Good morning, and welcome to the Depomed, Inc. Second Quarter 2018 Financial Results Call. My name is Louis, and I will be facilitating the audio portion of today’s interactive broadcast. [Operator Instructions] At this time, I would like to turn the show over to Mr. John Thomas, Senior Vice President for Investor Relations and Corporate Communications. Mr. Thomas, you may begin your conference.

Thank you, Louis. Good morning, and welcome to our Investor Conference Call to discuss Depomed’s second quarter 2018 financial results, which we announced this morning. The news release and investor presentation covering our earnings for this period are now available on the investor page of our website at depomed.com. With me today are Arthur Higgins, President and Chief Executive Officer; Augie Moretti, our outgoing Senior Vice President and Chief Financial Officer; and Phil Donenberg, our current Senior Vice President and Chief Financial Officer. I would like to remind you that the matters discussed on this call contain forward-looking statements that involve risks and uncertainties, including those related to the commercialization of Gralise, Cambia and Zipsor; our collaborative arrangements, including with Collegium Pharmaceutical; the company’s financial outlook for 2018; development plans, including those for cosyntropin depot; and other statements that are not historical facts. Actual results may differ materially from the results predicted, and recorded results should not be considered an indication of future performance. These and other risks are more fully described in the Risk Factors section and other sections of our quarterly reports on Form 10-Q and our annual report on Form 10-K for the year ended December 31, 2017. Depomed disclaims any obligation to update or revise any forward-looking statements made on this call as a result of new information or future developments. Depomed’s policy is to only provide financial guidance for the current fiscal year and to provide updates or reconfirm its guidance only by issuing a news release or filing updated guidance with the SEC in a public accessible document. Reference to the current cash and cash equivalents are based on balances as of June 30, 2018. All guidance, including that related to the company’s expected total product revenues, operating expenses, adjusted non-GAAP earnings and non-adjusted EBITDA are as of today. The nonfinancial – non-GAAP financial measures Depomed uses are not based on any standardized methodology prescribed by GAAP and may be calculated differently from and, therefore, may not be comparable to non-GAAP measures used by other companies. With that, I will turn the call over to Arthur. Arthur?

Thank you, John. Good morning, and welcome, everyone. It’s my pleasure, firstly, to introduce and welcome our new Chief Financial Officer, Phil Donenberg. Phil comes to us after a successful tenure at AveXis, the local Chicago area gene therapy biotech, where he served as CFO and played a key role in the company’s almost $9 billion purchase by Novartis. Phil brings more than 20 years of leadership in finance, M&A and operations with most of his career focused in the specialty pharmaceutical and health care arena. I’m also joined today by Augie, our outgoing CFO, and this will be his final quarterly earnings call. On behalf of the Board of Directors, our executive leadership team and all our employees, I’d like to thank Augie for his service as CFO and his numerous contributions to our company over the last six years. As many of you know, Augie was instrumental in raising $1.2 billion of capital to support our growth and transition to a commercial-stage specialty pharmaceutical company. We wish him all the best in his next engagement in the Bay Area. I mentioned in our first quarter earnings conference call that I expected 2018 to be a very busy and productive year for our company. With more than half the year complete, I remain more confident than ever that this will indeed be the case. So I’d like to share with you some of our key achievements to date, as we continue to execute against our three-pillar strategy of maintain, grow and build. On maintain, we have de-risked our business through our agreement with Collegium while at the same time, significantly improving our profitability. On grow, we completed two new business agreements that will support future growth, our co-promotion agreement for Zipsor with Allegis and our in-licensing agreement with Applied…

Thank you, Arthur. This morning, I’ll review financial highlights from our second quarter and then discuss guidance. My comments will primarily focus on our non-GAAP results. Please refer to today’s earnings news release for an explanation of our non-GAAP financial measures and tables that reconcile the company’s non-GAAP measures to GAAP measures. Total GAAP revenues for the quarter ended June 30, 2018, were $63.3 million. There were three principal elements to our revenues, net sales of our neurology products of $25.9 million; revenue under the commercialization agreement with Collegium in the amount of $31.2 million; and as planned, we recognized a $5 million milestone payment from Ironwood Pharmaceuticals related to the initiation of a Phase III trial being conducted by Ironwood. While sales of our core products were slightly lower than expected, from a profitability perspective, we were able to offset softer neurology franchise net sales by remaining vigilant in managing expenses. For perspective, total company GAAP SG&A expenses are down 37% for the quarter year-over-year and down 38% year-to-date versus 2017. As a reminder, with respect to the Collegium agreement, Collegium has the exclusive right to commercialize the NUCYNTA franchise. As planned, in the second quarter of 2018, the company received $33.75 million in cash and recognized $31.2 million in revenue in accordance with the revenue recognition guidance we provided on our last call. Lastly, on revenue. In July 2011, the company entered into a collaboration and license agreement with Ironwood Pharmaceuticals, granting a license for worldwide rights to certain patents and other intellectual property rights to our Acuform drug delivery technology for an Ironwood product candidate under development for refractory GERD. The company has received $3.4 million under the agreement previously, including a contingent milestone payment of $1 million in March of 2014 as a result of the…

Thank you, Augie. So I hope you all agree, the transformation is well underway and that we have had a very busy and productive year-to-date, and we look to more progress as we close out the year. With that, I would like to open it up for questions.

Louis, we’re ready for Q&A. Thank you.

[Operator Instructions] And your first question comes from Irina Koffler from Mizuho. Mrs. Koffler, your line is open.

Hi. Good morning. Thanks for taking my questions. I just wanted to dig a little deeper into cosyntropin. So just wondering if you could provide a little bit more color on the payer discussions in the sense of how affirmative were payers, whether they just expressed interest in learning more about the product or actually would put it on formulary for utilization? Have you had any discussions with the government payers? And just wanted to get a little better sense of how much intent there is to really use the product.

Okay, thanks. Thank you, Irina. I think what I would say is, there was a receptivity with the payers. Clearly, until they get a better sense of what the price discount is going to be, Irina, they were engaged and interested, but that’s about where – how far the discussions have gone. Clearly, as we get closer to market, we will start to share with you and the payers what our pricing strategy is. But without that, I would describe it as high interest, but it’s all going to depend on what the discount is.

And there is no demand for additional clinical data for any indications. They are comfortable with the idea that it’s Synacthen, like used in Europe. And in terms of your discussions with the FDA and promotion that you can potentially pursue, can you touch on that?

Yes. Again, I think, we were encouraged by the fact there was widespread knowledge of the availability of synthetic cosyntropin outside of the U.S. So we didn’t have a lot of bridging to do to explain that these products have that similar use pattern. And I think, again, the issue came to – in terms of clinical data, I would say, this is again more a function of, if the pricing discount is small, there’ll be more pressure for that. If the pricing discount is more in line with what they’re expecting, there’ll be less pressure on that.

Okay. And then I have a question on IP, just as a follow-up. So this is a 505(b(2) strategy. Are you expecting three years of market exclusivity? Or do you have an additional IP that you can discuss?

At the moment, all we’re expecting is the three years.

Okay. Thank you.

Thanks, Irina.

Your next question comes from the line of Ken Trbovich from Janney. Your line is open.

Hi, Ken.

Thanks for taking the questions. I guess, I wanted to – hey good morning. Wanted to start with the discussion, again, on Synacthen. I – just knowing that the product’s available, is it sold by Novartis currently in Europe? And what’s the pricing look like there? And have you contemplated any risk on the importation?

The product is actually sold by two people. It’s sold by Mallinckrodt and a European company whose name I’ve forgotten. But there’s two companies that have rights. Sandoz or Novartis gave the rights to Mallinckrodt and other European, small, midsize European company. I do not believe – I mean, there’s always a risk, but I think, again, that’s something we believe we can manage.

In terms of the importation risk, is the risk that can be managed?

Yes. And the other company Alfasigma by the way.

Sigma, thank you. Alfasigma, thank you. In terms of revenue or guidance, I guess, in general, one of the questions that, I guess, I have has to do with the GAAP numbers. Are we certain on the accounting for the PDL milestone? Is that just a straight flow-through, all of it recognized in a single quarter? Or is there some unique accounting here that would result in a treatment of this, much the same way that we’re seeing other types of agreements where you receive the cash, but the recognition’s deferred over the periods?

We’re comfortable, Ken, it will be recognized in Q3. And as we indicated in the call today, we’ve actually already received the cash. There are no future obligations on our part. It’s just a clean disposition of our rights in the remainder of the future cash flow. So it’ll all be recognized as revenue in Q3.

Okay. So part of that change in the GAAP net loss outlook is just purely a straight $20 million adjustment as a result of that agreement?

Yes.

Okay. And then are there any anticipated royalties from the Grunenthal agreement included in the GAAP net loss guidance?

I don’t believe so Ken.

Okay. So is that something you folks anticipate updating then when we see the third quarter results? Or when do we get a sense for how we should be thinking about the potential royalty to Grunenthal?

So what we’ve said, and this relates to the agreement that we made in connection with the Collegium agreement to protect Grunenthal with respect to sales of NUCYNTA above $180 million and below $233 million. And from an accounting perspective, we will address that as we go through the year and make a determination. Once we cross the $180 million threshold, we will make a determination as to whether we – estimate that we would owe any amount to Grunenthal, and we would reflect that at the time that we make that determination.

And if there were Ken, it would be small.

Okay. Thank you.

Your next question comes from the line of David Amsellem of Piper Jaffray. Your line is open.

Hi, good morning this is Mickey Ingerman on for David. Regarding cosyntropin, you had previously suggested the first filing would be in a therapeutic indication. So did anything change in your thinking or perhaps, as a result of your dialogue with the FDA? And are you still looking at any therapeutic indications beyond infantile spasms? And to that extent, can you give us a sense of when we may see the start of any clinical trials?

Mickey, first of all, I think, we never disclosed what the first indication was. I think people bridged from the fact that we were looking at infantile spasms, so maybe a therapeutic indication. But we were very careful to say we’re not going to have a discussion on that until we were ready, and we are ready today to explain our strategy. Again, it’s a strategy that is designed to ensure we’re first to market. As to the question of additional therapeutic indications, we are in discussions with investigators on other indications. And again, once we have determined which of those we want to pursue, we will update you on those indications.

Great. And one just quick follow-up. Can you guys provide any updates regarding the pace of enrolment in infantile spasms, and when we would expect to see top line data?

I think we’ve, again, been pretty consistent on that. Enrollment is progressing, but the trial, itself, we expect to take between 3.5 to 4 years. So you’re really talking about not seeing top line data for at least 3.5 to 4 years.

Okay, great. Thank you.

Thanks.

Your next question comes from the line of Randall Stanicky of RBC Capital Markets. Your line is open.

This is Dan Busby on for Randal. First off, welcome, Phil. Good luck out there, Augie.

Thank you.

First question, could you elaborate on – a little bit more on what’s driven the softness in Gralise? So a couple of parts for this. What’s the primary pushback you’re hearing from physicians? And two, what gives you confidence that the steps you’ve outlined would be enough to restart growth later this year and/or next?

Yes, Dan, first of all, we should remind everybody what we said we were going to do. The first part was, we have – our brand had been declining for several years. So the first step was to stabilize that brand. We’ve achieved that. I think it’s taken us a little longer than we would’ve liked. But it has demonstrated that the brand is promotionally sensitive. As to what we need to do, I think as we indicated, I think one of the key things we got do a better job of is, we have very good managed care coverage with over 75% of commercial lives covered. But we’re still seeing some leakage in the system between the prescription being written by the physician and actually getting into the hands of the patient. And we’re working with our provider and our simple script program to try and reduce that leakage. I think that’s one of the key steps. The other step that’s clear is that frequency of calling is very important for Gralise, more so than with Cambia and Zipsor. Again, you saw Cambia and Zipsor showing pretty strong quarter-over-quarter prescription growth. We didn’t see that in Gralise. And we believe that’s a function of it. Just needs more call frequency and by reducing the total call universe, we’re able to get our representatives more focused on the high-prescribing Gralise physicians. And finally, as I mentioned in the call, we have a pretty compelling message but we probably made it a little too complex. We’ve got to get that message through in a clear fashion that we are a true once-a-day product, and we have this favorable side effect profile. So it’s about making that message more powerful and impactful. And we believe that combination of these three steps gives us a reasonable level of confidence that we can return Gralise to growth.

Okay. Quick follow-up on the leakage in scripts. Is that a fairly new development? Or have you seen that in the past with this product?

We’ve seen it in the past. But again, I think, as we start to create demand again, we’re more sensitive to it because we’re trying to understand why are we not seeing the conversion of what – you asked in the beginning, how – what’s the receptivity to physicians to Gralise. It’s actually quite high, and the representatives are very motivated promoting the product. But we don’t see that conversion at a level we were looking at, and as we probed into that, we validated that there is a level of leakage that we need to address.

Okay, got it. And just one last question on business development. Broadly speaking, what are you seeing in the market? And do still expect to execute one or two deals this year?

We remain cautiously optimistic. The market has some attractive opportunities. Again, it’s all a question of price and attractiveness. But I think, as we’ve demonstrated, we’re pretty creative here, so we remain optimistic. We’ve got a few more months ago. And let’s see what we can do now between now and the year-end.

Okay. Thanks.

[Operator Instructions]

Louis, if there are no more questions, we’ll wrap it up. Thanks, everybody, for listening.

Thanks, again.

Are we done?

Yes, sir. There are no further questions at this time.

All right, thanks, everyone. And obviously, we’re around if you need anything else. And all the materials are posted to our website on the Investor Relations section. Thanks for joining us. Have a nice day.