Christopher Keenan – Vice President of Investor Relations James Schoeneck – President and Chief Executive Officer August Moretti – Senior Vice President and Chief Financial Officer Matt Gosling – Senior Vice President and General Counsel Jack Anders – Vice President of Finance.

Jason Gerberry – Leerink Partners David Risinger – Morgan Stanley Ami Fadia – UBS David Amsellem – Piper Jaffray Irina Koffler – Mizuho Ken Trbovich – Janney.

Good afternoon and welcome to the Depomed Third Quarter Fiscal Year 2016 Financial Results Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Christopher Keenan, Vice President of Investor Relations. Please go ahead..

Thank you, Teresa. Good afternoon and welcome to our investor call to discuss the company's third quarter 2016 financial results announced earlier today. The press release covering our earnings for this period is now available on the Investors page of our website at depomed.com.

With me today are Jim Schoeneck, President and Chief Executive Officer of Depomed; August Moretti, Senior Vice President and Chief Financial Officer; Matt Gosling, Senior Vice President and General Counsel; and Jack Anders, Vice President of Finance.

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 NUCYNTA, NUCYNTA ER, Gralise, CAMBIA, Lazanda and Zipsor.

The company's financial outlook and earnings guidance for 2016, development plans and expectations for cebranopadol, and other statements of future expectations that are not historical facts. Actual results may differ material 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 Form 10-K for the year ended December 31, 2015 and our quarterly report on Form 10-Q that will be filed with the SEC.

Depomed disclaims any obligation to update or reuse 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 and guidance upon corporate goals for the current fiscal year and to provide, update or reconfirm its guidance only by issuing press release or filing updated guidance with the SEC in a publicly available accessible document.

References to current cash, cash equivalents and investments are based on the balances as of September 30, 2016. All guidance, including that – all guidance, including that relate to the company's expected total product revenues, operating revenues, adjusted non-GAAP earnings and adjusted EBITDA are as of today, November 7, 2016.

Investors can find an explanation of the methodology for calculating non-GAAP earnings and adjusted EBITDA in today's earnings release, as well as reconciliation to the corresponding GAAP financial measures. With that, I'll turn the call over to Jim Schoeneck..

Thank you, Chris, and thank you, all, for joining us today. I'll start today's call with an overview of our third quarter results, how we are positioned for the remainder of the year and finally, I'll review a few recent events. Augie will then discuss our financials before I provide the closing comments and open the call to questions.

First, let me say that our quarterly results fell well short of our expectations. During the quarter, several factors influenced the net sales of NUCYNTA and Gralise.

The shortfall is in three areas, a disconnect in the quarter between prescription demand and shipments, changes in product reserve accounts linked to rebate submissions for prior periods and additional units falling under existing contracts, and prescription demand growth for our key products that did not meet our forecast.

I'll address these areas, then Augie will speak to the financial implications in greater detail. During the quarter, we saw a general disconnect between prescription demanded shipments, which resulted from a change in our customer's buying patterns.

As an example, while we saw a 4% increase in NUCYNTA ER prescription demand from second quarter 2016 to third quarter, we saw 1% reduction shipments to our wholesale customers, as well as a reduction in shipments from wholesalers to pharmacies during August and September.

Note that this was immediately after our August price increase on NUCYNTA and Gralise, the only one we've taken in 2016. As we hear from Augie, the data we're seeing from October indicate that shipments are now more in sync with prescription demand.

Moving to the reserve accounts in gross to net, price protection provisions in certain managed care contracts and adjustments to our return reserves related to the price increases offset any benefit in the quarter of the August NUCYNTA and Gralise price increases. We expect to see positive impact from these price adjustments for the fourth quarter.

We also experienced a number of adjustments to our gross to net for NUCYNTA that substantially impacted our net sales.

Specifically, one-time catch-ups for rebate side to PBM managed care and government contracts covering the first two quarters of the year were submitted both through J&J and directly to Depomed later than expected and were higher than forecasted.

Finally the large managed care plan that are not previously submitted their utilization for rebates submitting claims through PBM resulting an additional rebates for the quarter and additional reserves for future quarters. This particular item will also impact our gross to net in future periods.

The difference between our estimates and the actual amounts invoiced was recorded in the third quarter and the accumulative effect of these was significant. I'll discuss the prescription demand results, as I address each brand. With that as background, let me now turn to the results from the quarter.

Depomed posted the third quarter revenue of $111 million, an increase of 5% compared to $105 million for the third quarter last year. We had GAAP quarterly net loss of $13 million or $0.21 a share. Our third quarter non-GAAP adjusted earnings were $21 million or $0.28 a share and our non-GAAP adjusted EBITDA was $35 million.

Augie will review our GAAP to non-GAAP methodology later in the call. In the third quarter, the NUCYNTA franchise generated net sales of $65 million and has produced $396 million of revenue since its acquisition in April of 2015.

During the third quarter, NUCYNTA ER achieved approximately 20% year-over-year prescription volume growth, as well as all-time record highs for both total and branded prescription market share. In August, the brand reached an all-time monthly high of over 30,000 prescriptions, surpassing the previous monthly record set in June.

Third-party data shows that we are increasing unique or new prescribers of NUCYNTA, with new prescribers up 10% for the first three quarters of 2016 versus the same period last year. We continued to see NUCYNTA IR prescription showing signs of growth, with August up 5% versus the prior year and September up 1%.

You'll recall that the brand was declining 10% per year prior to our relaunch, unique or new prescribers for IR are increasing 4% for the first nine months of 2016 versus the same period last year. We also see an increase in dual prescribers, meaning those who are prescribed both NUCYNTA ER and IR.

All these are positive signs for the future, especially when you consider that the overall opioid market is down with the long-acting market showing a 4% year-over-year decline and the short-acting opioid market down 6%. We believe that NUCYNTA offers differentiated properties that favorably positioned it despite these market pressures.

For managed care, we continued our have excellent coverage in commercial plans, with NUCYNTA ER available unrestricted to 78% of commercial patients. We expect that level of coverage to continue in 2017. For Medicare Part D, we were not able to come to acceptable terms of SilverScript, so effective January 2017 NUCYNTA ER will no longer be covered.

The demand for high discounts by Med D plans continues, and this was a tough business decision. We believe that the full price prescriptions that we will maintain in some SilverScript patients will close to offset the loss of volume related to coverage.

Our market research shows that our positioning for NUCYNTA is still resonating well with our key targets particularly in pain specialists, physician assistants, and nurse practitioners. Our market share with pain specialists has now reached 3.3% of long-acting opioid market.

We believe that the progress we've made with this group in identifying proper NUCYNTA ER patient profiles, highlighting its efficacy and its differentiated properties will be key drivers for prescription growth in the future.

We continue to see patient concentration in this market as well with more, more patients receiving referrals too or seeking help from pain specialists where patients have a significantly higher chance of receiving NUCYNTA or NUCYNTA ER.

To summarize NUCYNTA, we have done well with the relaunch, reversing longstanding trends on both forms of the drug; however, we must do better. I believe that NUCYNTA is the right drug at the right time for a marketplace that is seeking alternatives to traditional opioid treatments.

We're examining each aspect of our NUCYNTA business looking to optimize our sales, marketing, and managed care strategies, so that we can better serve patients with severe pain and the providers that oversee their care. The rest of the portfolio experienced a 13% year-over-year growth for the quarter with $45 million in revenue.

CAMBIA and Lazanda reached all-time high sales during the quarter and achieved all-time high market shares in August and September respectively. Turning to Gralise, several initiatives were put in place in mid-year aimed at moving this product back into the growth mode.

This included additional training for CNS sales force and moving the drug into a first sales position from many of their physician targets. I previously indicated that the results from such initiatives typically take time to impact the market. We anticipate that we would start to see the trend changing in September.

But unfortunately we have not yet seen that change. We will continue to evaluate the impact of our changes and the allocation of our resources making adjustments as necessary. Cambia prescriptions grew 18% over the same quarter last year, achieving $9.1 million in quarterly revenue.

Our focus continues to be on neurologist as the key drivers of future prescription growth. Recently, we introduced a new formulation of Cambia removing aspartame as the sweetener.

This change was proactively made aid at improving the patient experience by addressing feedback from physicians and their belief that aspartame may trigger acute migraine attacks and some patients. It also removes a large aspartame warning on the outside the box. We believe that the new formulation could lead to increase prescribing.

With Lazanda, we posted record quarterly revenue of $8.2 million, up 50% over the third quarter 2015. We've achieved 9% year-over-year growth in units for the first nine months of the year in contrast to the overall TURP market, which saw 28% drop in the units in the same period.

As we have referenced before, there is a compression within the TURP market that comes as a result of payers scrutinizing of prescribing the drugs within a class.

The steps that we've taken include activities aimed at performing reimbursement support for physicians and the steps that led to prior authorization approvals at about 80%, up from the 55% approval rate that was seen earlier this year.

Regarding the development of our Phase 3 ready asset cebranopadol, our end of Phase 2 meeting with the FDA will take place later this month and we look forward to updating you as the programs moves forward. Now, let me turn it to recent events that will assist us in driving growth for the company and increasing shareholder value.

At the end of September, the Federal District Court of New Jersey ruled in our favor in patent litigation against Actavis, Alkem, and Roxane, the Endo filers with the NUCYNTA franchise.

The ruling extends our market exclusivity until December 2025, it upheld the ability of both composition and matter of patents, including the one covering the polymorph, a bookmark form of the drug and found that all parties infringe those patents.

The December 2025 date includes the extra six months of exclusivity that comes with studying the drug in pediatric populations. This win gives us more than nine years to continue to grow the NUCYNTA franchise.

The judge also ruled that while the patent covering the polyneuropathic pain education for NUCYNTA ER until March 2029 is valid that two of the generic filers did not infringe the patent. We plan to appeal this decision as we believe that there is substantial infringement of the patent, because many NUCYNTA ER patients suffer from neuropathic pain.

This was reflected in the original label for the drug and package insert for NUCYNTA ER, which contains language related to neuropathic pain. We don't believe that carving out the DPN education is proposed by the two generic filers is adequate to avoid infringing the patent. We anticipate resolution BPO within 15 months to 18 months.

I want to thank our Depomed team for continuing our strong track record of defending our intellectual property. Second, we welcome to the board three new independent directors, Jim Fogarty, Bob Savage and Jim Tyree, which bring a broad set of professional experiences and I believe can play an important role as we drove the company.

I would like to take this opportunity to personally welcome Jim, Bob and Jim to the board and look forward to highly collaborative relationship. The expansion of the board to nine members, comes as a result of our settlement with Starboard Value that we announced last month.

You may recall that in the second quarter of 2016, Starboard became our second largest shareholder with a 9.8% stake in the company. Members of management and our board have met with Starboard several times as they learned more about our business.

With the settlement, Starboard agreed to withdraw its proxy solicitation in special shareholder meeting request thereby canceling the previously scheduled November 15 special shareholder meeting.

In addition, we amended our bylaws to move the window for shareholders to nominate directors and to bring other shareholder proposals before the 2017 Annual Meeting of shareholders to March 15, 2017 to April 15, 2017. Starboard has agreed to certain standstill restrictions until the beginning of this nomination period.

We are pleased to be able to reach this agreement and believe it is in the best interest of all shareholders. And with that, I'll turn the call over to Augie to review our results from the quarter..

Thank you, Jim. Today, I'll review a few of the highlights of our third quarter results and discuss our guidance for the remainder of the year.

I want to mention that the offset that with respect to our third quarter 2016 results and our guidance, and we will be discussing certain GAAP measurements as well as certain non-GAAP measurements, which we expect to continue to present in future periods.

Please refer to today's press release, which is available on our website for an explanation of our non-GAAP financial measures and tables that reconcile the company's non-GAAP adjusted earnings per share, non-GAAP adjusted EBITDA, non-GAAP adjusted earnings guidance, non-GAAP adjusted EBITDA guidance, and non-GAAP SG&A, and R&D expenses guidance.

During the third quarter, total revenue were a $111 million, representing a 5% increase year-over-year. As Jim mentioned, our NUCYNTA franchise achieved net sales of $65 million, which was up 1% over Q3 2015. Gralise net sales were $20.6 million, which was down 2% from Q3 2015.

Our other products delivered strong growth with aggregate revenues of $24.4 million. Total prescriptions for the NUCYNTA franchise were up 2% over the second quarter of 2016. However shipments were down approximately 5% in Q2.

Total prescriptions for Gralise were flat for the second quarter of 2016, however Gralise shipments were down approximately 12%. For NUCYNTA and Gralise, we saw a disconnect between prescriptions and shipments in Q3 resulting from a change in the buying pattern of our customers.

Days on hand at our wholesalers decreased by one day in Q3, after increasing by a day in Q2. So when comparing Q3 to Q2, keep in mind, that Q2 had two days of inventory build relative to Q3, resulting from the change in days on hand. Secondly, we saw a reduction in shipments out from wholesalers to pharmacies, despite the increase in prescriptions.

As a result, we believe inventory levels as at if the pharmacy level declined during the quarter. Based on the data, we're seeing so far in October, we feel that shipments out from wholesalers to pharmacies in October are stronger than what we saw during Q3, 2016.

With regard to price, while we did take a price increase from NUCYNTA and Gralise in August, we did not realize any event price increase during the quarter. This is due to price protection and rebate provisions in our managed care contracts, as well as increases in our returns we serve – resulting from the higher price.

We expect to realize approximately half of the price increase during Q4 of 2016 and approximately an additional 20% in Q1 of 2017. We also experienced some adjustments in our growth platform in NUCYNTA during Q3 that contributed to net sales being down quarter-on-quarter.

These included a catch-up to our managed care and government rebates for the first quarters and second quarters of 2016, which were recorded in Q3. This catch-up have the effect of reducing net sales during Q3 by approximately $2.3 million.

These amounts represent the difference between our previous estimate of rebates and the amount finally invoiced to us. One large managed care organization sent us an invoice for additional rebates relating to sales in Q1 and Q2 2016.

They had previously billed us different amounts for Q1 and Q2 and this additional invoice was unexpected and exceeded our estimates. Second, government rebates with respect to the NUCYNTA franchise that J&J paid and subsequently pass through to us for reimbursement came in higher than previously estimated for Q1 and Q2 2016.

These amounts relating to government rebates included higher than estimated Medicare Part D and Medicaid usage and more Medicare rebate utilization.

I want to note that Lazanda had a favorable gross to net adjustment during Q3 as returns have come in lower than estimated and the reduction in return reserves recognized in Q3 added approximately $1.4 million to net sales of Lazanda.

Moving to cost of goods, for the quarter cost of goods was approximately 18% of product sales, and we expect cost of goods for the remainder of the year to be between 18% and 20% depending upon product mix. Looking at expense levels, GAAP SG&A expense was $51.6 million in Q3 2016 compared to $49.1 million in the prior year.

Non-GAAP SG&A expense was $45.2 million in Q3 2016 compared $42.9 million in the prior year. Non-GAAP SG&A excludes stock-based compensation, purchase accounting contingent consideration adjustments and nonrecurring costs. The increase in expense in 2016 over 2015 is due to slightly higher commercial expenses.

GAAP R&D expense for the third quarter of 2016 was $10.4 million compared to $4.6 million for the same period in the prior year. Non-GAAP R&D expense was slightly lower $10.3 million for the third quarter of 2016 compared to $4.5 million for the same period in the prior year.

The increase in expense in 2016 over 2015 is largely due to cebranopadol development expenses. Also included in R&D expenses are pediatric trials for NUCYNTA, which we assumed as part of its acquisition. Completion of these pediatric trials will convey an additional six months of exclusivity for NUCYNTA IR and NUCYNTA ER.

Non-GAAP cash taxes reflect the cash taxes that we estimate we will pay associated with the quarter. On a non-GAAP basis, we now estimate our non-GAAP effective tax rate to be in the low single digits for 2016 and down from our previous estimates of high single-digits.

This resulted in a non-GAAP tax benefit of $1.3 million during the third quarter of 2016. GAAP net loss for the Q3, 2016 was $12.9 million or $0.21 per share compared to a loss of $11.8 million or $0.20 per share in the prior year.

Non-GAAP adjusted earnings for Q3, 2016 were $20.9 million or $0.28 per share compared to $24.9 million or $0.33 per share in the prior year. Adjusted EBITDA for Q3, 2016 was $35.4 million compared to $38.2 million in the prior year.

Our balance sheet at September 30 was strong with cash, cash equivalents and marketable securities of $137 million, up from $119 million at the end of Q2. Keep in mind, that Q3 is a heavy quarter for cash consumption as we pay six months of accrued royalties to [indiscernible] and pay six months of accrued interest on our convertible debts in Q3.

Moving onto guidance, we're revising our 2016 financial guidance in light of our performance to- date. Guidance for the year is based on actual results for the first nine months of the year and our current budget and expectations for the remainder of the year.

Our budget is based on a large number of assumptions and there are significant uncertainties in estimating future product revenues, this is particularly true for our largest revenue products NUCYNTA and NUCYNTA ER.

For a more complete discussion of the relevant risks related to our guidance, I will direct you to the risk factors section of our quarterly reports on Form 10-Q that we expect to file either later today or first thing tomorrow.

With that said, total revenues for our six products for 2016 are expected to be in the range of $455 million to $465 million. This is a reduction from our previous guidance of $480 million to $505 million. We are also reducing our non-GAAP SG&A expense guidance.

Non-GAAP SG&A expenses that is GAAP expense minus stock compensation, purchase accounting, contingent consideration adjustments and nonrecurring costs are expected to be in the range of $183 million to $187million, a reduction from our previous guidance of $185 million to $190 million.

We are also providing GAAP SG&A expense of $204 million $208 million. We are adjusting non-GAAP R&D guidance to $32 million to $35 million, which is the upper end of the range of our previous guidance of $28 million to $35 million. We are also providing GAAP R&D guidance of $33 million to $36 million.

GAAP net loss is expected to be $41 million to $47 million. Non-GAAP adjusted earnings are expected to be in the range of $79 million to $85 million, a reduction from our previous guidance of $95 million to $105 million.

Non-GAAP adjusted EBITDA is expected to be in the range of $152 million to $160 million, a reduction from our previous guidance of $175 million to $190 million. The reductions to the range is a non-GAAP adjusted earnings and non-GAAP adjusted EBITDA from our previous guidance, reflect the adjustment in revenues and expenses.

That concludes the financial discussion and I'll now turn the call back over to Jim..

Thanks, Augie. With that detail, we hope that you see that a number of factors negatively impact at our quarterly results.

For the rest of 2016 and beyond, we are fully committed to building the prescription demand for our products, while we work with our distribution channel and pay our customers to minimize quarter-to-quarter variances in our revenue line related to shipments and reserve accounts. Before I open the call to questions, I have one additional announcement.

Effective today, our Chief Commercial Officer, Scott Shively is stepping down and leaving the company. I want to thanks Scott for his role in our NUCYNTA expansion relaunch and I wish him well as he continues his career.

The sale, marketing and managed care functions previously reported to Scott will now report directly to me, which will allow me to work more closely with the commercial team. As we analyze our business, optimize our commercial strategies and accelerate the growth of our brands and the company. With that, I'll open the call to questions..

[Operator Instructions] And your first question comes from the line of Jason Gerberry with Leerink Partners..

Hi. Good evening. Thanks for taking the question.

Jim maybe first question, just can you talk about what's going on in the overall pricing environment for long-acting opioids, you know with some of the these deterrent formulations of oxycodone coming to market, OxyContin generics, are we – as you – you've got a line of sight on 2017 formulary contracts beyond the commentary about the pricing that's going to flow through 1Q 2017.

What kind of pricing environment are we in?.

I think it's always – always isn't a spend of competitor pricing environment. I would say that with NUCYNTA. We do have the differentiation of having the dual mechanism of action and with that I think that certainly helps us in those discussions. As more entries have come in, it's been more competitive.

But we see more of it between the oxycodone brands than we do anything else at this moment. And at this point, I think that's going to be where the biggest pressures are going to be. I would say over the last couple of years, we certainly have seen some different pricing behavior out of people like Purdue.

And with that, I think it's actually taking some pressure off of the category. It may be re-accelerating a bit now with the new entries..

Okay. And then, if I could just squeeze in a follow-up. Can you just, I mean, this is a question for Augie SilverScript. Can you remind me how big of a piece of the business was that in 2016.

And how you are planning on offsetting that?.

Yeah. I think it's – the number of number of people in the plan, I believe is around – Yeah I'm sorry, we don't have the exact number here. I just looked at the couple of our folks here, but it's one of the larger Med D plans, the level of discounting as I mentioned, was getting to be very high.

And with that, we expect it will keep a portion of those patients, but now at full price, that should we think offset or just about offset the profit that we're taking from that segment. And Jason, we can get back to you with the exact amount on – exact number of people, I just don't have here in front of me..

Okay. Thanks..

And your next question comes from the line of David Risinger with Morgan Stanley..

Yes. Thanks very much. I have a couple questions, Jim and Augie. First, could you just talk a little bit about the outlook for pricing Depomed going into 2017, specifically how we should think about the prospect of additional list price increases, but also how that will be offset by greater rebate pressures.

So wanted to better understand the outlook for net price going forward.

And then, Augie, you had mentioned the impact of a catch-up of rebates, was there any impact this quarter that reflects any expected higher rebates going forward or was not – was that not any part of it? And then the final question is just on IMAs, could you update us on, where you stand with inventory management agreements, and how much of a surprise it was to you that inventory levels were reduced in the channel in the September quarter? Thank you..

Well, Dave, thanks, thanks for the questions. Let me start and then I'll turn over to Augie on the second piece of it. But for the first one on the pricing, overall pricing environment, I think as we've all seen, it is getting in – it is a more sensitive pricing environment, I expect to see that continue after the election.

And we've actually seen this coming for a while, and we believe that you would see a moderation of black price increases in – after the election for the last couple years, regardless of who was going to be, who the candidates work on the parties or who ultimately is to wins that election.

With that, we're still seeing our managed share agreements, the allowance for price increases that are not – that price increases without violating price protection, and those still are typically in the 6% to 9% range.

So essentially the agreements that we have with the managed care plans, allow our price increase to 6% to 9%, depending on the plan, and in some cases, individually to the products within that plan, before they get any additional rebate around the pricing. So, I do think that there is still is a room for price.

You may actually see, as the pricing mitigates, more of the pricing going to bottom line, simply because it's within those parameters with managed care plans..

And Dave with respect to inventory levels, on balance are by the days on hand in the wholesaler channels of approximately three weeks, 21 days, 22 days, which is not. I would say, what the pattern we have seen in the previous years has been one and which days on hand, is at its high point at the end of the year.

We typically have them reduction in Q1, and then it gradually builds back to a high-point at 12/31. This, we had that pattern continued, we would have if anything expected days on hand to have increased in Q3 and continue to increase in Q4. So, we have not – we didn't follow that pattern in Q3..

And David, in terms of the inventory management agreements as well as the wholesaler agreements, so we do have those in place with the major wholesalers. Specifically, around those, they cover what the wholesalers will keep on hand, but as you've seen and are aware the wholesalers have been under tremendous pressure themselves.

So, they've been making adjustments as they're reporting as I've said over the last couple of the weeks.

I think the other one that we bet, that we saw this quarter that was a bit different than we've seen before, and again we see now, recover in October is this difference between prescribing the outflows from wholesalers, you know we don't have a window into what the retail inventory level is.

So actually at the pharmacy – the last thing that we see is the flow that goes from the wholesaler out to the pharmacies and that's where we saw a disconnect that we haven't prior seen on NUCYNTA release in August and September.

Again, recovered in October, what would expect that means longer-term is that because of there is just less inventory at the retail side, because they're being sensitive to things, it could be in the C2 category that as other drugs have launched in that category and those drugs have to be kept in a safe and locked up in the pharmacies and maybe even just the physical space restriction around how much inventory that they can carry, but there is certainly isn't an impact there, that we're trying to explore further.

But unfortunately don't have direct detailed down – direct data down to that level of detail..

Okay. Thank you very much..

And your next question comes from the line of Ami Fadia with UBS..

Hi. Good evening. Couple of just a more clarificatory ‎questions around NUCYNTA. Firstly could you quantify the amount of impact from the inventory destocking the in the channel and are you telling us that you do not expect any further destocking in the fourth quarter? And secondly with respect to the government rebates.

How do we think about the impact on net price into fourth quarter and into next year based on sort of the catch-up that you had to take into account.

And thirdly you have talked about a reduction in co-pay systems last quarter and I was wondering, if you were able to do that and if you were able to get any type of benefit in terms of your net price around that, any color on that would be helpful? Thanks..

Okay. Why I don't I take the first and the third one and we're going to let Jack Anders, our VP of Finance take the one in the middle on the government pricing and the reserve accounts.

So in terms of the destockings as I just mentioned, the final channel piece at the retail level, we do not have specific date around, so we can't give you if that – if that is a one-time effect or multiple, but at some point, we think you reach a minimum inventory level at that level.

At the wholesale level, as Augie mentioned normally you would see a slight uptick in third quarter from second quarter instead it was a slight downtick. Again, I think that some of the sensitivity that's going on in the marketplace with the wholesalers themselves and their financials.

And as far as the fourth quarter, we would anticipate that you would see additional inventory in the channel based on what's happened in prior four quarters, simply because you get to the end of the year and oftentimes the wholesalers will take some additional inventory, because buyers are on vacation, because there may be weather disruptions at that time of year, you've got the holidays and just less staffing at various parts of distribution channel.

So we would anticipate would go up based on history, again with them having submissions this year, I don't know that we can count on it happening as it has every time in the past, but in the end that's what's happened in the past..

And Ami as it relates to rebates going forward for the NUCYNTA products, relative to where gross to net was in the first half of the year, our expectation is gross to net will decline in Q4 and then going forward relative to our where it was previously, and that's a couple of functions, one is there is a higher volume of rebates or utilization running through that is getting rebate higher than what we thought in Q1.

But then secondly, you know the effects of the price increase, and we don't realize the full amount of that price increase, so effectively when you take price your gross in that typically drops a bit..

And then final on the co-pay of systems, so as we announced on the August call, we are making modifications to those programs, the one that was quickest to do were the e-vouchers. These are the reductions in the copayment for patients that happened actually at the pharmacy through the pharmacy terminal.

That was a – in effect that happened in August, so we had some benefit in third quarter, will have some more in the fourth quarter. The co-pay cards themselves are printing co-pay cards, take a bit of time to cycle through.

As you can imagine in office that has a co-pay card to a certain level, is an app to throw those out of the next ones they're get at a higher levels. So that we can figureable really come into play by the first quarter as those inventories or co-pay cards start to run out on the doctors' offices..

Thank you..

Thank you. And your next question comes from the line of David Amsellem with Piper Jaffray..

Thanks. So, just a question on the NUCYNTA franchise, and I know you've discussed myriad issues, but just thinking about the sales force and overall marketing and promotion.

Do you think that adding new reps is potentially one way or necessary way to drive an uptake in volume growth or is just that's the case where there is just too many headwinds and that just doesn't necessarily make sense..

So David, I think there is two things here. One is really kind of I think the underneath part of your question is about the promotional sensitivity of NUCYNTA and how things are – things respond.

One of the things was part of our relaunch strategy, we really focused on with a real hyper-focused on the pain physicians and then the nurse practitioners and PAs that were in those offices. I think, as we go forward, we'll be looking to take some of those calls and move those in the broader reach.

But we really felt like during the first 18 months or so with launch, we had the broad – we had to really hyper-focus to get the top of the – top of the pyramid, reestablished with NUCYNTA which we've clearly done both in terms of volume and share.

Now that we going to 2017, we'll look to take even our current sales force and the current calls that they may, and makes sure that more of those calls are going to some of the mid-level, if you want to call, I probably shouldn't call it mid-level, because we use that term to call PAs and nurse practitioners, but the deciles in the middle for the primary care physicians really to look at those, to look at drive those and get broader reach.

So may make the few less calls in the pain specialist, but we believe, we've got the business we are at, where we can continue to grow it that way, while we expand the reach. Certainly more reps could do more with it, I think this is a market that is very large.

We certainly have a low share, if you look at the share we've got, I mean overall, we are just right at a 2% share of the long-acting market.

So we think, there's plenty to grow, and particularly with the differentiating aspects of NUCYNTA has and some of the environment that we are in right now, where I think physicians truly are looking for alternatives..

And then secondly for me taking another, are there any products I mean beyond NUCYNTA where just given delay of the – you may consider pulling back on promotion?.

Yeah and it is part of what we do each year, we do an analysis of just that to go, where we're getting return, where we're not, what might it mean, in terms of both our sales force targeting and the call allocation from the sales force. We actually use one of that look like, because the toppers of the industries, we have associates to do that.

We're finishing up some of the analysis on that right now and then we'd look – should we want to make changes to do that early next year..

Okay. Thank you..

Thank you, David..

And your next question comes from the line of Irina Koffler with Mizuho..

Hi. Thanks for taking my question. Going back to the SilverScript issue. Can you maybe comment more broadly what percent of the NUCYNTA patients are Medicare patients.

And then secondly, on the sum, catch up on the rebates and government contracts, I mean is this something is one-time issue for the company, where someone didn't forecast properly and wasn't paying attention, and it's not going to be repeated again or is this something that we could be plagued with every year as unexpected issues arise? Thanks..

On the, Irina, on the SilverScript percentage and the overall Medicare percentage for NUCYNTA. For NUCYNTA IR, it's actually very low. That's a 100% or 99% generic market with short acting opioids. So there is very little impact on NUCYNTA IR in the Med D market. In terms of the Medicare market for IR, we will get the numbers on it.

But, it's I believe we've had coverage of around 40% in that marketplace as a drop, as I think by about 10% or 15% coverage, done around 25% covered in that marketplace..

Thank you..

In terms of – yeah, in terms of the rebates and the catch up, let me let Jack and Auggie address that..

Yeah. I mean with respect to the cash rebates, I think it's – it is a little bit of both, one is, is a major PBM NUCYNTA's invoices for Q1 and Q2 when we thought those were indeed accurate, and then they came back in NUCYNTA's additional rebates invoices on top of that. So, the – a big piece of that is a one-time catch up.

However, as it relates to utilization going forward, that is subject to rebates based on this data and based on some of the data that we did receive from J&J, it does have a deterioration of gross to net going forward, because more of our businesses is rebated a little bit higher than what we thought in Q1, and no upside in the first half of the year..

And then, I would say with that, we've got a long history with these PBMs, as we've – we started the commercial business in 2011, we've got a five-year history of receiving it. We haven't seen something like this before. We've this, this type of catch up.

We've seen small things that might come in and actually might go the other way, as there might be some reversals or some ineligible plans or patients that were in there. That's the first time that we've seen one like this where it's coming that it's been a large claim that came in this late..

Okay. Thank you..

And your next question comes from the line of Ken Trbovich with Janney..

Thanks for taking the question. I guess, I'm trying to rationalize some of the commentary around the change in guidance, and I just want to make sure I fully understand. If I understand the commentary that was sort of three buckets.

First bucket was the change in sort of the wholesaler inventories, which if we look at that as being a couple of days, and we're talking about maybe 3% of sales somewhere in the single digits, $3 million to $5 million maybe. And if I understand the adjustments on the rebates, the number that was given was $2.3 million. So if we aggregate those.

We're still well less than half of what I'm looking at the shortfall in the quarter and certainly maybe the expectations and the impact going forward those would be non-recurring. So then it begs the question of whether or not, the difference is entirely the result of the change in prescription demand and your expectations around that.

I guess, the reason for the question is that, if I look at the guidance and the change in guidance, on the one hand, it would suggest there might not be much change for to the fourth quarter, in terms of the implications. On the other hand, we could see another $20 million change on the other end of the – on the guided range.

So I'm trying to better understand how much of this is recurring versus non-recurring?.

I think we've a – you've got a good handle Ken and Augie and Jack can comment more on the numbers per se. But I think, in terms of the one-time items that are there.

In terms of the prescription demand piece, I mean, certainly the prescription demand, while we are setting records on NUCYNTA ER, and why we've made a turn on NUCYNTA, we still, in our plan, had it moving further than it has to-date.

And that's one that I'll be digging into significantly over the next few weeks here and what we can do to make sure that's accelerating as we would expect. I think a piece of that is certainly the opioid market and we came into this last year, the opioid market was a long-acting market was growing about 1% a year now, it's declining 4%.

It looks like it stabilize that about that 4% year-over-year decline, at least for the last three months. I'll see – we'll see, where it continuous for the rest of the year. I mentioned on our last call as well, that we had some downtick in the milligrams per script. That's continued as well.

It hasn't gone done much farther, but it's continued at the lower level, and that puts as an additional 4% to 5% in revenue loss. Since, this is basically a linear pricing.

So as we continued to see some of these things and not seeing changes in those, it certainly does effect both the script numbers going forward, and some of the realization per script, in addition to what's on the login, Jack had mentioned in terms of the growth in that change..

And Ken, as it relates to Q3, I mean I do think some of the analysts might have had a benefit of the price increase in their Q3 models, and so some of the disconnect might be just, we just didn't realize essentially any of that price increase during the quarter, but we do expect to realize some of that going forward..

Sure, and I guess that's, I guess that's part of the reason for the question though, because implicit in the commentary is that $10 million or $15 million of changing in sort of actual versus expectation is demand driven on the RX side, and that would suggest that, that even beating the guidance that we're seeing now, which should be looking more towards the low end not the upper end?.

Ken, I can't, I can't comment on where in that, being that guidance folks should be focused. However, I do want to say, that this is a first time in essence we are giving quarterly guidance.

We've never done it before, we don't intend to do it going forward, but we would changing our guidance today with one quarter left in the year, and that the full year revenue guidance translates into between $123 million and $133 million, and product revenue in Q4..

Sure. Now I understand.

And then, I guess my final question is just elephant in the room, the question that hasn't been asked, the comments from Bloomberg last week, that seem to suggest that there was a process, a sale process underway with confirmation from at least one party that they were in discussions, can you guys comment?.

Yeah, I was – I'm not aware of anybody confirming that they were in discussions last week, so you may know something that that we don't, but we don't comment on any type of rumors like that.

Certainly, we've all been that are around this room, have been with different companies where that's – where they're been subject to buyout rumors over a course of a number of years, and we just don't comment on any specifics around it.

But, I would say that there is always rumors and some people sometimes get away hyped up bottom and other people don't..

Sure. Okay. Thank you..

And there are no further questions. I would now like to turn the call back over to Mr. Schoeneck..

So, I want to – well, thank you. I want to thank you all for the attention that you paid with the company. I want to thank you for cheering about our business and the patients that we serve. And with that, we are here to indeed serve those patients and shareholders.

Our focus truly is on how do we take the resources that we have, the products that we have, and leverage on for the benefit about. And we look forward to continuing to do that and reporting our progress to you early next year..

Thank you, ladies and gentlemen for your participation in today's conference call. You may now disconnect..