Peter Vozzo - Westwicke Partners, IR Jack A. Khattar - President and CEO Gregory S. Patrick - CFO.

Ken Cacciatore - Cowen and Company Annabel Samimy - Stifel Nicolaus David A. Amsellem - Piper Jaffray & Co..

Good day, ladies and gentlemen and welcome to Supernus Pharmaceutical Fourth Quarter and Full Year 2014 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will follow at that time. [Operator Instructions].

As a reminder this conference call is being recorded. I now like to turn the conference over to Peter Vozzo. You may begin..

Thank you, Nicole. Good morning, everyone and thank you for joining us today for Supernus Pharmaceutical’s 2014 Fourth Quarter and Full Year Financial Results Call. Results discussed today are for the quarter and year-ended December 31, 2014. Yesterday, after the market close the company issued a press release announcing these results.

On the call with me today are Supernus' Chief Executive Officer, Jack Khattar; and Chief Financial Officer, Greg Patrick. Today's call is being made available via the Investor Relations section of the company's website at www.ir.supernus.com. Following remarks by the management we will open the call to questions.

We expect the duration of the call to be approximately 45 minutes. During the course of this call management may make certain forward-looking statements regarding future events and the company's future performance.

These forward-looking statements reflect Supernus' current perspective on existing trends and information and can be identified by such words as expect, plan, will, may, anticipate, believe, should, intend and other words of similar meaning.

Any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those noted in the Risk Factor section of our annual report on Form 10-K, which we expect to file later this week. Actual results may differ materially from those projected in these forward-looking statements.

For the benefit of those of you who may be listening to the replay this call is being held and recorded on March 11, 2015 at approximately 9:00 a.m. Eastern Time. Since then the company may have made additional announcements related to the topics discussed. Please reference the company's most recent press releases and current filings with the SEC.

Supernus declines any obligation to update these forward-looking statements, except as maybe required by applicable securities laws. I will now turn the call over to Jack..

Thank you, Peter, and good morning, everyone. I appreciate everyone taking the time to join us as we discuss our 2014 fourth quarter and full year results. I'm very excited about our results, the continued solid growth in our business and our prospects moving forward. Let me give you some of the key highlights.

Total product revenue for the fourth quarter was $30 million, substantially exceeding the product revenue guidance of $24 million to $26 million we provided during our third quarter conference call in November. Also back in November we projected that we would become cash flow positive by the end of the fourth quarter.

We exceeded that guidance too as we were significantly cash flow positive for the entire fourth quarter. Underlying our net product revenue is strong growth and prescriptions for Oxtellar XR and for Trokendi XR.

Total prescriptions for the quarter; as reported by Symphony increased by approximately 12,963 prescriptions or 22% over the third quarter of 2014, a total of 70,739 prescriptions. Trokendi XR prescriptions for fourth quarter totaled 50,583, which is a 28% increase over the 39,524 prescriptions for the third quarter of 2014.

Oxtellar XR prescriptions for the fourth quarter totaled 20,156, representing a 10% increase over the 18,252 prescriptions in the third quarter. 2015 first quarter to-date total prescriptions for Trokendi XR and Oxtellar XR are 15% higher than the comparable period in the fourth quarter of 2014.

Throughout 2015 we will continue to promote our brands with our sales and marketing teams fully focused on maximizing the potential. We continue to believe that the two products combined have the potential for peak sales of $400 million to $500 million.

Both products continue to offer patients significant clinical benefits and reasons to switch from immediate release products.

For instance in a recent retrospective medical chart review of 200 patients treated with immediate release oxcarbazepine or Oxtellar XR; Oxtellar XR was associated with significantly lower rate of in-patient hospitalization space, lower rate of emergency department visits and a higher rate of compliance.

The patient charts were obtained from 17 geographically and clinically diverse sites across the U.S. to include non-academic and academic affiliated practices, general neurology, pediatric neurology and epilepsy centers.

In addition Trokendi XR and Oxtellar XR continue to have strong managed care coverage with roughly 89% of Trokendi XR and 90% of Oxtellar XR national claims being approved by payers. Moving on to our pipeline we continue to progress on schedule with our two pipeline candidates. First SPN-810, which is for the treatment of impulsive aggression in ADHD.

As you may recall last year we received the fast track designation from the FDA and had an end of Phase II meeting with them in December. At that meeting we discussed the development plan of SPN-810 and the protocols for our studies. Based on the meeting we will expand the target patient population in our clinical program to include adolescents.

This allows us to address a larger patient population and does not significantly alter our development plan cost estimate or projected time line.

In 2014, we initiated and completed an intensive program to create and validate a new and specific outcomes and assessment scale for use in this unique development program for the treatment of impulsive aggression in patients with ADHD. We are making very good progress toward finalizing the scale in close cooperation with the FDA.

We are targeting to meet with the FDA during the second quarter to review the scale and our request for a special protocol assessment. In summary we continue to plan to initiate Phase III clinical testing by the end of this year. For SPN-812 which is a novel treatment for ADHD we expect to start a Phase 2b trail during the fourth quarter of 2015.

This trial will be a dose range finding study in pediatrics designed to establish safety and efficacy in ADHD. As previously announced we selected an extended release formulation that will be the basis for use in future trials.

CMC development activities on the active drug substance are progressing well and we will continue to conduct further pharmacokinetics studies and preclinical studies that are required for the completion of the new drug applications.

As we announced in our fourth quarter results press release last night we will be hosting an Investor Day in New York City on June 17, 2015 when we will share with you an overview of our company, including a detailed discussion of our clinical programs and an assessment of market potential of these products.

Before I hand it over to Greg for the financial overview I would like to summarize by saying that our company including our commercial team and sales organization has done an outstanding job in 2014, progressing the launches of Trokendi XR and Oxtellar XR. These products continue to post solid prescription growth despite increased competition.

In addition our research and development organization has made substantial progress during 2014, moving forward a rapidly accelerating pipeline. With that I will now turn it over to Greg to walk you through the financial results..

Thanks, Jack and good morning everyone. As I review our financial results I'd like to remind our listeners to refer to the fourth quarter and full year 2014 earnings press release issued yesterday after the market close. We expect to file our Form 10-K for 2014 later this week.

Net product revenue for the fourth quarter of 2014 was $30.5 million comprised of $22.9 million for Trokendi XR and $7.6 million for Oxtellar XR. Having been launched in 2013, both of these products are clearly still in a growth phase.

As such we believe the best framework for analyzing revenue growth is to compare revenue versus the prior quarter as reviewing sequential quarter’s helps us to understand the momentum in revenue growth. Fourth quarter product revenue for Trokendi XR $22.9 million is 50% higher as compared to third quarter 2014.

On a sequential basis, Trokendi XR revenue grew by $7.6 million. Fourth quarter product revenue for Oxtellar XR was $7.6 million, compared to $7.2 million in the third quarter of 2014. Total revenue for full year 2014 was $122 million compared to $12 million in 2013.

Please note that this year-over-year comparison is affected by the change in revenue recognition methodology, which transitioned in 2014 to contemporing [ph] its recognition based on shipments to wholesalers and distributors.

Revenue in 2014 included $89.6 million in product revenue, $30 million in royalty monetization revenue and licensing revenue of $2.5 million. Gross margin for the quarter was 92.5% and for the year was 93.6%. Going forward we continue to expect product gross margins to exceed 90%.

Selling, general and administrative expenses were $18 million for the fourth quarter and $72.5 million for the full year, as compared to $15.2 million and $55.6 million in the same periods in the prior year.

The increase in expense reflected expansion of the sales force from 90 sales representatives at year-end 2013 to more than 150 sales representatives in 2014, coupled with concomitant promotional and marketing activities to support the expanded sales force.

Research and development expenses were $5.8 million during the fourth quarter of 2014 and $19.6 million for the full year compared to $5.4 million and $17.2 million in the same periods in the prior year.

This increase is due to preclinical and clinical trial activity coupled with manufacturing scale up activities for both of our product candidates; SPN-810 and SPN-812.

We expect our research and development cost to continue to substantially increase for both SPN-810 and SPN-812 as we prepare for late stage clinical trials to start in the fourth quarter of 2015. For the fourth quarter operating income totaled $4.7 million as compared to an operating loss of $11.4 million in the fourth quarter of 2013.

For full year 2013 operating income was $24.2 million compared to an operating loss of $61.9 million for 2013. Net income for the fourth quarter was $4.4 million or $0.10 per diluted share as compared to a net loss of $22.4 million or $0.65 per diluted share in the fourth quarter of 2013.

This year-over-year improvement in net income is driven primarily by increased revenue associated with higher sales volumes from Trokendi XR and Oxtellar XR.

Excluding change in fair value of derivative liabilities and loss on extinguishment of debt non-GAAP net income for the fourth quarter of 2014 was $3.7 million compared to a non-GAAP net loss for the fourth quarter of 2013 of $13.4 million.

For full year 2014 net income was $19.9 million or $0.32 per diluted share as compared to a net loss of $92.3 million or $2.90 per diluted share in full year 2013.

Excluding the $30 million in revenue from royalty agreements in 2014, changes in fair value of derivative liabilities and loss on extinguishment of debt, the non-GAAP net loss for full year 2014 is $10.3 million compared to the non-GAAP net loss for full year 2013 of $69.4 million.

This year-over-year improvement is driven primarily by increase revenue associated with higher sales volumes from Trokendi XR and Oxtellar XR, partially offset by higher expenses as I described earlier.

So approximately 43.2 million weighted average common shares were outstanding in the fourth quarter 2014 as compared to 34.6 million in fourth quarter 2013. For full year 2014 approximately 50.6 million weighted average common shares were outstanding as compared to 31.8 million shares for 2013.

As of December 31, 2014 we had $94.2 million in cash, cash equivalents, marketable securities and long-term marketable securities. This amount significantly exceeds our guidance for the year of $85 million and is $3 million higher than the balance of $90.9 million as of December 31, 2013.

For the first time the company was cash flow positive from continuing operations with positive cash flow of $6 million during the fourth quarter of 2014. Excluding the impact of $30 million royalty monetization payment received in the third quarter cash burn for full year 2014 was approximately $27 million.

Including the impact of the $30 million royalty monetization payment cash inflow for full year 2014 was approximately $3 million. As of December 31, 2014 approximately $36.1 million or 40% of our six year $90 million convertible notes remained outstanding. As of March 4, 2015 approximately $31 million of convertible notes remained outstanding.

For full year 2015 we estimate that product revenue will grow by approximately 50% ranging from a $130 million to a $140 million. As a clarification last night’s press release indicated total revenue will grow by 50%, which should have stated total product revenue will grow by 50%.

Operating income is forecast range from $6 million to $10 million driven by continued growth in product sales from both Trokendi XR and Oxtellar XR, partially offset by growth in research and development expenses as our pipeline products move into late stage clinical trials. I would now turn the call to the operator for questions. .

Thank you. [Operator Instructions]. Our first question comes from the line of Ken Cacciatore of Cowen & Company. Your line is now open. .

Good morning guys. Thank you very much.

Just a question, with the really good performance here in getting these products established, I know Jack that you wanted the sales force focused, but can you talk about potential business development, now that you’ve kind of seem to have inflected and garnered critical mass? And second question is around 810, can you just describe that molecule in a little bit more detail and the indication that you’re going for, help us nuance maybe what the opportunity is as you describe it? Thank you.

.

Yes, sure. Yes, starting with the business development activities, clearly that now we feel very good and very strong about Oxtellar XR, Trokendi XR. They’re well established. We continue to grow them.

They are still and I would emphasis, they are still in the early stage of growth obviously and that gives us certainly in 2015 much more room for us to really emphasize business development and the activities there.

We have been active, as I said for many times, that we have been active even over the last couple of years in business development activities.

But certainly from a timing point of view we see 2015 as a much more appropriate time for us to execute something, that will be a strategic fit and that really fits very well with the large footprint that we have in the neurology space. As far as 810 this was truly an innovative program that we are pioneering in this field.

As most of you may know impulsive aggression is a disease that is very prevalent across many, many areas. It is prevalent in ADHD and autism, bipolar, schizophrenia and dementia.

And our estimate at this point even if we look only at ADHD autism and bipolar, we believe the market opportunity is north of $3 billion and this is an area where there are no approved products today for that condition, although it's a very well recognized condition and clearly as the FDA recognized last year in giving us the fast track designation because it's a critical unmet need for which there are no products that are well developed specifically for that condition and approved for that condition.

So we believe this is a huge, huge opportunity for Supernus. We are very proud to be on the cutting edge here as far as clinical development.

We are developing a whole new scale and we, as I mentioned in our remarks we have developed that scale and we have validated the scale and we are sharing that with the FDA in the next few months before we start the Phase 3 study. This is a truly an innovative clinical program.

The molecule itself it is very, very old anti-psychotic, it’s dopamine serotonin antagonist and it really works very, very well in treating aggression.

And the data that we have seen in the Phase 2a as well as the Phase 2b studies earlier in the last few years shows a very strong signal that this drug we believe should work very, very well in these stations.

And that's why we will be doing the Investor Day actually in June 17 to get into more details about this unique and very innovative program 810, as well 812 and we will also try to give you an assessment of the market opportunity for both products also. .

Great. Thanks guys. .

Thank you. [Operator Instructions]. Our next question comes from Annabel Samimy of Stifel. Your line is now open. .

Hi. Thanks for taking my question, and congratulations on a good quarter.

Just along the lines of business development, can you talk about your capacity? You have about $94 million but with the EBITDA, what kind of EBITDA that you have for 2015 and what kind of size are you thinking about in terms of business development and with the programs that are moving quite rapidly into Phase 3 and potentially as extensive as they are, are you ready for some transformative deals, or is it just going to be product selection or accretive assets? Thanks..

Yes, I'll take the second part of the question, I'll let Greg answer the first part.

As far as the kind of products or companies or transactions that we are looking for, let me try to clarify that from a priority point of view as far as our priorities typically the first we are looking at a product that would sit very nicely within the footprint that we have from a sales force perspective of the commercial team and the organization that we put in place.

So our priority would be things in the neurology and/or adjacent areas, whether psychiatry to really fit within the sales force that we have. Second priority will be something that could be a pipeline product but is actually more advanced than 810 or 812.

There is clearly no sense for us to go after opportunities that bring us Phase 2 program or a Phase 1 program. So if we are focused on bringing a pipeline product that will be something that could potentially be ahead of 810 from a timing perspective and ahead of 812.

And then finally if there was a company type of transaction that can be more transformative, clearly we're very open to that as well that could really change Supernus and bring it to a much higher level in a much quicker timeframe than if we were doing it as we've been doing it boot strapping it from the beginning.

Regarding the capacity of doing deals, clearly we do have more capacity in doing product deals, obviously and depending on the size of the deal and as the transactions get bigger in size and so forth, we have capacity from a leverage debt and so forth and I'll let Greg speak a little bit more specific about numbers. .

Right. I am going to use the same framework that Jack articulated because I think it's a very useful one and underscore -- we look at any and everything. I think in terms of financing capacity that's probably the last barrier that we worry about.

So kind of following along Jack’s structure if it is a product that we would drop into our sales force, those tend to have or can have very minimal upfront payments and they tend to be more of a pay as you go kind of opportunity. So most of the economics would be wound around royalties, ongoing cost sharing agreements and the like.

And that clearly we can fold into our existing P&L and balance sheet structure. If it is a pipeline product, that too we believe that we have got with the growing income stream over the next several years ability to self-fund that. With a balance sheet of almost a $100 million we clearly have cash on balance sheet.

So we believe that would not require any extra extraneous financing to be undertaken and finally if it is a transformative deal and a deal with another company, I think there is that’s clearly moving into the equity at the outsized, very large transaction.

If it is small transaction more where Supernus would be the larger of the two merged companies, then as Jack suggested we could do something around restructuring our existing convert deal and probably expand -- then go back to the market with an expanded convert deal to raise additional capital that was necessary..

Okay.

Is there any leverage ratio that you are thinking in terms of targeting or the max leverage ratio that you have?.

Yeah, I think the leverage ratio probably something in 20% to 30% ultimately would make sense.

We are sensitive in the next couple of years as we are continuing to ramp up our commercial products and grow our income streams, that we do find ourselves overly encumbered with leverage because just the servicing requirement to that can create a bit of headwind both from the cash flow and P&L standpoint.

But I would say ultimately something in kind of 20% to 30%, 30% kind of be an outside number would make sense for us..

Okay. And if I could ask you on your guidance, if I look at the assumptions that you draw there, I end up with vastly differently operating income then the $6 million to $10 million that you pointed to. So that must mean that there is some change in the SG&A line that would be the only variable.

So maybe you can help us understand what the trajectory of SG&A should be going forward.

Do you have any unusual expenses for the year, any plans on expanding the sales force or increasing anything over there?.

Actually the other line to pick on would be the R&D line. That’s the one where the expenses will significant grow. I am going to put a plug in for our Investor Day at June 17th that we, as Jack mentioned, plan on laying out not only the clinical programs but also the spending requirements for these programs and the market opportunity for our programs.

But I would say that as Jack and I have said on numerous occasions that in bringing both of these products to market will probably require something in the range of, broad range of number $70 million to a $100 million for each of these product opportunities.

And so if you keep in mind that probably will be a four year development cycle and aggregate that spending that, just simple math would suggest that R&D needs to move up substantially from where it has been over the past couple of years. 2014 was just a little bit below $20 million. 2015 is probably a 50% or more year-over-year increase.

So that that’s clearly going to absorb and everything else being equal we will drop far more income to the bottom line but R&D spending is clearly going to absorb a lot of that income capacity. .

And to your question, Annabel on the sales force, we have no plans to expand or anything there. I would just remind everyone that there will be an annualization effect in 2015 versus 2014 for the expansion of the sales force.

So whatever the numbers are in 2014 they will be higher in 2015 just because when we brought in the extra 50 or 60 reps half way through 2014 you got to annualize that extra cost and so you are going to see a bump clearly in 2015 of that cost but that’s not due to the expansion for -- that’s not due to any further expansion..

Right and that affects both sales and market expenses, so it’s probably in the range of $4 million to $5 million year-over-year increase versus where we were in 2014..

Okay. And if I can ask one more question on Trokendi XR, has the thought of expanding into the migraine area become any kind of priority for you? I know in the past you've sort of commented that neurologists appreciate your focus on epilepsy. But do you have any plans expanding into migraine, at any point? Thanks..

It is always something we look at certainly and if you don't mind I will just reserve making any comments for competitive reasons. .

Okay, great thank you. .

Thank you. We have time for one more question from the line of David Amsellem of Piper Jaffray. Your line is now open. .

Thanks a just a few so. First can you just give us a refresher on where things stands on the litigations with the generics on both the Oxtellar and Trokendi and maybe if you can talk about how confident you are, you can get those cases settled, so that's number one. Number two is on the molindone opportunity.

Can you talk about how do you thinking about it commercially in terms of the extent to which you need to expand the sales force, how many reps you need to support it? How are you thinking about the physician call audience bearing in mind that this is somewhat of a market that you are going to be developing? So how should we think about that going forward and with the pipeline in general, this is my last question, are you contemplating any partnerships out licensings of either the asset in late stage development either for the U.S.

or even ex-U.S.? Thanks. .

Yes, sure. Regarding the first question, David on the IP and the litigation, I mean that's moving forward on both products. Oxtellar XR is clearly ahead from a process point of view versus Trokendi XR.

And on that one we are always and have been always confident about our IP and the strength and we continue to add more patents to our portfolio to protect both products. So we're very confident as far as the outcome or potential outcome of these courts [ph]. Clearly we can give people the certainty, 100% certainty of the outcome.

But we continue to be very bullish about how the case is proceeding and so forth. As far as settlement itself we keep all options open. So we are open to all kind of options in these kinds of situations if they make sense obviously. So the answer is yes, all these options are on the table to do the right thing for us.

The key thing I always like to remind people of is that our patents go all the way out to 2027, 2029 in certain cases. So these are not the cases where we are faced with expirations on patents in 2020 or 2019. And that certainly helps us and also the strength of the patents themselves are pretty good.

And I've also mentioned and not that, that will have any implication on Oxtellar XR and Trokendi XR that we do have a very strong track record in navigating through these issues defending these kind of cases and actually in the fall of last year for the first time ever a pharmaceutical company actually won IPR challenges in our industry and the win was on three patents with three challenges.

And that pharmaceutical company is Supernus. So we tend to be very good in this space, we know this space very well, we worked very, very hard in this area. We have a great track record in it.

Again one success in one area doesn’t guarantee success in another product, because technologies differ, the patents differ, but it’s just another example to show you our expertise on this space and hopefully giving people more confidence and comfort that we will come out all right on both products in these cases.

As far as the commercial strategy for SPN-810, clearly SPN-810 and 812, first of all they are very synergistic, both of them together and that was by design, even way back in 2005 and '06 when we were building the pipeline.

So clearly it's the psychiatry space and having started the program in 810 in the ADHD space that gives us a tremendous synergy between 812 and A10. And to have an optimum sales force that to give you a good coverage it will certainly be bigger than the current sales force that we have in the neurology space.

So it will probably in the 200 to 300, and it's a little bit of a shot in the dark at this point, but just to give you a range of what that sales force could look like.

Clearly at that time, when we are launching these kinds of products we will also look at what our current sales force is at that time and the synergy between the two or overlap, potential overlap between the two maybe in the pediatric space.

But when you look at the ADHD space and we have done it before many, many years ago and for several years at Shire, I mean we know somewhere in the 200 to 300 sales reps should be adequate for 810 and 812 together.

And then I think the last question you had was on the pipeline in general and partnerships; overall on partnerships we have been in discussions and we are always open to discussions on partnerships on all our products, not just the pipeline but also Oxtellar XR and Trokendi XR outside the U.S. So those partnerships we are open on all our products.

In the U.S., we certainly are open also and have had discussions before on partnerships for co-development, co-marketing in the psychiatry area, so that’s certainly is something we look at as well..

Hey, that’s helpful. Thank you..

Thank you. And I would like to turn the call back over to Jack for any closing remarks..

Thank you. We are proud of the remarkable achievements in 2014 and the progress we made since going public in 2012 and since launching two products in 2013. We substantially exceeded our revenue and cash flow guidance for 2014 and achieved for the first time as a public company, profitability.

We view 2015 as a new chapter for Supernus, given that we have achieved profitability and have built a significant cash position. We now have entered our second phase in building the company to be a leading specialty CNS company.

Our strategy in building Supernus has always been to first establish a strong position in CNS with Oxtellar XR and Trokendi XR and then generate significant future cash flows from their success in the market.

Such cash flow will now allow us to develop our innovative high value pipeline products and facilitate the execution of potential strategic business development transactions. Thanks for joining us today. We look forward to another strong year in 2015 and to updating you during our next earnings call and Investor Day on June 17. Thank you..

Thank you. Ladies and gentlemen this does conclude today’s program. You may disconnect. Have a great day everyone..