Christopher Keenan - VP of IR Arthur Higgins - President & CEO August Moretti - SVP & CFO.

David Amsellem - Piper Jaffray Ashley Ryu - RBC Capital Ken Trbovich - Janney.

Good afternoon and welcome to the Depomed Second Quarter Fiscal Year 2017 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, Operator. Good afternoon and welcome to our investor conference call to discuss Depomed's second quarter 2017 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 Arthur Higgins, 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 for 2017, expectations regarding governmental inquires investigations, expectations of the opioid markets, and other statements 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 Annual Report on Form 10-K for the year ended December 31, 2016 and our Quarterly Report on Form 10-Q that we file today with the SEC.

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 provide financial guidance and guidance on corporate goals for the current fiscal year and to provide, update or reconfirm its guidance only by issuing a press release or filing updated guidance with the SEC in a publicly accessible document.

References to current cash, cash equivalents and investments are based on balances as of June 30, 2017. All guidance, including that related to the company's expected total product revenues, operating revenues, adjusted non-GAAP earnings and non-adjusted EBITDA are as of today, August 7, 2017. I'll now turn the call over to Arthur Higgins..

Thank you, Chris. Today I will provide some context into the rapidly evolving opioid marketplace and outline why this is leading us to be more cautious in our financial outlook.

I will also review the actions we are taking to adapt to the changing pain markets, and discuss how Depomed is fully committed to be part of the solution in combating the opioid epidemic. For perspective, let me begin by reminding you what I discussed in my first conference call as CEO back in May.

Fundamentally Depomed is fortunate to possess a portfolio of differentiated products that are each uniquely positioned to help patients in the management of pain. Our flagship products NUCYNTA is a dual mechanism opioid and NUCYNTA ER is the only opioid approved to treat diabetic peripheral neuropathy.

While there are significant challenges shaping the opioid market channel which I will discuss further, it is clear that when used appropriately opioids are and will remain important products for the treatment of pain.

With all this change taking place in the pain market, we remain committed to the physician treating pain and the patient suffering from pain.

We firmly believe that by treating patients fast and by engaging all the different stakeholders to find meaningful solutions, we will emerge as a stronger company, a different type of specialty pharmaceutical company and a true leader in pain management. It is clear we are operating in a challenging and volatile environment.

You only have to turn on the television or read the newspaper to understand that opioid injection and the resulting overdoses and deaths are a national crisis. Recently the new FDA commissioner Scott Gottlieb called the opioid epidemic the biggest crisis facing the FDA.

Janet Yellen, Chairman of the Federal Reserve called the opioid epidemic a threat to the U.S. labor force. And the commission on combining drug addiction and opioid abuse led by Governor Chris Christie asked the President Trump last week to declare it a national emergency.

Also last week the FDA announced plans to expand the existing long-acting REMS program to include immediate release for acting opioids. We’re also seeing governmental stakeholders question the role of drugmakers, wholesalers and prescribers in this space.

To that end, on July 28 we received the subpoena from the Department of Justice regarding our commercialization practices for our NUCYNTA products and Lazanda. Similar inquiries have been made to other pharmaceutical companies in the opioid space and we as a company look forward to cooperating with this request.

As you know I’m relatively new to Depomed and Depomed is relatively new to the opioid space having only launched NUCYNTA IR, we launched NUCYNTA IR and ER in 2015.

Since that time many things have changed but one constant is that the company has always been committed to operating according to the highest standards of compliance, ethics and patient care and I can assure you these standards will continue under my watch.

Not surprisingly and we feel justifiably this environment has significantly impacted the overall opioid market. In the second quarter, the long-acting and short-acting market showed a year-over-year decline of approximately 11% and 7% respectively.

Against this background, we were able to continue to grow our market share of our NUCYNTA franchise and deliver companywide revenue of $100.4 million which is broadly in line with our expectations.

However in the past several weeks we've experienced some softness that is our forecast in weekly prescriptions and ex-factory shipments of both NUCYNTA IR and ER.

This made a flagged the events that we have just outlined and thus coincide with physician feedback from our pain sales force that the primary care segment is becoming more conservative in the writing of opioids and pain specialists are facing tougher roadblocks and getting prescriptions through the reimbursement system.

I had talked that given the expansion of our pain sales force earlier this year, we will see a clear separation of current performance versus the market by the year-end and while I’m not given up on that goal, I think it's more realistic that this will not be fully apparent until sometime in 2018.

For the reason I just described and coupled with the associated cost required to respond to incoming legal inquiries, as well as our very positive recent decision to accelerate our neurology field force builder, we feel it's prudent to be more conservative with our full year outlook.

Augie will give you more specifics on our financials for the quarter and revised guidance shortly. Acknowledging that we can’t control the macro environment, we continue to focus our energy of what we can control which is our strategy and execution. So let me update you on that.

You'll recall after the highly disruptive changes that we made to our field force at the beginning of this year, my first priority coming in was to stabilize the field force so we can understand what was and was not working in our go-to-market strategy.

That remains our goal and at this stage we are making only repayments that are in line with the evolving opioid market and with the needs of a regular portfolio. Two of the important moves we’ll make in the coming quarters are firstly we are registering the number of calls on our call targets and our pain sales force by approximately 20%.

The vast majority of that target reduction comes from primary care physicians and its becoming clear they will play a reduced role in pain management. This move will allow our sales force to increase frequency and focus and resources to the pain specialist throughout playing and ever increasing role in achievement of these patients.

To illustrate that point, pain specialists and their physician assistants and nurses currently account for approximately 70% of our NUCYNTA franchise.

By focusing on the pain specialist, we will protect our base business and by increasing our frequency and resourcing to the pain specialist, we believe we will be in a position to efficiently go to the business over time.

Secondly I am pleased to announce that we are aggressively moving forward with the expansion of our neurology sales force which will grow from 40 to 90 sales specialists.

This sales force focus will be on Gralise and Cambia and we are confident that the expansion which will be completed in September will ensure that Gralise and Cambia which are both promotionally NUCYNTA products will get the resources they need to effectively complete enroll.

While the cost of this expansion remain incremental SG&A, this investment is also consistent with our stated goal to strengthen our neurology platform and create a more diversified business.

In addition to these moves which strengthen our promotional effectiveness, I'm also excited about the steps we have taken to fortify the organization with talented experienced individuals who play a critical role on my executive team.

Peter Schineller joined us as Senior Vice President of Sales and Managed Care bringing with him a professional career of more than 25 years standing both the diagnostic and pharmaceutical industry. Most recently, he served as Chief Commercial Officer at the Diagnostic Company SkylineDx.

Peter was brought on board to further improve our sales force execution, as well as assist us as we navigate the changing pain market dynamics. Jeff Carrol was recently promoted the position of Vice President and Chief Compliance Officer. Jeff has been with Depomed since 2014 as a Compliance Officer and Assistant General Counsel.

Jeff’s position will be reporting directly to me and reflects the continued importance we as a company placed in operating our business ethically and appropriately. Timothy Hermes joined us as Vice President, Government Affairs.

He brings with him almost 15 years of Government Affairs experience or the leading physicians at Collegium, Auxilium and Sunovion Pharmaceuticals. Tim will lead our newly formed Governmental Affairs. In addition advances of commitment to have increased voice at the State and Federal level.

One of Tim's top priorities which ensure both at the State and Federal level it is clearly known as Depomed support the ongoing health focus to reduce the abuse of opioids. We share the way we help you that proper patient selection and the management of these proper medicines is critical.

Furthermore we recognize that treatment duration for short-acting opioids to be for the shortest amount of time in this role the patient will effectively manage their acute pain and move on to an opioid fully recovery. We also as a company strongly support measures to the care and just abuse of these medicines.

In closing, I came to Depomed with a conviction that we were uniquely positioned to succeed and indeed even in the pace of greater headwinds that I think anyone could have foreseen, I remain confident in the future.

Depomed's Board, management and employees are resolute in the turning of business to growth and committed to being part of the solution in addressing opioid crisis. I would now like to turn the call over to Augie to discuss our second quarter financial performance and our updated guidance.

Augie?.

Thank you, Arthur. Today I'll first review our second quarter results and then review our updated guidance.

I want to mention at the outset that with respect to our second quarter results and our revised 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. Total GAAP revenues for the quarter ended June 30, 2017 were $104 million. For the quarter total NUCYNTA franchise sales were $64 million up from $60.7 million in Q1 2017.

Gralise second quarter net sales were $18.1 million down from the $18.6 million in Q1 2017. Cambia in second quarter net sales of $8.5 million up from $7.2 million in Q1 of 2017. Lazanda had second quarter net sales of $5.3 million, an increase from $3.9 million in Q1 2017.

As we discussed in our first quarter call, we made the decision to halt the sales force promotion of this product. Finally, Zipsor had second quarter net sales of $4.4 million, a decrease from $4.7 million in Q1 2017.

As we anticipated days on hand at wholesalers increased approximately four days from the end of the first quarter of 2017 ending the quarter at approximately 19 to 20 days.

Cost of goods for our portfolio in Q2 2017 was approximately 19.5% of revenue and this is consistent with Q1 2017 as mostly 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 expense was $50 million for the second quarter of 2017 and non-GAAP SG&A expense excluding stock-based comp and contingent consideration was $48 million for the second quarter 2017.

GAAP and non-GAAP R&D expenses for the second quarter 2017 were $5.6 million and $5.3 million respectively. R&D expenses include the costs associated with pediatric trials of NUCYNTA. Our EBITDA for the quarter was $28.3 million up from $25.3 million in Q1.

Moving onto the balance sheet, as of June 30, 2017 cash and cash equivalents and marketable securities were a $117 million, quarterly decrease of $78 million. As we previously announced in April 2017, we prepaid a $100 million of principal of our secured debt along with a $4 million prepayment fee.

So when you net it out, we added $26 million in cash to the balance sheet. The company announced a reduction in force during the quarter ended June 30, 2017 in order to streamline operations and achieve operating efficiencies. The company recorded $3.4 million in severance and benefit charges during the period.

Restructuring and related liabilities payable as of June 30 were $1.9 million. I want to discuss government increase for a moment. Recently, Depomed and other pharmaceutical companies received subpoenas relating the opioid sales and marketing practices from the office of the Attorney General of Maryland.

And as you heard from Arthur, the United States Department of Justice, we are currently cooperating with the state of Maryland and DOJ in their respective investigations.

In addition, Depomed and other pharmaceutical companies earlier received a request for information from Senator McCaskill for ranking minority member of the United States Senate Committee on Homeland Security and governmental affairs relating to company's promotion of opioid products.

The company has barred generally first information responsive to such requests. As a result of the activity required to respond to these requests, we will be incurring legal expenses in support of our responses which are reflected in our updated guidance.

And turning now to guidance, we’re updating our 2017 financial guidance as a result of recent developments including an increased pressure on short-acting and long-acting opioid markets by federal and state governments managed care and other stakeholders.

July shipment and prescription demand trends increased legal expenses associated with responding to recent government inquiries subpoenas and expenses associated with the increase in the neurology sales force that Arthur mentioned.

Guidance for the year is based on actual results for the first six months of the year and our current 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 of our largest revenue products, NUCYNTA and NUCYNTA ER given the rapidly evolving opioid market. For more complete discussion on the relevant risks related to our guidance, I’ll direct you to the risk factor section of our quarterly report on Form 10-Q that we filed earlier today.

With that said, total revenues for our six products for 2017 are expected to be in the range of $395 million to $410 million. This is a reduction from our previous guidance of $405 million to $425 million.

Non-GAAP SG&A expenses, that is GAAP minus stock compensation, purchase accounting contingent consideration adjustments and nonrecurring costs are expected to be in the range of $195 million to $201 million.

This is an increase from our previous guidance of $187 million to $197 million and reflects the costs associated with responding to the government inquiries and the increase in the neurology sales force. Non-GAAP R&D expenses are expected to be $18 million to $23 million. This is a decrease from our previous guidance of $22 million to $29 million.

Non-GAAP adjusted EBITDA, is expected to be in the range of $107 million to $117 million. Lastly a comment on our debt refinancing, we continue to actively explore refinancing options but given our high concentration of revenue tied to the opioid market, debt investors are requesting a risk premium in those negotiations.

I’ll close with the comment on non-GAAP financial measures, the 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, and I’ll now turn the call back over to Arthur..

Thank you, Augie. We’re now open for questions..

[Operator Instructions] Your first question comes from the line David Amsellem with Piper Jaffray..

So wanted to get your high-level thoughts on spend. I know you were talking about the higher spending around the neurology focus sales force.

But given the pressures across the business and given that the product portfolio generally focuses on relatively concentrated prescriber base, I'm just puzzled as to why you're not focusing more in trying to drive more profitability out of these franchises. And perhaps there is a way to cut spend significantly.

So if you can talk to that that would be helpful? Thanks..

Yes, David. I mean, David I think I’ll bring you back to when I came in and I mentioned in my opening remarks. My first priority was to stabilize. And I also said it would take several quarters before we would see the benefit of the increased field force.

I think we have to get back it’s time we believe at this stage, we have the right size of field force and the right appropriate level of expense, but clearly, this has to be confirmed by our future performance..

And then in terms of the overall portfolio, I mean, you talked about, Lazanda and halting promotion there.

Are there any other products you can envision also discontinuing active promotion?.

No, I think we see that a role for all the products that are in our portfolio with Lazanda, we are supporting that product with non-field force promotion. We’re talking about probably less than a hundred key prescribers are carrying for 75% of that business. So we’ll look to that through non-promotion.

But as regard to rest of the portfolio, we have no intention of changing our efforts behind those products..

Your next question comes from the line of Randall Stanicky with RBC Capital..

This is Ashley Ryu on for Randall. I just wanted to start with NUCYNTA.

So in light of the continued pressure in the opioid space, how much visibility do you feel that you have? It sounds like the market has worsen relative to your initial expectation last quarter and how do you feel comfortable about this updated outlook kind of captures the right level?.

Ashley, I think that’s a very good question. And I think, again, in my opening remarks we said, we wanted to be more conservative and cautious. This is a highly volatile environment. It’s moving rapidly, and we’re doing our best to stay on top of it. So what we’ve presented today is our best outlook based on the information we have available.

We believe it’s right, but I caveat that by saying this is a very challenging and volatile marketplace..

Yes, that definitely makes sense. I guess switching to neurology. Of course, it looks like there’s a greater investment in neurology now with the move up to 90 reps.

Is the step up perhaps because you're seeing a greater opportunity there and want to invest behind it, is it because you're seeing the need for more support since there’re more promotionally sensitive products? What kind of drove that acceleration?.

Ashley, I think it’s consistent with our stated goal to try and diversify away from opioids to all the regions where we’re just discussing. But perhaps, equally importantly, we believe historically this has been demonstrated that both Cambia and Gralise are highly promotionally sensitive.

We had reduced our sales force to sub-optimal number and we believe by returning that to a more optimal size, that we can get these products back on to a growth trajectory faster and that's what we’re trying to do. So one, the products deserve it, and two, it’s consistent with our strategy to diversify away from pain..

[Operator Instructions] Your next question comes from the line of Ken Trbovich with Janney..

Just to better understand your comments about the intended plan to refinance the debt. I understand your point about the fact that they’re requiring a higher pay.

Does that suggest that there is no longer an opportunity to refinance at better terms, or simply that the cost savings would be lesser degree that’s expected?.

Ken, we will continue to negotiate to refinance the debt and I think it’s really going to go to the terms that we’re able to achieve..

So with goal then still be to complete that in the third quarter, or is that been pushed out?.

We’re still actively working to get this refinancing done in the quarter which is what we had previously announced..

I would now like to turn the call back over to Arthur..

Hearing no more questions, let me just thank everybody for their participation today. I think we would have acknowledged that in all challenging markets, there are winners and losers.

We believe to be remain focused on execution by putting the needs of our patients and the physicians to treat our patients first but we will emerge out of this challenging market a stronger company and a true leader in the pain space. I need to thank you all for your attention and wish you all a very good evening. Thank you very much..

Ladies and gentlemen, this concludes today's conference call. You may now disconnect..