Christopher Keenan - VP of IR James Schoeneck - President and CEO August Moretti - SVP and CFO.

Randall Stanicky - RBC Capital Markets Jason Gerberry - Leerink Partners Ami Fadia - UBS David Amsellem - Piper Jaffray David Risinger - Morgan Stanley Scott Henry - Roth Capital Ken Trbovich - Janney Chiara Russo - Cantor Fitzgerald.

Good afternoon and welcome to the Depomed Fourth Quarter Fiscal Year 2016 Financial Results Conference Call. Please note that 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, Angela. Good afternoon and welcome to our investor conference call to discuss the fourth quarter and full year 2016 financial results announced earlier today. The press release covering our earnings for this period is now available on the Investor 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 quarterly reports on form 10-Q and annual report on 10-K for the year ended December 31, 2016 that we expect to file with the SEC later today.

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 and guidance of our 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 available accessible document.

References to current cash, cash equivalents and investments are based on balances as of December 31, 2016. All guidance, including that relate to the company's expected total product revenues, operating revenues, adjusted non-GAAP earnings and non-adjusted EBITDA is as of today, February 21, 2017. I'll now turn the call over to Jim Schoeneck..

Thanks, Bruce and thank you all for joining us today. I'll start today's call by reviewing our 2016 business achievements followed by a summary of our financial results. I'll then outline our 2017 NUCYNTA growth initiatives and then continuing to unlock future value for the franchise and the company.

Augie Moretti our CFO will then dig into the results and guidance before I provide closing comments and open the call to questions. 2016 was the year of growth challenges and building value. In 2016 we set a full year record with net revenue of $456 million, up 33% over the prior year.

In fact each of our products achieved the highest revenue in their history in 2016 led by NUCYNTA franchise. Our progress over the past three years has been dramatic with net product revenue increasing from $114 million in 2014 to $342 million in 2015 and $455 million last year.

Our cash flow and bottom line performance has been even more impressive growing EBITDA from $7 million in 2014 to $111 million in 2015 and $156 million in 2016. And all of this was accomplished against three substantive headwinds.

Changes in the opioid market, continuing pricing pressure from payers and the challenges of growing the business and achieve with regular headwind distractions. Before I go further into our performance and plans, let me highlight two additional areas that stood out in 2016 our IP progress and our balance sheet.

Depomed has a long history of excelling in legal matters in 2016 further bolstered that regulation. As you all know in September the company won district court decisions finding both of our NUCYNTA composition of matter patents valid and in French by the NUCYNTA anti-filers. We now expect our market exclusivity to extent to December 2025.

Also in the patent front, we received a favorable appeals court decision in March confirming the patient ability of the Depomed patents asserted in our patent infringement lawsuit against Purdue Pharma related to their views to turn OxyContin. Our suite against Purdue has resumed and we now expect the jury trial during the second half of 2017.

From the balance sheet side we did what we said we would do. We prepaid $100 million of our secured debt facility held by Deerfield and Pharmakon dropping our secured debt to $475 million. As we just reported we finished 2016 with $177 million in cash.

Later Augi will discuss our plans to further pay down the debt in April and then to refinance the remaining balance at what we expect will be much more favorable terms.

This was our plan from the time that we took out the 2015 loan to buy NUCYNTA, pay down the debt as quickly as possible and to refinance at the two year mark when the company’s credit characteristic would be significantly better. And we did this in a non-diluted way to preserve shareholder value.

Now, I’ll turn back to our commercial and financial performance for last year. Starting with NUCYNTA ER in 2016 we achieved all time record prescription volumes for the brand and grew prescriptions 19% over the prior year. And that was against the challenging and changing backlog in the opioid market.

In 2015, the long acting opioid market was stable compared to the prior year. After the release of the new CDC opioid guidelines in early 2016 the market moved suddenly downward with the long acting opioid prescription market ending the year down 5% compared to 2015. We saw daily dosing levels drop as well.

Both of these market trends were different than we had anticipated at the beginning of 2016. Even with these headwinds we still saw a significant growth in NUCYNTA ER.

The short acting opioid market acted much the same way with prescriptions down 6% in 2016 NUCYNTA immediate release outperformed the market for the first time in five years with prescriptions in 2016 basically holding study compared to 2015.

Considering that they NUCYNTA IR had seen double-digit decline for four straight years we are pleased with the progress and now look forward to moving the brand to growth in 2017.

In short the new challenges in the marketplace meant that we did not achieve the levels of growth that we had initially expected to see in 2016, get NUCYNTA ER outperform the market by 24% and NUCYNTA IR with 6% about the market.

As I mentioned earlier, each of our brands recorded net sales achievements the highest in their history with Gralise up 9%, CAMBIA up 14%, Zipsor up 7% and Lazanda up 50% compare to full year 2015. We see this as good indicators of growth and we are committed to finding ways to generate even more value in the future.

We’ve learned a lot since the relaunch of NUCYNTA in June of 2015, several things have changed in the opioid market including prescribing trends with some doctors stepping back from the category, changes in dosing levels and reimbursement dynamic.

These insides along with nine years of exclusivity for tapentadol allow us to constantly move forward with our 2017 NUCYNTA and portfolio growth initiatives.

There are three prongs in our plan sales force deployment, including revisions to our targeting, our physicians, product messaging initiatives both for NUCYNTA ER and immediate release and label enhancement studies to further differentiate our products.

During the second half of 2016, we engaged the top three consulting firms to asses our commercial effectiveness and to identify opportunities for growth.

We then worked with ZS Associates, the industry leader specializing in sales force sizing analysis and targeting analytics to complete a bottom up look at who we are calling on, our sale structure and our deployments.

The new targeting and sales force alignment reflect the insights gains surrounding the recent changes in opioid prescribing as well as reimbursement dynamics.

Specifically the new deployment provides us with more effective sales call allocation, broader reach into high prescribing segments while also zeroing in on prescribers with favorable payer dynamics for Depomed products.

For example, we only kind of prescriptions sort of prescriber’s potential if NUCYNTA or NUCYNTA ER has Tier III or better coverage with the payer. For some doctor this targeting makes a dramatic difference in how we view them. While they may have the potential to write the category, they may not have a clear path to write our brands.

Our efforts are focused on the writers with the best opportunity to prescribe our products for appropriate patients and to increase the odds that those prescriptions are paid and filled. With the relaunch of NUCYNTA in June 2015, we first focused on NUCYNTA ER with pain specialist in the key opinion leader community.

With last year’s publication of the CDC guidelines, as well as other sector pressures this decision prove to be the right one as we’ve seen more primary care physicians referring their pain patients to pain specialist who along with their nurse partitions and physicians assistance are seeing more patients than ever.

It’s important to note that not all primary care physicians have dropped off writing the category and this new targeting initiative is aimed at those who continue to prescribe in our markets. The new targeting leads to changes in our sales force deployment and structure.

We’ve redrawn territory lines, closed some territories and changed the layout of the sales force. As a reminder, our organization is comprised with three groups, pain, neurology and our oncology group that sells Lazanda. Our pain team has increased to approximately 260 reps from 180.

The team is now selling NUCYNTA ER, NUCYNTA immediate release and Gralise, which was formally sold under our Neuro Group. For NUCYNTA ER and NUCYNTA immediate release, this increases the number of sales calls by about 40% compared to 2016 and enables us to go deeper into high decile targets for short-acting opioids.

We returned Gralise to the new and larger pain team as there is a large overlap between NUCYNTA ER prescribers and Gralise and we were not seeing the results that we wanted to have from Gralise with our smaller Neuro Group.

I can tell you that the pain team is excited to have Gralise back as many of them helped launch the drug and they have great relationships with these prescribers. We believe that Gralise will benefit from this adjustment. Our Neurology team now numbers 39 is responsible for CAMBIA, NUCYNTA immediate release and Zipsor.

And finally our oncology team was adjusted from 33 to 20 sales reps and will continue to focus on Lazanda. Here are the net changes for this action.

We expect to seek continued and slightly expanded coverage of pain specialists, significantly broaden coverage with high decile primary care prescribers of opioids and prioritize targets based on payer mix of each prescriber and their patient’s access to our brands.

We regained broader reach for Gralise with presenters [ph] who know the product well, have a team focused on headache specialists and neurologists who right migraine products and basically maintain our coverage with the current prescribers of Lazanda in the TURP category. And all this was accomplished by adding only five sales territories.

During the messaging for NUCYNTA ER, we are emphasizing it that first that is the first and only long acting opioid approved for the severe pain associated with diabetic peripheral neuropathy or DPM.

Market research shows that when DPM is the key part of the message, physicians connect this with neuropathic conditions and mix pain and recognize NUCYNTA ER as the top choice. We believe that by leading with DPM, we will further drive differentiation resulting in prescription growth.

For NUCYNTA immediate release, we are launching a separate promotional campaign aimed at differentiating the product. This is the first time since 2011 that NUCYNTA immediate release will have its own messaging campaign.

We believe that this support combined with the increased pain specialist and enhanced targeting, we’ll move NUCYNTA immediate release to volume growth. Our sale force is energized by these initiatives and are ready to make 2017 a highly successful year.

Finally, with clarity on the NUCYNTA patent exclusivity that provides us with another nine years to invest in it and we have the opportunity to grow the molecule well into that period, we are taking steps in 2017 to strengthen the scientific data for tapentadol.

This year we are initiating label enhancement studies aimed at further differentiating NUCYNTA by highlighting its respiratory depression and have of used potential profile. These labeling studies will focus on the properties of the tapentadol molecule and its uniqueness in the pain marketplace.

With this new 2017 development focus and the longer exclusivity for NUCYNTA we’re adjusting our timelines with the clinical development for cebranopadol our Phase 3 ready asset and NUCYNTA follow on candidate. Our plan is now to initiate Phase 3 trials for cebranopadol in 2018.

We are comfortable with adjusting these timelines, believing that we have time to complete the cebranopadol program and bring it to market well prior to the December 2025 NUCYNTA patent expiry. And with that, I will turn the call over to Augie to review our financial results. .

Thank you, Jim. Today, I'll first review a few of the financial highlights from our fourth quarter followed by our 2017 guidance.

I want to mention at the offset that with respect to our fourth quarter and full year results and our 2017 guidance, I 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 for an explanation of our non-GAAP financial measures and tables that reconcile the company's non-GAAP measures to GAAP measures.

Also, I want to mention that in our earnings release we changed our methodology for presenting adjusted non-GAAP earnings and accordance with FDC guidance issued in 2016 and our press release has a reconciliation of our prior methodology and the new methodology that we will use going forward.

As Jim just outlined the fourth quarter was a good one both in terms of product revenue and cash flow. Total product revenue for the quarter ended December 31, 2016 was a record $124 million, representing year-over-year product revenue growth of 11%.

For the fourth quarter total NUCYNTA sales were record $75 million, NUCYNTA ER achieved record prescription volume in Q4 of over $90,000 and record all time quarterly market share. NUCYNTA ER prescriptions for the year exceeded 344,000. In Q4 the NUCYNTA franchise represented approximately 60% of our product revenue.

The rest of our products also delivered strong performances in the fourth quarter, Gralise fourth quarter net sales were a record $25 million, an increase of 15% compared to the fourth quarter of 2015. Full year net sales were $88 million.

CAMBIA which we acquired in December 2013 and relaunched in February 2014 had fourth quarter net sales of $8.4 million, full year net sales were $31 million. Lazanda which we acquired in late July 2013 and relaunched in October 2013 had fourth quarter net sales of $7.5 million, an increase of 42% compared to fourth quarter 2015.

Full year net sales were $27 million, an increase of 50% compared to 2015. Zipsor full year net sales were $28 million, an increase of 7% compared to 2015. Gains on hand at wholesalers increased approximately four to five days from the end of Q3 to the end of Q4, ending the year of approximately four weeks.

This is a typical pattern that we have seen in each of the last five years and reflects year end buying patterns from the large wholesalers. Based on our past experience we expect that days on hand at wholesalers will be reduced in Q1, 2017 and accordingly shipments of our products could be less than prescription demand in Q1.

Q1 has historically been our weakest quarter of the year due to reduction in days on hand in the channel and annual insurance resets and we expect product revenues in Q1, 2017 to be less than Q4 of 2016 as has been our pattern for last several years.

Couple of comments on cost of goods, cost of goods for our portfolio in Q4, 2016 was approximately 18% and COGS for the full year was approximately 19%. As most of you on the call know COGS for NUCYNTA is approximately 25% of net sales and COGS for the rest of the portfolio is approximately 10%.

Turning to our expenses GAAP selling, general and administrative expenses were $48.5 million for the fourth quarter of 2016 these expenses include $2.4 million associated with the company's activities and settlement with the Starboard value, excluding stock-based compensation contingent consideration and the one-time expenses associated with the Starboard non-GAAP SG&A expense was $41.6 million for the fourth quarter of 2016.

GAAP SG&A expense for the full year was $204.5 million, non-GAAP SG&A expense for the full year was $182.7 million.

GAAP and non-GAAP research and development expenses for the fourth quarter of 2016 were $9.2 million and $9 million respectively, GAAP and non-GAAP research and development expenses for the full year $32.6 million and $32.1 million respectively.

R&D expense includes costs associated with the pediatric trials of NUCYNTA and cost associated with cebranopadol development.

As discussed in our press release we are modifying our method of calculating non-GAAP income tax expense for non-GAAP adjusted earnings and non-GAAP adjusted earnings per share to align with the guidance under the non-GAAP financial measures compliance and disclosure interpretations issued by the SEC on May 17, 2016.

This new methodology, which the company will use exclusively beginning in the first quarter of 2017 calculates non-GAAP tax expense by adjusting the GAAP tax expense for the estimated tax impact of each non-GAAP adjustments. The estimated tax impact is based on the statutory income tax rate for each non-GAAP adjustment.

Previously we adjusted the non-GAAP tax expense to reflect the estimate amount we expected to pay or received in taxes for the period. We present non-GAAP adjusted earnings and non-GAAP adjusted earnings per share under both our old and new methodology and provide reconciliations in our press release.

For comparisons to our guidance which used our prior methodology our non-GAAP adjusted earnings for the fourth quarter using our prior methodology were $37 million from $0.48 per share and for the full year were $85.7 million or $1.16 per share. The change in methodology has no effect on non-GAAP adjusted EBITDA.

By the way we expect our cash tax rate for 2017 to be in the mid-teens. As of December 31, 2016 cash, cash equivalents and marketable securities were $177 million, which represent a quarterly increase of $40 million. This increase included approximately $14 million of income tax refund.

During 2016, we used cash to prepay $100 million of our secured indebtedness and a $5 million prepayment fee. As we have stated several times over the last few months we intent to use at least $100 million of our cash to prepay our security indebtedness in early April of this year and we intend to refinance the balance of indebtedness.

We are investigating several different approaches to refinancing the debt, we expect that the refinancing will result in a reduced interest rate on our outstanding debt and the combination of repayment and refinancing at a lower rate will substantially reduce our interest expense going forward.

However, for your models I want to remind analysts and investors that as a result of the expected repayment and refinancing, we will incur a prepayment fee of $19 million and we will write-off approximately $9 million of non-cash expense consisting of unamortized debt discount and debt issuance costs. We will recognize these expenses in Q2.

Refinancing at a lower interest rate will in large measure depend upon our recent and projected EBITDA. EBITDA for 2016 was $156 million.

In April of this year after repayment of at least $100 million of principal, our secured debt to EBITDA ratio using our 2016 EBITDA should be approximately 2.25 and using our expected EBITDA as set forth in our 2017 guidance, which we will discuss in a moment should the under 2. One final item before we get to guidance.

The company recorded a $43 million GAAP valuation allowance to offset in full the future tax benefit related to its net differed tax assets as of December 31, 2016. This was done because realization of the tax benefit of these differed assets as determined by GAAP is uncertain.

The applicable GAAP standard does not allow us to rely on internal projections of taxable future income.

The company will continue to assess the realizability of its deferred tax assets on a quarterly basis, using the criteria described in the applicable accounting literature and to assess whether an additional reserve or a release of the valuation allowance is required in future periods.

This change in the fourth quarter has no effect on the company’s cash flows or non-GAAP financial measures. Now turning to 2017 guidance. Guidance for the year is based on our current budget and our budget is based on a large number of assumptions. There are significant uncertainties in estimating future product revenues and operating expenses.

This is particularly true on the revenue side for our largest revenue products NUCYNTA and NUCYNTA ER and on the expense side for the R&D expenses related to our ongoing pediatric studies, NUCYNTA label studies that Jim mentioned and several development works.

For a more complete discussion of the relevant risks relating to our guidance I will direct you to the risk factors section of our annual report on Form 10-K that we expect to file later this week. With that said, total 2017 revenues are expected to be $490 million to $520 million.

We expect total product revenues to be approximately the same as we are not anticipating any milestone revenue or any significant royalty revenue in 2017.

Cost of goods for our products in 2017 will be approximately 19% of net sales for NUCYNTA and NUCYNTA ER, COGS will be approximately 25%, reflecting manufacturing cost and the royalties on net sales [indiscernible]. Average COGS on the other products are expected to be approximately 10% of net sales.

Non-GAAP SG&A expense that is GAAP minus stock compensation and contingent consideration for 2017 is expected to be $192 million to $202 million. As in past years SG&A expenses will be slightly frontend loaded during the year. Non-GAAP R&D expense that is GAAP minus stock compensation is expected to be $30 million to $38 million.

These expenses include NUCYNTA label studies that Jim mentioned several development program as well as pediatric studies for NUCYNTA. We expect R&D expense to be somewhat backend loaded during the year.

Interest expense for the year was expecting to be $80 million to $90 million as we discussed a few moments ago, we expect to prepay at least $100 million of our existing secured debt in April 2017 in additionally plan to refinance the remaining unpaid balance of our existing secured debt, this will incur a prepayment fee of $19 million and we will write-off approximately $9 million of non-cash expense consisting of unamortized debt discount and debt issuance costs.

We will recognize these expenses in Q2 and this total of $28 million is included in the interest expense. Actual interest expense with depend upon the rates we achieve in the refinancing. Adjusted EBITDA for 2017 is expected to be $170 million to $195 million.

And finally before I turn the call back over to Jim, just a final comment on GAAP financial measures, non-GAAP financial measures used by Depomed are not based on any standardized methodology prescribed by GAAP and maybe calculated differently from and therefore may not be comparable to non-GAAP measures used by other companies.

That concludes the financial discussion; I’ll now turn the call back over to Jim..

Thanks, Augie. Over the past four years we’ve gone from the company virtually unknown wire physician customers to one of the top companies in our field. We believe that we have performed well in the phase of the 2016 challenges. And we believe that have strategies in place to take us to the next level.

We think that this will benefit the patients, the providers and the payers that we serve and will deliver additional value to shareholders. And with that, I'll open the call to questions..

[Operator Instructions] Your first question is from the line of Randall Stanicky with RBC Capital Markets. Caller your line is open..

Great, thank you. Hi, guys.

I just have a couple of questions if you are looking at the guidance for 2017 it implies about $15 million of revenue increase, which is about 11% and then when I look at recent NUCYNTA scripts they seem to have slightly moderated in recent weeks, and so can you just maybe talk about that and help us calibrate the price volume build into those guidance numbers? And then I have a follow-up..

So, Randall just in general we expect to see NUCYNTA ER scripts up in double-digit and NUCYNTA IR scripts getting into single-digit growth. And so that's what we are in the volume side in addition to seeing some realization of the price increases that we’ve taken that we took last year.

At this point as you know we have not taken a price increase in 2017. As far as the recent trends around it I think we have been and would expect to go through in this first quarter through some level of disruption as we’ve moved things around in the sales force.

And we’ve added 80 people approximately to our pain sales force, which is the group that will really push and move NUCYNTA and NUCYNTA ER and in that group but we’ve got a number of positional relationships that are now new because of the changes that we've made. And we have some places in the country where we're actually hiring new people.

So we'd expect as you would see in these situations some level of disruptions with the first three to four months after this redeployment has taken place. And then we would expect to see both the growth coming in and then the benefit of that redeployment happening in the second half of the year..

Okay. So we should expect scripts to be flattish for the first quarter too and then start to pick up in the back half for NUCYNTA that's where you would think….

I would say yes, softer in the first part of the year and then increasing towards the back half of the year..

Okay, great. And then I have a bigger picture question for you. You've grown the EBITDA base, you've improved your balance sheet and you probably have quite a bit of opportunity to leverage the broader infrastructure. And you're still independent company.

So as you look at Depomed today, what's the opportunity for Depomed to go out and pursue the deal on its own and where strategically do you think that would be most beneficial? And how much capacity do you have?.

So I’ll answer the first couple of piece and I'll let Augi jump in on the capacity piece.

One, I think we have a firm conviction both as management and a Board that to be able to succeed in the marketplace that we're in the pharmaceutical marketplace you've got to get bigger and that's a both scale for working with managed care plans, it's scale for be able to have part of your revenue base going toward development to then fund innovation, to be able to both grow markets and to be able to get paid for that in the future.

And so with that we continue to have a very watchful eye toward opportunities to bring things in or to look for things that might get us much bigger, much faster.

Now with all that said are the areas that we're looking at really have not fundamentally changed where we look at the central nerve system as a great opportunity with a number of sub-markets in there.

We've been in the pain market, but certainly are and have been open to doing things in the broader neuro market or even into parts like the psych market.

We've defined in the past adjacencies things like addiction therapy or things where we already call on orthopods and rheumatologists that we would have infrastructure that are already to be able to move forward.

And if we saw the right opportunity for something that was maybe a bit less adjacent and thought it could be a great standalone business we would look at that as well assuming that it brought us significant scale.

So we tend to be -- we continue to be open on those fronts in terms of how we get to scale whether it's us being able to execute transactions to bring things in, more of a merger of equals or something where we would become part of something larger. Because we believe that firmly and scale as a necessarily piece of success..

Okay. And then….

And with respect to your question about capacity, keep in mind that I think what the total capacity would be within large measure be dependent upon the cash flow characteristics of the target that we would go after. But if I just think about our own balance sheet for a moment.

As I mentioned in my remarks, if we use our midpoint of our EBITDA guidance for 2017 our secured debt-to-EBITDA ratio will be approximately 2 when we're done with the repayment refinancing. I think we could to operate at four times so essentially borrowing again as much debt as we had outstanding.

And then I think again layering on top of that what support we could get from the cash flow associated with the target we were after..

Okay.

And Augi is equity an option for you?.

I think would very depend upon the deal. I certainly wouldn't say that it's off the table..

Okay, great. Thanks guys. .

Thanks, Randall. .

And your next question comes from the line of Jason Gerberry with Leerink Partners. Caller your line is open. .

Hey, good evening. Thanks for taking my questions. Just a couple of follow ups on the guide. If you can comment I wasn't sure if NUCYNTA pricing was actually factored in -- new price increases taken in 2017 factored in the guidance? I know that you guys have kind of been more of a price follower.

So just wanted to clarify if pricing in '17 will be upside to numbers..

So Jason we've definitely -- I think last year we took one price increase. This year I would anticipate that we would take price at some point during the year, but as you know as with the rest of the industry we don’t pre announce that. But I would expect that we wouldn’t take price during the course of the year.

We did see a couple of people in our -- in the opioid marketplace take price increases in January of about 9%. So to your point we do watch closely where other players in the market are particularly the market leaders and look to stay within a band around that price..

Got it.

And it look like the mix of NUCYNTA ER to IR has somewhat stabilize would it be your operating assumption that the mix of ER to IR is pretty stable going forward?.

We still see ER growing quicker, as I mentioned before where I would see the growth there in double-digits where IR as you know has been -- we were finally able to hold the decline that we inherited when we launched the product and now in 2017 with the additional focus both in terms of the messaging and in terms of the sales force and targeting, we would expect to bring that into growth.

But let’s take the first step first which is getting it into single-digit growth. .

Got it.

And then last one for me, just thinking about the 11% forecasted growth for ‘17, is it fair to think about the two big products NUCYNTA release sort of being above that bandwidth and then the remainder of the portfolio falling below or can you just kind of give us some directional parameters on the product mix?.

Yes, we haven’t done that in the past and I think we are ready to start doing it Jason, I understand the question, but at this point the guidance is non-product specific..

Got it. Okay, thanks for taking the questions. .

Thanks, Jason. .

And your next question comes from the line of Ami Fadia. Caller your line is open. .

Hi, thanks for the question.

Couple of questions, firstly, just with respect to NUCYNTA, could you go back and tell us which price increases in the past you haven’t yet seen an impact on your net price? I believe there was a price increase in third quarter of ‘16 and there was a still a small portion of the original like 40 plus percent price increase you’ve taken when you required it.

How much of it is yet to flow through to your net price? That’s one piece and then in your guidance for 2017, can you give us some color on the market growth that you have baked into your assumption? And I wanted you to clarify, if you’ve baked in another price increase into your guidance or not? And then I have a few others questions..

Okay, let’s take the first, I’ll let Augie come back on the net price from the past increases. But in terms of the market growth we have watched as you have the market trends and we don’t see a large scale change from that in 2017 from what we saw in 2016 at least as it comes to the opioid markets.

And so we are forecasting contraction of both of those markets and with that an increase in share for our products providing the growth. In terms of pricing as I mentioned, we have not -- we have taken price increases this year on CAMBIA and Lazanda we have not on the rest of the portfolio.

And I would -- and as I said I would expect that we will take price at some point during the year on NUCYNTA and Gralise as well as Zipsor..

Got it.

Maybe if Augie you could address the price increase from the previous quarters?.

Sure, so as we said on our last quarterly call, price increase that we took we did not see any benefit of price increase in Q3, what we had indicated was we were expecting to see approximately 50% of the price increase in Q4. And then approximately 20% more of that price increase as we moved into Q1 of this year.

And that’s been the experience that we’ve had. .

I see, okay. I didn’t see any benefit but we can talk offline more about that. Maybe a related question just on your sales force reallocation.

All the markets that you guys operate in are very detail sensitive markets and as you pull sales force focus from some of your products and put it towards NUCYNTA, do you worry about some of the other smaller products suffering from that how do you think about that? Thank you..

I would say Lazanda is a very distinct market as you know and making the change that we made on Lazanda we moved from covering 93% of the prescriptions and a little bit less of that at the market to 91%. So even with the 20 people we have we cover greater than 90% of our own product coverage around that product. So not a big effect at all.

In terms of CAMBIA that becomes a more focused group instead of selling Gralise and CAMBIA and their lead will be CAMBIA. So actually the sales call equivalence for CAMBIA actually go up.

Zipsor does come down in this configuration, but as you know that's been a smaller product for us and really one that's more sample sensitive than it is detailed sensitive. And the two big beneficiaries of it in particular are NUCYNTA ER and even more so NUCYNTA immediate release.

And as we're in the market that we're in we believe that with the differentiation we have around tapentadol on the unique molecule and with the length of the time that we have on the IP for it that that's the best place to put the resource and really drive the growth. And so hence that's the decision that we’ve made to be able to focus that way. .

Got it, thank you. .

Thanks, Ami. .

And your next question comes from the line of David Amsellem with Piper Jaffray. Caller your line is open. .

Thanks. So in the past you have talked about focusing more on the fact that NUCYNTA has a differentiated label in the diabetic peripheral neuropathy used as a selling point. And I think what you said is that you think that will be a key driver of potentially an uptick in volume growth.

But I guess the question here is what specifically do you think you're going to do differently going forward given that since you have the product in 2015 you've been talking to that point of differentiation.

So I guess what I'm trying to understand is what do you think you can do differently or what specifically are you doing differently here with throughout NUCYNTA?.

Yes David on the relaunch of NUCYNTA ER we focused on chronic lower back pain. There was a couple of pages in the sales aid that had data on DPM, but it wasn't a key focus and it wasn’t anything that was a lead which is what we've changed to starting in the beginning of February.

The data that's there we've got additional recurring carriers, we've got patient profiles that really highlight that because we see as such was the differentiation. But it was crucial for us the beginning to reestablish ourselves with the pain specialist and that to do that really chronic lower back pain really is the key in those practices.

So we feel like we've done a good job of laying that base and now it's time to switch the focus and we'll actually be leading with the DPM piece in a much more detail with its own if you want to call it sub-support program within the broader campaigns, which has never had either under J&J’s hands where they actually didn't launch it because they stopped promotions shortly after it was approved or in ours where it was a couple of pages towards the back of a sales aid..

Okay. And then secondly on Gralise, it’s felt like to me that in the broader neuropathic pain space it's a pretty small volume player, but nonetheless [indiscernible] has gone generic in the not too distant future. So maybe talk about longer term how you think that may or may not impact Gralise volumes? Thanks. .

David, thanks. That's already the market that Gralise is in and with Gralise having as the chemical entity GABA [ph] a patent, it’s already an 80% generic market and in fact that 80% is made up of generic GABA. So we're used to be in a marketplace that has heavy generic on that versus having being a primarily branded market.

Because that's really what we're doing is really separating Gralise from the generic GABA that's prescribed so broadly in the marketplace. So while that certainly will be an event in the marketplace I mean it's possible that you could have some plans to some sort of a double step at it or something to Gralise.

We don't see it being a big impact and it’s one as I said we've already been used to playing in a market like that that's heavily generic..

Okay, thank you. .

Thanks, David. .

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

Thanks very much. Hi, Jim and Augie.

I have just two questions and I apologize I had to step out the call briefly so if I am repeating anything you can skip it, but cebranopadol could you please comment on how much you think the Phase 3 program will costs and maybe give us a sense for annual spending for Phase 3? So we know what the outlook might be for spending once you do start Phase 3? And then with respect to be strategic agenda, I know Jim you’ve discussed in the past that better scale and leverage would be beneficial to the company so you’re considering different options for that if you could just update us and provide any additional comments on your strategic outlook that would be great.

Thanks so much..

Okay.

On the first and I’ll let Augie comment more specifically around some of the cost pieces, but on cebra we did mentioned that with decisions that we’ve made to invest in enhancing the label on NUCYNTA that we’re moving the start of the cebra program back to 2018 for the Phase 3 program, and I’ll let Augie comment perhaps on that and then I’ll come back on the strategic agenda..

Right. So the Phase 3 development expenses will be spread across ‘18, ‘19 and ‘20. We are still in the process of negotiating the Phase 3 clinical trial agreements and I don’t have a detailed update on development expense at this time David, but the expenses will really be incur in ‘18, ‘19 and ‘20..

And then on the strategic agenda I had mentioned earlier that we do -- we are committed to scale and that is getting bigger either by us acquiring merger of equals or being part of something bigger because we believe it’s crucial both for the managed care environment that we are in, the payer environment and also to be able to put an appropriate amount of investment toward development to be able to bring innovation to the market and ultimately that being the key to getting paid particularly as we going forward.

So, with that we are open to all those fronts because we are really committed scale..

Thanks so much..

And your next question comes from the line of Scott Henry with Roth Capital. Caller your line is open..

Thank you and good afternoon gentlemen. I’m going to start just on a big picture question, I know you hit on it a little bit about expecting contraction in the opioid market, now obviously pain is not going away and paid treatments are not going way.

So at what point would you expect the opioid market to bottom out? obviously you don’t have a crystal ball, but I just like to get your thoughts I mean do you think by the end of 2017 you start to at least be flat or how should we think about the duration of this kind of contraction cycle?.

I actually see it as a bit longer term than just ‘16, ‘17. I think it will start to mitigate but I think it’s going to be a few years before you see it actually get to flat.

And some of that as I think some of it is bringing some things out of the system that probably shouldn’t have been there to start with and I think you’ve got pressure that have people that have over prescribed, we think that's appropriate.

And so I think this is where doing the work that we are starting the first half of this year to further differentiate the molecule, we think is really the key for us because over the next few years it’s going to be an appropriate use and share situation and that's the way we are focused on it..

So I guess and that kind of leads into the follow-up question.

I don’t expect NUCYNTA was high on the abuser list and it certainly does fit the profile of an opioid one would abuse, but the negatives of the market have outweighed that profile over the past year? At what point do you think the NUCYNTA profile flips over in terms of that negative into a positive by differentiating it? Is that something you could hope to be have in place by the coming out of ‘17 and to 2018?.

And so, when I think the market of course we do market research, you see that the perception of NUCYNTA is different than the other pure new opioids. You also certainly see differences in the street price and some other things that we’ve talked about before. And we see that the brands are actually outperforming the market.

So NUCYNTA immediate release scripts were flat for the year versus the market that was down 6%. NUCYNTA ER was up 19% against the market that was down 5%. So we continue to see the brand, but what we are doing on these studies that I mentioned is really to enhance that profile to get the data there and be able to get it hopefully into the label.

Now knowing the timeframes for that which includes both doing the clinical work and producing the scientific data and then filing it with the agency I think the effect of those things, the practical effect beyond say publication of some data is more in a 2019 timeframe than a 2018. .

Okay. And then final question which is a little more specific, in the past couple of years certainly at the end of ‘15 and at the end of 2016 your January market share for NUCYNTA has taken a noticeable decline, but then in February you recoup that claim and by March you are hitting new highs in market share.

Now obviously one or two data points don’t make a trend, but when you look into ‘17, the question is would you expect market share to snap back in February and then again be reaching new highs within the first half of the year do you think that’s just a dynamic trend because of January the reset of the copays of whatever it maybe?.

Yes, I think in general that’s true. This year we have the added piece, which is the retooling of the sales group. And so we’ve got a lot of our physician customers that have got a different sales coverage coming in just by definition growing from about 180 people to 260, we’ve got a lot more physicians will be calling on that will be new to us.

So I actually would see that taking a bit longer this year than we have seen it in past years just because of that disruption factor in terms of our sales coverage..

Okay, thanks for the color.

Final question for Augie, I just wanted to make sure I understood the change and I have seen this with a couple of companies now, the way of computing tax for non-GAAP, I mean effectively should we start thinking about your non-GAAP being fully taxed versus I assume in the prior it was a truncated rate, I mean is that what’s going on so when I think of comparing prior estimate to a new estimate, I guess it’s a higher bar now?.

That is essentially what’s taking place, we are tax affecting each item at the statutory tax rate as oppose to our prior methodology which really applied our cash tax rate, which was substantially lower than the statutory rate. So....

I mean what sort of range... .

So if you look at the reconciliations in the press release Scott, I mean you can see the difference in the tax adjustments and they are significant. .

Yes for 2017 for example as Augie mentioned before we expect an effective cash tax rate in the mid-teens and yet what you see from fully allocating is going to be significantly higher than that. So it’s a non-cash impact on the earnings, but indeed its fair based on the SEC guidance for reporting. .

Okay, great. Thanks for taking the questions guys. .

Thanks, Scott. .

And you next question comes from the line of Ken Trbovich with Janney. Caller your line is open. .

Thanks, couple of quick question.

Augie I think earlier in the discussion you had said something about COGS for NUCYNTA did I misunderstand you is the COGS for NUCYNTA coming down in 2017?.

Would be approximately the same, it's composed of two items, one is the manufacturing transfer costs and the second is the royalty on net sales that we pay to [indiscernible]. So it’s been 25% approximately for the two products for NUCYNTA as a franchise and that it will approximately that going forward in 2017. .

Although I would expect it to drop a little bit in the second half of the year because there is a small royalty that’s paid to a party not [indiscernible] and that actually stops in May..

Okay.

But there was a comment I think during the initial discussion there was some referenced to 19%, I was uncertain what that was pertaining to?.

19% was the COGS across, the blended COGS if you will across the portfolio..

Got it, the whole portfolio, I miss understood that okay. Okay I appreciate that.

And then Augie just on the debt and the refinance, I know you’ve got some specific targets on where you think you’re going to be in terms of secured debt-to-EBITDA, do you have a sense yet from the rating the agencies as to sort of where that would put you, is that maybe going to put you in that B1, B2 kind of category? And could you give us feel for what you think the borrowing costs for those types of ratings might be in the market today?.

Ken I'm reluctant to speculate on what the actual borrowing costs is obviously there is a lot of dynamisms in the debt market today and we won't really price anything until we get out to April..

But I think Ken it is important that as we're looking at this, we are looking at more than just bonds. And so Augie why don’t you just mention the... .

So we've looked at a whole range of possibilities and they fall onto sort of three buckets. One is referred to as a Term Loan A which is really syndicated bank debt. And that bank debt that does not require a rating.

Then there is something referred to as Term Loan B, which is debt that is really syndicated to institutional investors that does require a rating. And then third large bucket is high yield debt, which absolutely requires a rating.

And then so we're looking across a whole range, but there is at least one set of alternatives in the syndicated bank loan area that would not require us to get a rating..

Okay. .

And really what we look at is that trade-off between rates, covenants and flexibility..

Sure and I know you guys gave some guidance as to what you expect the interest expense to be including the charges that you referenced for the second quarter does that factor in the lower borrowing cost or is that sort of steady state for the current borrowing at the current terms?.

Couple of things, in terms of the expense that we've just talked about in terms of the guidance section that that assumes what we consider to be a relatively conservative assumption on refinancing rate. Hopefully we will be able to do better than that, but won't know until we get out to April. .

Okay, thank you. .

Thank you, Ken. .

And your last question comes from the line of Chiara Russo with Cantor Fitzgerald. Caller your line is open. .

Yes hey guys. I think I'll be quick here I've only two questions as most of my have been asked and answered. The first is easy, you talk about contraction within the states that looking to expand the market share.

I was wondering if you could sort of -- if there was any framework around end or exit from promoting their products and how you sort of look at that market share or taking some of that market share?.

Yes, so Chiara we definitely see that as an opportunity and there is really two really pieces to it. One is looking at it in terms of just a player that had a large share of voice a large of people selling in the space between the end or dedicated people that were their employees and their contract sales force.

There is about 375 people that were selling in this space that no longer are. So that certainly helps us in terms of the share of voice in the marketplace and gives us an opportunity to pick up the share that was there with Opona [ph]. So we certainly do look at that as an specific opportunity.

And those are scripts that were the physicians already to choosing to use something other than either an oxycodone based product or morphine based product. So one that we think maybe some valuable ones for us to go after. And in addition there is some very good people and the fact that we at this point we have territories that were open.

We've had I can say a lot of people from the indo side. And because of the data that we have we know how they perform. And so we've been able to cross reference that and really go where to do have openings and where do we have experience people in the pain space that could be a good match for us..

Fair enough, okay. And so my last question has to do with these label extension studies, I think you said that you're going to be focusing respiratory depression and abuse.

And I was curious if you could give us a little bit more detail into what those studies would look like and what the additional label would look like as well?.

Yes and so it's really two sets of studies.

One would be to do I would call the kind of traditional or per guidance category one, two and three studies that others have done that really is more around abuse to turn it and that are really intended more for molecules that are already significantly abused and then you are using a physical or chemical barrier around it to try and force that abuse.

So we with one set of studies that we follow that but I think the ones that are more interesting are the ones that would look to separate data that we could produce around respiratory depression, look at what is the respiratory depression for tapentadol is there a sealing effect, what is really the impact there, because that’s what people die from with that take opioid.

That’s really is the concern around that.

And we have data that’s been published over the last year or like a K series of 104 consecutive pediatric accidental overdoses with tapentadol, I think the most remarkable part of that is none of the children died, if that had been a oxycodone based products you will could have seen 20% or 25% of them that would have perished in that kind of a situation.

So we see things like that and those things are more anecdotal and are not available for use by our sales force. Now with that said, producing data that can be included in the label generally in the pharmacology section of the label and then could be promoted would not be comparative to the other products, but would be data that they would not have.

And so our reps could not make a direct comparison and say something is better or lower or something like that. But yes they would be able to describe the results of those studies assuming that we were able to get it into the label..

Got you.

And the timeline for that I think you said it was about 2019?.

Yes we started now, we get data in ‘18 and then you have got filing with the agency that I think for practical pieces that you can’t get into the label to be able to promote until 2019..

Okay, alright great. Thank you. .

Sure, thanks..

And we have no further questions in queue. Jim the floor is yours..

Thank you. I just want to say in closing, I want to thank all of you that follow the company and in particular though I want to thank the remarkable team here at the company that stay focused on our mission and our vision during what that have been some challenging times and headlines in 2016.

We think we’ve put together a highly differentiated portfolio one that helped us become a top three player in the pain space and really than with the ability to grow well beyond that. We look forward to that we look forward to updating you on our key milestones as we go through the year.

We continue to look for ways to enhance the growth and bring value to our business. And again thank you for your support. .

And this concludes today’s conference call. You may now disconnect..