll turn the call back over to Augie to discuss our quarterly results and after that, open the call to questions. I've now been CEO of DepoMed for a little over a year and I'm pleased to report that the strategic decisions we took in 2011 are beginning to pay off. The release launch that commenced on October 2011 is progressing nicely with increasing prescriptions and numbers of prescribing physicians. Gralise product sales for the quarter were $1.75 million and the most recent weekly prescriptions were over 2,000 for the week ended April 27. Total prescriptions increased by over 40% from February 2012 to March 2012. More than 3,500 health care providers have written Gralise since launch and the majority of the prescriptions are being written by pain specialists and neurologists. Of the 60% of patients new to Gralise in March, approximately 70% have been switching from generic gabapentin or Lyrica. We continue to make progress on our managed care efforts as well in commercial plans, as well as Medicare Part D and Medicaid. In March, for the first time, over 50% of Gralise Medicare prescriptions presented to the pharmacy were dispensed with Gralise, up from 32% in December. Ensuring the successful commercial launch of Gralise is our principal goal in 2012. And we believe based on the results so far, that we're off to a good start. There are a few key learnings since the launch of Gralise. First, early on, we identified the importance of pain specialists and the treatment of PHN. Our initial call universe included only approximately 1,200 pain specialists. Pain…

Thank you, Jeff. I would now like to summarize the financial information that's included in the Form 10-Q for the quarter ended March 31, 2012 that we filed today with the SEC. I'd like to be clear at the outset that year-to-year comparisons of 2012 and 2011 results are very complex. In Q1 2012 -- in Q1 2011, we recognize over $100 million related to our Gralise agreement with Abbott and the termination of that agreement. We received $88 million in cash, consisting of a $48 million milestone payment recognized as revenue and a $40 million payment received in connection with the termination of the agreement, which was reported as a reduction in expense. In addition, we also recognized $12.6 million in license revenue in Q1 2011 related to the Abbott agreement. Also, 2012 Q1 results reflect the effect of the restructuring of the Santarus agreement in the sales and marketing expense related to Gralise. Jim provided a summary of the revenue and expenses related to the Santarus agreement in Q1 2011 in contrast to the royalties received in Q1 2012. With that in mind, here's a summary of the quarter. Total revenue for the first quarter of 2012 was $16.8 million compared to $83.1 million for the first quarter of 2011, the decrease in revenue was primarily related to the $60.6 million of milestone and license revenue from our agreement with Abbott and $15.3 million of Glumetza product sales in the prior year, offset by Glumetza royalties in the current year. Gralise product sales were $1.75 million for the first quarter of 2012. We began selling Gralise in October 2011 and recognized revenue during the quarter on a prescription basis. At March 31, 2012, we had $5 million of deferred product sales related to Gralise shipments that were not…

Thank you, Augie. Our efforts to 2012 are highly focused. Our strategy is 3 significant components, and as a result, our 2012 corporate goals are straightforward. First, we'll focus on growing our top line with our branded, marketed products, Gralise and PHN, which we are commercializing ourselves and Glumetza for type 2 diabetes, which is being commercialized by Santarus. Second, we'll focus on the continued monetization of our Acuform technology. We will support our BD deals and will seek to complete additional deals that will include potential royalty and milestone upside. And finally, we'll seek to acquire in-license or co-promote marketed or late-stage products and differentiated assets that can leverage our existing call pattern of our sales force and meet our short- and long-term financial goals. We look forward to updating you on our progress throughout the year, and we want to thank you for your continued support. And now I'd like to open the conference call to questions.

[Operator Instructions] We will go first to Scott Henry with Roth Capital.

I guess just for starters, the decision to add 75 flex reps, was that in any way related to how the discussions went on the Orphan Drug designation? Obviously, the longer or the more confidence you have in the duration of that asset, the more willing one is to invest in it. And as well, you mentioned perhaps substantial updates on the next call. What is the process for pursuing Orphan Drug designation in this situation?

So Scott, let me take the first part of that and then I'll let Matt take the second. In terms of the decision for the flex reps, no, it was not related to the Orphan Drug meeting. It simply was one of looking at our coverage in primary care and looking at the opportunity in primary care. And now that we've got the specialists beginning to support the drug, looking at ways that we could take advantage of that to an influence cascade from the pain specialist and the neurologist down to primary care docs, as I mentioned, specifically in areas where we know we've got good managed-care coverage.

Yes. And Scott, as far as the process goes, unfortunately, it's not as we talked about before defined by the deadlines and so forth. So the guidelines are somewhat unclear, however, we do think at some point over the next few months, we ought to have more in a way of substance to share with you all. Certainly, we were pleased that we were able to hold a meeting and have made some progress there.

Okay. And then the next couple of questions, I just wanted to drill in a little bit on this decision to add 75 flex reps. For starters, how long does a rep or would you expect that it would take a rep to at least cover their costs in terms of -- at what point, what's the breakeven time period for a rep in your opinion?

Yes, I think, Scott, tough to put it exactly. And so, I mean, for one, flex rep is a significantly lower cost than a full-time rep. The costs on a flex rep are about 1/3 of what we would expect to all in a full-time rep and yet the number of calls we get is about 60% of what you would expect with a full-time rep. So...

So are these shared reps?

No, these will be flex reps working on Gralise only or anything else that DepoMed may promote.

Okay. So these would be kind of like a part-timer that wants to come back and work 15 hours a week...

Exactly. Well, they work 24 hours a week. And so that's -- but that's exactly the profile is that they've been pharmaceutical reps, they've been successful with other companies for whatever reason, they've stepped out of full-time work. I mean, oftentimes, these are folks that have had kids and are looking to come back into the marketplace but have great skills. And so flex reps, overall, in the industry are about 90% female...

And what kind of duration can a program -- I mean, to some extent, you have to see how it works, but what kind of time frame -- like, what if you didn't like the results you were getting? I mean, could you change directions relatively quick with these flex reps?

Yes, contractually, we'll be able to unwind it quickly if we would want or need to do that.

Okay. And I'm sorry I forgot, did you ever tell me how long you would expect a rep to turn profitable?

No. Actually, Scott, I didn't have the exact answer for you on it, so I don't want to just estimate on it.

Could you tell me of you're 164 reps currently? And first, let me say, I think the launch is going very well. I don't mean this to be critical, but could you tell me if the 164 reps, are any currently covering their cost today?

I don't know that exact answer, either, Scott. I mean, that's data that we've got, I just don't have the answer on it. I will say that not it's not unusual, this is the third time that I've started a commercial group from scratch. I think not unusual in that, but we've had people that have succeeded and done very, very well and we've got other folks where we've needed to make some changes toward the bottom of the sales force. So coming into a situation like this on the full-time reps, I would expect that we would end up with a turnover rate somewhere in the mid-20s or so by the time we get out to a year. It's just not untypical that about 75% of your reps work out over that year time period. So we've also, I think, have an opportunity as we get better reps into some of those territories that haven't performed well to help us continue to grow the prescriptions too.

We will go next to Jason Butler with JMP Securities.

Maybe just focusing on the Gralise launch again. Could you maybe discuss some of the metrics that you're capturing to show whether personal physicians are continuing to use the drug once they prescribe it for a first time? And second, whether patients are showing willingness to stay on the drug?

Yes. Jason, the first one, the metrics are relatively straightforward, because we get prescriber numbers on a weekly basis. And so we can look and see, are people writing it within the last -- whatever measurement that we use internally has an active prescriber and have they written the drug within the last 4 weeks. And then with that, we look at how many prescriptions are coming from each physician, and so that gives us a little bit more of how deeply we're starting to penetrate the practice. And so those are some of the internal metrics that we use on it. Patients are a little bit tougher. Patients, you've got the gross estimate of total Rxs to new Rxs. We've got some of the information that we've put in our -- that we put in our presentations about the number of patients that are continuing from prior months and, for instance, for the month of March, we had 40% of the script for Gralise for people that continued from the month before. Now that may sound relatively low, when you consider the growth slope that we're on, it means that we're maintaining a number of those patients into the next month. So those are really the overall metrics. Otherwise, it's specific tracking studies on a patient basis. And a primary...

Okay, great. And then just on a physician's -- is the data you're seeing showing that the physicians are -- you have active prescribers that are -- there's a growing number of them?

Definitely. A growing number of active prescribers and a growing number of prescribers that have written more than 5 prescriptions and 20 prescriptions and 50 perceptions, which are the metrics that we're using.

Okay. And then just a couple of more. Another question on the flex reps. Do you have the option to turn them into full-time reps or what is the strategy there if there is success and how do you grow this into a larger primary care target audience?

Yes. It's -- normally, on a flex rep piece, that they're selecting flex rep, because that's what they want to see. And so, it really, they really, generally, is not a situation where you convert them to full-time reps. And one of the things that I believe very strongly and that is not disrupting during a launch phase, the relationship between the rep a doctor. The more you do that, you just set yourself back a few months. So in terms of territories, I wouldn't look to add full-time territories any time soon, simply because I think that relationship is so important and this is a way for us to be able to get that for the region to primary care, maintain flexibility and at the same time, pick up a substantial amount more coverage.

We'll go next to Jason Napodano with Zacks.

A question on Glumetza. Obviously, I saw the news about the settlement with Lupin back in February. I assume that they were the first to file, but then I also saw that Watson has also filed an ANDA. So can you help me understand Watson's motivation here in filing an ANDA outside of the settlement? And I saw that you filed an injunction that would keep them off until October 2014, I believe. But maybe you can shed some light on that.

I'll kick that over to Matt.

Yes, Jason, I think -- I mean, it's certainly hard for us to speculate as to why it may be that Watson would file an ANDA against Glumetza. And I do for now, we do have a 30-month stay in place under act -- due acts and as a result of our filing suit against the -- wish I could give you more information, but you'd really have to ask them why they filed.

But Lupin was the first to file.

That is correct.

Okay. So it just seems odd to me that Watson would be doing this, but I guess I will ask Watson. The question on Serada, was there anything in the SPA for Serada -- for, I'm sorry, for Breeze 3 that talked about how the primary end point would be analyzed?

So Jason, we don't have Mike here today. But there would've been -- there was in the SPA, a predetermined end point to be analyzed. And so all of that would have been in that SPA. So I don't...

I'm sorry, not the end point, the method at which you were analyzing the data. I'm just curious, as to if the SPA allowed for multiple analysis of the data. And I know the FDA has stated that they would like to conduct their own analysis and I'm curious as to if the SPA allowed for the possibility of different types of analysis of those primary end points.

Yes. So there were secondary analyses that were within the SPA, but the primary was certainly predetermined. And within that, the FDA has within their judgment that they can look at other analytical methods. And so, really, that's, I think where we are now. And then looking at both the totality of the data and looking at alternate methods once we would file on each of the individual studies.

We'll go next to Jim Molloy with Think Equity.

I was wondering about the -- a couple of questions. One, is there any way to talk to the relative strength of the patents that you'll be defending? I know that the 2016 patent is one and our -- if I recall correctly, DepoMed beat Teva and Bristol on those patents, it seems a fairly strong one and so the relative method of that versus the longer-reaching ones? And then any discussion on steps you've taken or next steps we should looking for to get this 7-year exclusivity back on Gralise if that's even still possible?

So Matt, I'll let you handle both those.

I mean, first, as to the strength of the patents, Jim, you correctly point out, we did reach favorable settlements at both BMS and Teva related to the 2016 patent. So I can tell you that the later formulation patent, they go up to 2022 and 2024, will figure prominently in this litigation and we do have a lot of confidence in the strength of those patents that we're certainly expecting exclusivity well beyond 2016 here. And we do continue to prosecute a number of formulations specific to that total, that would cover our formulation and really want to be defensive. And so we're very confident in our special properties dating around Gralise and Serada if it's approved.

And then around -- Jim, your question around the process around the Orphan Drug piece and the potential to get it, I think you've answered before Matt.

Yes. Really, we'd love to have more to say. But at this point, we're not in with the new PDUFA deadline, so we do expect however, that we'll have more to say on the topic within the next few months. We'd love to tell you more, but that's just where we are again.

Fair enough. Let me leave with a final question on Serada. Can you talk a little bit about, coming out of the FDA meeting and your re-filing, how much was -- was the FDA was like, what? Sure, go ahead and file, we'll see what happens or you get sort of -- you spoke with M&A, and said, yes, obviously, the FDA has spent over backwards for this drug in the past given the known safety on it and the medical need. Can you talk a little bit about the relative, we're pendulum swung between, hey, go ahead and file. We'll see what happens to, yes, we'd really have a plan to get the things through if XYZ is met.

Yes, Jim, I don't know if there's one I can say on kind of either end of the pendulum other than to say, as we met with the agency, they will take the actual deep dive on the data only after the application is submitted and accepted. So anything like that, the FDA would consider a review issue upon looking at the totality of the data. If we didn't believe there was an openness for them to look at some other analytical methods, we wouldn't have taken the action that we've taken. And so, while the agency isn't going to tell you, go ahead and file or don't file, we felt like based on the interaction we had with them, that there was a reasonable chance based on what the data says and based on the interaction we have with them.

We'll go next to Rohan Seth with Auriga USA.

I'm calling on behalf of Difei Yang. I was just curious, if you could talk about your expectations on licensing revenue for the rest of the year?

I mean, at this point, we could talk about some of the specifics in terms of what we have on existing arrangements. If the question really is to additional things that we may have on the Acuform technology. I mean, those are things that, as with any business deal, until it's signed and done, it's not done. And so I don't want to give you any guidance that way one way or the other, simply because until the deal is actually in place, we really won't know if it'll happen or the parameters of it. In terms of some of the current revenue around it...

Yes. I was going to say, we announced today that we've begun to recognize revenue on the Merck transaction and we recognize milestone revenue off of the ongoing Boehringer Ingelheim and the Ironwood transactions, that the development agreements that we have in place, there are 4 agreements other than Merck and they each call for milestones and royalties on net sales. All of those agreements are still -- still relate to products that are in the development phase and we don't control the timing of filing an approval and so on with respect to those programs. So we haven't really given any guidance with respect to our anticipation of revenue from those agreements for the remainder of the year.

We'll go next to Difei Yang with Auriga.

You eventually made it just in time, so a couple of questions. First one is related to Gralise. So I think you have said that there are 3,500 physicians that are currently prescribing or they have described Gralise. And could you let us know, among the 3,500, how many of them are writing 5 and more prescriptions?

Difei, although we use that as an internal metric, we have not released that. So unfortunately, I won't be able to give you that number.

Okay, all right. And so let's -- yes, let me, looking to the next question, so -- oh, yes, with regards to the guidance for the $5 million for the year, extra $5 million you spent is associated with Serada filing. Do you think that's included in the R&D expense guidance on between $15 million and $20 million?

Difei, this is Jack here. Yes, the bulk of that will reside in research and development for the small portion in SG&A.

Right, and that's included in that guidance number, Difei.

[Operator Instructions] We'll go next to John Gordon with Delta Asset Management.

Just as a first matter, numerically, I just would like to go through the pricing that you've laid out with respect to Gralise. I guess, I thought that going into the price increase that Gralise was priced at about a 5% discount to where Lyrica was being sold last year. And I gather that Pfizer increased their price of Lyrica by 9%, I guess at the beginning of this year or sometime early this year, and that you, therefore, were able to announce a 20% increase on May 1 and yet it's still lower than Pfizer. And I'm just trying to figure out how that math works, because was the original discount more than 5%?

John, the original discount was 5%, but that was figured with all Gralise patients being at 3 tablets per day, 1,800 milligrams per day. And what we're seeing and we compared that to an average of about 2.3 tablets per day for Lyrica. So their average use per day. And so what we've now seen is that our average tablets per day are less than the 3.0 for people that are both ramping up in terms of the dosing and some don't end up with a full dose of 1,800. And so with that, as we did that math in terms of the daily cost of it, we'd looked it and saw that we were a substantial amount below the daily price of Lyrica. And so it's not only their 9% price increase, but also us having now actual data on the number of tablets per day with Gralise.

Okay, and just in the interest of full candor, have you just delivered a smidge of bad news with the good news, the price increase? But is there an implicit message that in fact that the plain is water side affect of Gralise actually as a tiny bit less plain in the sense that patients can't tolerate 3 pills a day?

John, I don't think it's so much around if they can tolerate or not tolerate the 3 pills. And we've continued to see that most of the patients can get up to full dosing, a great majority in 2 weeks and that they can tolerate the 1,800-milligram dose. I think it's just that some physicians are not apt to go to the higher doses. And so I think that's more what we're seeing. And then there are some patients that are older that I think they don't want to push the dose up unless they actually have to on the pain relief side. So I don't think it's any type of reflection on the side effect performance the drug, but just a little bit more the practicalities in the marketplace. And we have seen that per-tablet usage go up each month, so we would expect to see that continue to go up. But I think we're probably, if I would say anything on and just slide through it under the kind of key learnings or lesson's learned, we were probably a bit too conservative in terms of assuming on a price, a daily pricing basis that everyone on Gralise would be on the 3 tablet-a-day dosing.

Right. I guess, just -- I think I heard you say in the past that you'd been doing some post launch sort of analysis of how things are going. And I assume that one of those dimensions if, in fact, that is going on, is that you would be sort of monitoring what percent actually do get up to the 3 pills a day and stay there, just so that you can address the issue on a real experience basis in terms of tolerability at the full dosage, am I right in that?

Yes. I think, John, and we've also have a Phase IV study that we've initiated, looking at the kind of actual in-office use of Gralise, and we'll be reporting on that in the future as well. Both in terms of titration in an open population, also in terms of tolerability. And so as we report that, that back. But again, I don't -- we haven't had anything unexpected in terms of the tolerability on the drug.

You have not. Okay, terrific. Jim, just moving on, I know that the Serada announcement that you made wasn't all that long ago and but you know, I'm a impatient shareholder. I'm just curious, whether any of the women's health groups that populate the airwaves have raised their head, either saying go DepoMed or being cautionary. I mean, in a way, is there anything that's being said about this outside of DepoMed on the one hand and the FDA in the other?

John, I haven't seen anything and I haven't specifically asked some of the people we have, they're looking at Serada so closely right now. But I'm not aware of it, though in terms of anything kind of being out with the women's health groups, I would think that as Mike has mentioned, that we would expect to have data that we would present on the studies of the menopause -- Merck's American Menopause Society meeting in September. And I suspect that, at that point in time, as for some of the talk are really starting to form.

Right, sure. And then just, finally, I wouldn't mind hearing you just describe the corporate development process in terms of where you think you are in the ongoing hunting and pecking search for incremental products to give to the sales force or incremental compounds to put into your development arsenal. Can you just sort of describe the lay of the land there now, please, Jim?

So I meant that, typically, what I'd say was, John, you've got to kiss 100 frogs to find one very small prince when you're doing this type of business development activity. And again, it does fall into that piece, so until you've got a deal, it's not a deal. So we continue to have a team that's been focused on this since third quarter last year, that is not involved, that's not very involved or is not involved with the Gralise launch, so we don't end up pulling anything away from Gralise. But it continues to work hard, both in terms of getting things into the pipeline and analyzing things that we've already put into the pipeline. And so, I mean, other than I can't give you any update on it simply because any discussions that we'd be having until they come to fruition, unfortunately, don't mean a lot. They're just not...

Yes, sure. But I take it that there have been some frogs out there that you've at least may not have kissed, but you've gotten closer to.

I think that's fair.

And we will go next to Difei Yang with Auriga.

Yes, I have a quick follow-up question with regards to on the net price on post May 1 price increase. So in terms of modeling, what should we assume?

In terms of the prices. So the price previously had been $1.88 a tablet, it's now $2.25 a tablet. So I think that's probably the easiest way to think about it just in terms of the absolute price increase on a per tablet basis.

That does conclude today's question-and-answer session. At this time, I will turn the conference back over to Jim Schoeneck for any additional or closing remarks.

Okay. So I just want to thank everyone for being on the call today and I thank you for your continued support for the company, continued interest and we look here at DepoMed to continue to deliver results to you, both in terms of our partnerships and through our partners in addition to our direct efforts with Gralise selling to pain specialists, neurologists and primary care. And with that, I look forward to interfacing with all of you as we progress through the year, so thank you.

That concludes today's conference. We thank you for your participation.