Neurocrine Biosciences Inc

NASDAQ:NBIX

Earnings Call Transcript 2022-Q1

[Operator]

Good day, everyone, and welcome to today's Neurocrine Biosciences Reports First Quarter Results. [Operator Instructions].

It is now my pleasure to turn today's program over to Todd Tushla, VP of Investor Relations.

[Todd Tushla, VP, IR]

Thank you, operator. Good morning, everyone, and thanks for joining our first quarter 2022 earnings call. With me as usual are Kevin Gorman, our Chief Executive Officer; Matt Abernethy, our Chief Financial Officer; Amy Roberts, our Chief Medical Officer; Eric Benevich, our Chief Commercial Officer; and Kyle Gano, our Chief Business Development and Strategy Officer.

Before we get going, I'll remind everyone that during today's call, we will be making forward-looking statements. These statements are subject to certain risks and uncertainties, and our actual results may differ materially. I encourage you to review the risk factors discussed in our latest SEC filings. After our prepared remarks, we'll be happy to address your questions. Now I'll hand the call over to Kevin Gorman.

[Kevin Gorman, CEO & Director]

Thank you, Todd. Good morning, everyone. I'm sure you saw our press release this morning, and I have to say I'm very pleased with the work of our entire commercial and medical organizations in educating health care professionals on TD resulted in a record number of TD sufferers being treated with INGREZZA last quarter.

Now while the external environment has improved, it is not back to normal, and there are still challenges. However, I believe we are adapting well to the remote delivery of health care, which we know will persist at some level moving forward. So we have now seen our fourth consecutive quarter of sequential growth.

We're not only making progress on our commercial business. As you may recall, at the beginning of the year, we updated you on the portfolio of clinical programs that we have started, what we are anticipating starting this year and the data readouts. It was very aggressive. I'm pleased that we remain on track for most of these programs, importantly, including filing the sNDA for INGREZZA in Huntington's disease and our 2 data readouts in essential tremor and CSWS.

Now as I will share with you, there are 2 programs that have been impacted by the invasion of Ukraine, and we are currently mitigating the impact of the loss of those potential clinical sites. But aside from that, we have handled this growing and complex pipeline extremely well, and I'm looking forward to sharing data with you later this year.

With that, I'd like to hand it over to Matt.

[Matthew Abernethy, CFO]

Good morning. As you saw in our earnings release, we delivered strong Q1 performance with INGREZZA sales totaling $303 million in what is typically the most challenging quarter of the year. Our team did a very nice job managing through the Q1 payer-related seasonal dynamics and also rectifying the Q4 pharmacy distribution challenges we experienced. These 2 items ultimately benefited our refill rate for patients as compared to the previous first quarters.

In addition, we exited Q1 with a record number of new patients, reflecting an improving external environment and benefits from our commercial initiatives.

As you think about Q2, we do expect sequential growth. However, the dollar growth will likely not be as strong as prior years given the benefit we saw in Q1 from our team's improvement in managing through the seasonal dynamics.

On the financial front, we continue to have plenty of flexibility with a strong balance sheet and attractive P&L profile to continue to invest in INGREZZA and advance our pipeline.

With that, I'll now hand the call over to Eric Benevich, our Chief Commercial Officer. Eric?

[Eric Benevich, Chief Commercial Officer]

Thanks, Matt. I'm pleased to provide an update for everyone regarding our Q1 commercial progress. With our INGREZZA franchise, Q1 has always been a tale of 2 half quarters, with the first half of the quarter impacted by seasonal payer dynamics largely related to the prescription reauthorization process. The second half of Q1 is when we usually see an uptick in new patient starts. But with more than 30% year-over-year growth in Q1 this year, what were the drivers of our growth?

Despite the surge in the Omicron variant early in Q1, we did see a general improvement in the external environment translating into improved HCP access in favorable conditions to mitigate the typical Q1 payer dynamics. We knew the key to a successful Q1 was to focus on execution, and our field teams did a phenomenal job delivering not only on strong rates of compliance but also record levels of new patients. These results were accomplished while we recruited, trained and onboarded in the incremental 140 sales representatives to complete our sales force expansion at the end of the quarter. We expect to see the benefit of the expanded sales force as we get into the back half of the year.

As it relates to the second quarter, as Matt mentioned, given our strong performance in Q1, we do expect to see continued growth in Q2 over Q1, but at a slightly lower percentage increase compared to prior years given the stronger-than-expected growth in Q1. This past Sunday was the 5-year anniversary of the launch of INGREZZA. You expected us to achieve the level of success we've had given the effort required related to diagnosis and treatment of tardive dyskinesia.

From a regulatory perspective, INGREZZA was designated a breakthrough medicine by the FDA. It's also been a breakthrough in the sense of completely changing the paradigm of TD treatment. While as once an untreatable condition is now viewed as treatable, but was once a stigmatizing condition and is now becoming more mainstream. What was once a dramatically underdiagnosed condition is now more systematically being diagnosed and managed. We worked hard to change the historical paradigm and our results speak for themselves. However, our work remains largely unfinished with approximately 85% of the estimated 600,000 people living with TD either still in diagnosed or not being treated with a VMAT2 inhibitor like INGREZZA. So we've made significant commercial investments to accelerate the diagnosis and treatment of TD, not just this year, but for years to come.

The expansion of our field sales team and continuation of our direct-to-consumer campaign give evidence to our conviction to help many more TD patients.

Lastly, I'd like to share that the month of May has been designated as mental health awareness month. This week, in particular, is recognized as Tardive Dyskinesia Awareness week, or TDA for short. 5 years ago, most people living with mental health conditions were unaware that TD existed. Today, TDA is now officially recognized across the entire United States. We've made great progress raising awareness in the mental health community. I'm odd by what our team has been able to achieve in these past 5 years, and I'm humbled by the scope of what we aim to accomplish in the years ahead as we improve the lives of the many thousands of patients still suffering from TD.

So with that, I'll turn the call over to my colleague, Eiry Roberts, our Chief Medical Officer.

[Eiry Roberts, Chief Medical Officer]

Thank you, Eric, and good morning to everyone. I'm happy to provide a brief update regarding a selection of our clinical programs, beginning with valbenazine. In March, we received very good news from our partner, the Mitsubishi Tanabe Pharma Corporation, regarding the regulatory approval of valbenazine in Japan for the treatment of tardive dyskinesia. We were very impressed with the data that was generated from the KINECT Phase III study, and we look forward to supporting our Japanese partner as they proceed with launch plans for DYSVAL, the Japanese brand name of valbenazine.

Turning to valbenazine for the treatment of chorea in Huntington's disease. In collaboration with the Huntington's Disease Study Group, we were pleased to present additional safety and efficacy data at the American Academy of Neurology meeting earlier this month. You'll recall in the KINECT-HD study that valbenazine met the primary endpoint of significant improvement in severity versus placebo, as measured by the Unified Huntington's Disease Rating Scale, Total Maximal Chorea Score, with improvement beginning as early as week 2 of treatment.

In addition, the percentage of study participants with clinician or self-rated global improvement was significantly higher at 12 weeks with valbenazine treatment than with placebo. Importantly, also the safety profile was consistent with valbenazine known safety profile in TD with no suicidal behavior or ideation.

We remain on track to submit the supplemental NDA to the FDA in the second half of this year. I'd be remised if I did not mention the humanitarian crisis occurring in Ukraine. Our thoughts are always everyone tragically impacted by the current situation in Ukraine, including our contract research organization and clinical research partners in the region.

Like many in our industry, several of our recently initiated clinical program in psychiatry and neurology intended to involve sites located in Ukraine and Russia. While we've pivoted contingency plans across our portfolio, the war has already impacted the time line for the Phase III study for valbenazine and dyskinesia related to cerebral palsy, and the initiation timing for the second Phase III study of valbenazine for the adjunctive treatment of schizophrenia.

We now expect to have top line data for the treatment of dyskinesia due to cerebral palsy in 2024, while for top line data for the first Phase III study of valbenazine for the adjunctive treatment of schizophrenia remains on track for 2023. Initiation of the second Phase III study, however, has been delayed to 2023. All other clinical programs remain on track at this time.

Turning to NBI-104, our selective T-type calcium channel antagonists in dossier. Midyear, we will readout the data from our Phase II proof-of-concept study in essential tremor. Then in the second half of 2022, we'll complete our ongoing trial in epilepsy with continuous spike in wave during fleet. Based on the review of the totality of data generated for NBI-104, we will then determine potential next steps for 104 in each of these indications.

In closing, I'm very pleased with the progress of our clinical pipeline. I want to thank the teams working on each of these programs for their hard work and dedication. With that, I'll hand back to Kevin. Kevin?

[Kevin Gorman, CEO & Director]

Thanks, Eiry. Operator, we are now ready for questions.

[Operator]

[Operator Instructions]. We'll take our first question from Paul Matteis with Stifel.

[Paul Matteis, Stifel, Nicolaus & Company]

Congrats on the quarter. As it relates to your improvement with compliance this quarter, right, I was wondering if you could just add a little bit of context around that. So I think historically, you've said something like a 7% to 8% headwind can happen in 1Q with refill delays. What does this look like relative to prior years? And then maybe can you just comment a little bit on your expectations for gross to net this year and if there's going to be any increased impact of contracting?

[Matthew Abernethy, CFO]

Paul, for the gross to net side of the equation, we've guided that the first quarter should be around $5,300 per script and then for the full year, around $5,400 per TRx. And that implies around a 2% headwind in the first quarter. As it relates to the seasonal dynamics, not going to get into the specifics here, but we did see, I guess, less of a decline moving from refill rate per patient from Q4 to Q1. And that was a good thing. It was a good thing we were able to manage through the reauthorization process much more effectively, I think, between experience and improving environment from an access perspective that afforded us to be able to do that.

So historically, you've seen that recovery from Q1 to Q2, that added a very nice bump. And what we're saying is we do expect to grow sequentially into Q2, but it might not be as a high a clip as what you've seen historically. Anything to add, Eric?

[Operator]

We will take our next question from Neena Bitritto-Garg with Citi.

[Neena Bitritto-Garg, Citigroup]

I was just wondering, first, if you could comment on whether there was any impact from inventory during the quarter. And then also just thinking about the guidance, the reiterated guidance, maybe if you could talk a little bit about what you would have needed to see, I guess, in the first quarter to kind of feel comfortable raising the guidance just given the strength the gross number this quarter?

[Matthew Abernethy, CFO]

Yes. So we're really encouraged by what we saw in the first quarter, record number mutations, environment improving. But we're really owing through the first quarter. And we've just launched our expanded sales force. So we felt it prudent to simply reiterate guidance at this point. As it relates to inventory, no real comment this quarter. We have gotten into a place where we don't have as many significant swings in inventory. And so nothing to flag right now. A clean quarter from that regard.

[Operator]

We will take our next question from Tazeen Ahmad with Bank of America. .

[Tazeen Ahmad, Bank of America Merrill Lynch]

Can you give us a little bit of color on how the split is looking these days between psychiatrists and neurologists in terms of scripts. I know you've had a focus on increasing penetration in the neurologist community. Just wondering how that's going? And if you could give us a sense of where you think you'll be by the end of the year in terms of penetration with new neurologists versus adding patients to the group of psychiatrists who are already using INGREZZA?

[Eric Benevich, Chief Commercial Officer]

Tazeen, so historically, it's really been pretty consistent over the last few years. The split of our business between neurology and psychiatry has been about 80-ish percent in psychiatry and about 20% in neurology. Certainly, in looking at the development of the TD market, we felt that there was opportunity to better penetrate the neurology segment, and that was an important consideration in our decision to expand and reorganize the sales team.

We just deployed our new standalone neurology group. And obviously, we've hired people with considerable experience and relationships in neurology, but that team is just hitting the ground, so to speak. And so I think we'll have a better sense of how it's going with further developing the neurology segment of our business as we get into the second half of the year.

But I should also comment that an important group for us across both psychiatry and neurology is advanced practice providers. As part of the rationale for expanding our field sales organization is to do a better job of reaching and educating nurse practitioners and physician assistants in both neurology and psychiatry.

[Tazeen Ahmad, Bank of America Merrill Lynch]

Okay. Maybe just a quick follow-up. This year was the first year that you provided sales guidance for the year. Some companies have gone as much as to provide their thoughts on what they think peak sales could be for products. Do you at Neurocrine have a sense of where you think INGREZZA sales could peak longer term?

[Matthew Abernethy, CFO]

Tazeen, we're not prepared to talk about peak sales haven't been and probably won't be.

[Operator]

We will take our next question from Josh Schimmer with Evercore.

[Joshua Schimmer, Evercore ISI]

First, SG&A seems to be annualizing much higher than the guidance for the onetime charges in the quarter to note. And then ONGENTYS doesn't seem like it's doing particularly well commercially. What do you think is going on that's limiting uptake? What are your plans to minimize losses from this product and then to avoid launching other products in the future that don't achieve commercial success.

[Matthew Abernethy, CFO]

Josh, it's Matt. In regards to the SG&A spending, really 2 dynamics that occurred during the quarter. The first is the seasonal spending. If you look back over time, there is -- has historically been a step-up from Q4 to Q1, that are Q1 specific investments that we make. So you would expect that might pull back a bit as we head into the second quarter.

And then in addition to that, we did invest in our sales force. Most of them were on board for the quarter going through training and were recently pushed out into the field at the beginning of April. So within our guidance range that we provided today, we're confident that's the right level of spending.

As it relates to ONGENTYS, as Eric mentioned previously, we have an expanded sales force at this point with a higher focus on neurology. We're going to continue to focus on calls to neurologists for both TD and then also Parkinson's disease. And it is something that we're looking at, Josh, and ensuring that if we are making the investment in ONGENTYS that it does drive the right kind of returns. And I think it is straightforward, the sales are a bit lower than what any of us would have expected at this point. But we do hear positive feedback as the benefit that is providing to patients. So it's something that we're spending a significant amount of time looking at and talking through.

[Kevin Gorman, CEO & Director]

Yes. If I could just tack on to that. ONGENTYS is a really good product, but the Andy Parkinson's category is challenging from a payer access perspective. Frankly, the way that health plans manage any Parkinson's drugs is to really limit access to branded medicines across the board. And so ONGENTYS will continue in 2022 to be primarily approved in the prescription process through formulary exceptions. And the feedback that we get from prescribers is very positive. And so we're going to continue to press forward with our new neurology team driving initial trial and adoption of this medicine. We feel like it provides an important benefit for Parkinson's patients, and we're committed to moving to sort of neurologists.

[Operator]

We will take our next question from Anupam Rama with JPMorgan.

[Anupam Rama, JPMorgan Chase & Co.]

Maybe a quick pipeline question for me. Just thinking about the midyear readout in essential tremor, Phase II, how are you thinking about that data set? And what would you describe as sort of a win scenario there?

[Eiry Roberts, Chief Medical Officer]

Thanks, Anupam. So we are on track to read out the data from our proof-of-concept signal-seeking Phase II study in essential tremor with the antagonist target midyear. The primary impact of that study is the crossover study, single center, well-controlled program in 28 patients. And the primary endpoint is an accelerometer measured quantitative endpoint of maximal change from baseline. So we'll obviously be interested in that as evidence of pharmacological activity of the drug in this important disease state.

In addition to that, we do have the more traditional TETRAS clinical endpoints in that study as well, and we'll be able to compare the tremor measures across placebo and active treatment for each patient against those endpoints in addition. So then we'll look at the totality of those data to understand what signal we're seeing and using that we'll go forward to regulators if we have a positive outcome to understand next steps for registration program.

[Operator]

We will take our next question from Carter Gould with Barclays.

[Carter Gould, Barclays Bank]

I'm going to ask a follow-up to Anupam's question there. Just as we think about that 104 data coming out, can you talk about then the sort of the urgency to move forward given relative -- you're somewhat behind your peers. Should we be thinking that you'll wait for the CSWS data before then engaging with regulators or once you have sort of the data, you can kind of move forward on its own and not wait for those data.

[Eiry Roberts, Chief Medical Officer]

I think we're looking at these programs independently. They're both very important potential indications for this medication. And obviously, we'll learn from one study to the other, particularly in terms of tolerability and different patient sets. But we will be looking at these independently and moving forward. .

[Operator]

We will take our next question from Phil Nadeau with Cowen and Company.

[Philip Nadeau, Cowen and Company]

Pack on INGREZZA's commercial success, we're curious to understand where the psychiatry field is today in terms of in-person visits? What's the lay statistics on the proportion of visits that are in-person? What Serco's thoughts on when the reimbursement could change to make in-person better compensated than virtual visits? And last, how levered is INGREZZA's performance to in-person visits? Would you expect an acceleration in INGREZZA growth once more person? Or do you think that the virtual commercial efforts that you're doing has really made it less relevant, whether patients are seeing their physicians in-person or virtually?

[Eric Benevich, Chief Commercial Officer]

Phil, so the latest data that we've seen is that telemedicine still constitutes about half of all visits in psychiatry. And its -- telemedicine is utilized at a lower rate than other physician specialties. It's less than 10% of paid visits in neurology, for example. So psychiatry still stands out as an outlier in terms of the use of telemedicine.

In terms of how that's going to change over time? Certainly, as long as the public health emergency declaration is still in place, the temporary waivers that were issued by CMS remain in place, including parity of reimbursement for a virtual visit versus an in-person visit.

In the market research that we've done with physicians and psychiatrists in particular, their expectation is that in the future, they will utilize telemedicine at a lower rate, probably more like in the 20% to 30% range. But that's after there's changes to reimbursement and some of the temporary waivers have been removed.

So from a business perspective, we continue to operate as if the status quo is going to continue out into at least 2023. And certainly, a lot of the work that we've done to adapt our business model to our ECP customers changes in terms of how they're delivering health care have paid dividends. And certainly, I think that that's reflected in, for example, the strong Q1 that we just experienced. So any changes to telemedicine in the future or any reduction in telemedicine and increase in in-person visits is really just upside from our perspective.

[Kevin Gorman, CEO & Director]

And Phil, the only thing I would add to that is, as Eric said earlier, our enhanced focus on advanced practice professionals, they utilize line far less than psychiatrists to, they're really the front lines delivering psychiatric care. And so that gives us more in-person contact with health care professionals than if we just focused on the psychiatrists.

[Operator]

We will take our next question from Brian Skorney with Baird.

[Brian Skorney, Robert W. Baird & Co.]

I know it's been a while, but we're finally seeing Conestofon's Phase III program coming on the horizon next year. Assuming excess, I'm just wondering how you're thinking about commercializing? It seems over the years, you've come to focus more on the neuro side of things, but less on the print side of things. Is this an area that you would want to build out a separate sales force? Or are you thinking about evaluating strategic partnerships or a full sale? Just trying to think ahead to next year of success, what the build-out should look like.

[Kevin Gorman, CEO & Director]

Thanks, Brian. I think our plan is still, as we've said all along, we would plan on commercializing crinecerfont ourselves. And in addition to that, that's not just in North America. We have -- we look forward with crinecerfont to be able to internationalize, and it could be one of several drugs that we find that Europe would be an ideal location for us to begin to put down a commercial footprint. So we do not plan on looking for a partner either in North America or in Europe.

[Brian Skorney, Robert W. Baird & Co.]

Is there any way you could kind of give some qualitative description on -- or you've been quantitative on what kind of the build-out to launch crinecerfont would look like?

[Matthew Abernethy, CFO]

Brian, we'll, of course, get into more detail around that as we get closer to potential launch. But the footprint isn't too large. You think about how these patients are cared for in a very concentrated way by either pediatric endocrinologists or of the adult endocrinologists. So the sales infrastructure to be added to commercialize this isn't too significant and something that's well within our wheelhouse and capabilities.

[Operator]

We will take our next question from Brian Abrahams with RBC Capital Markets.

[Unidentified Analyst]

This is Steve on for Brian. Congrats on the progress. For INGREZZA and Huntington's chorea, curious if we could get a little more on how clinicians reacted to the full data presented recently? And maybe your view on what type of patients will see the strongest uptake early on.

[Eiry Roberts, Chief Medical Officer]

Yes, I can start on that, Brian. So we were able to present the -- more of the data from our Phase III KINECT-HD trial at the AAN just recently. And I think in general, the response was very favorable as it has been from the investigative group and even the community to the data that we were able to share. As you remember, we saw a highly statistically significant improvement in the Total Maximal Chorea score, week 10 to 12 compared to baseline in individuals with HD, together with improvements in the clinician's global assessment and feature global assessment of severity.

And so from that perspective, and in particular as well, the tolerability and safety profile was very consistent with what we've already seen for INGREZZA in tardive dyskinesia with no indication of suicidality. And so I think we were very impressed by that profile. We continue to be on track with the long-term safety data generation from the 6 months data that's required for the submission later this year, and we'll be moving forward with that.

[Operator]

We will take our next question from Jay Olson with Oppenheimer.

[Jay Olson, Oppenheimer]

Congrats on the quarter. Since Neurocrine has a strong cash position on the balance sheet and a solid track record of business development, can you talk about what types of deals and therapeutic approaches you're most interested in these days?

[Kyle Gano, Chief Business Development and Strategy Officer]

Thanks, Jay. This is Kyle. Obviously, what you've seen over time is kind of a 3-pronged strategy in how we allocate capital over time. It's number one, focusing on INGREZZA and building out indications there with the lead in tardive dyskinesia. It's supporting the pipeline and then the business development. On the BD side of things, you've seen a range of collaborations that we struck over the years. And I think what you see is that the strategy lies at the intersection of looking for novel medicines in development that treat or address conditions of unmet medical need and then looking at partners that offer technology and expertise programs that complement our own.

I think largely, we'll continue down that line in that strategy as we move forward. and where we can find programs that range from early to late stage. These are all things that we can consider as time goes along. Matt, do you have anything to add to that?

[Matthew Abernethy, CFO]

No. I think we have a lot of flexibility to your point, Jay, and we're going to continue to operate our business focused on INGREZZA and changing our pipeline, but open to things to in-license or potentially acquire.

[Operator]

We'll take our next question from Danielle Brill with Raymond James.

[Unidentified Analyst]

This is Alex on for Danielle. Just had a curiosity. What do you think is the key driver for new patient starts, increased foot traffic, the sales force that direct-to-consumer campaign? And on the foot traffic angle, we're curious whether you are seeing any sort of inhibition based on some of these BA 0.123 variants?

[Eric Benevich, Chief Commercial Officer]

Yes. I think that the answer is all of the above in terms of what's driving new patient starts. Certainly, the overarching theme for our launch these past 5 years has been to increase awareness and drive diagnosis of TD, and through educating HCPs and then more recently through the efforts that we've had with the patient and care partner population as evidenced by the success of our DTC campaign.

So whether it's the HCP, the psychiatrist, the nurse practitioner being more diligent in having an awareness and proactive screening approach for TD, whether it's the patient bringing these symptoms up during their visit. And our goal is to make sure that TD gets diagnosed and treatment gets offered.

And certainly, as the COVID environment improves and there's more face-to-face interactions between the providers and the patients, that also helps. And so all of these things, we think, are positive drivers for growth of the franchise.

And with regards to the most recent variants, certainly, you see regionally some changes in terms of reported rates. What we're not seeing as much now is changes in terms of how we're dealing with COVID societally. There's not as much likelihood for closures and things like that. So overall, I'm pleased with the progress that we're seeing in the market.

[Operator]

We will take our next question from Myles Minter with William Blair.

[Myles Minter, William Blair & Company]

Congrats on the quarter. Just on 568, the M4 agonist, that's moving into Phase II this year. Are you also planning to do any cardiac safety monitoring studies either before or alongside that study, just given the debate there is in the field with the cholinergic mechanism?

[Eiry Roberts, Chief Medical Officer]

So we are moving forward and we're on track with our plan to commence Phase II study in schizophrenia for our selective M4 agonist later this year. And I think we will be including all appropriate safety and efficacy measures in that study in acute treatment of schizophrenia. I think once we release the full protocol in the context of concotrals.gov, obviously, you'll be able to see exactly how we are measuring some of those cardiovascular and other safety measures in the context of the study. .

[Operator]

We will take our next question from Chris Shibutani with Goldman Sachs.

[Chris Shibutani, Goldman Sachs Group]

I just wanted to clarify the updated what appears to be operating expense guidance. It looks as that the range for the R&D is slightly diminished, SG&A is slightly higher. You have discussed some of the push-pulls that reflected in the first quarter. But maybe if you could just help provide further color in terms of what guided those changes.

[Matthew Abernethy, CFO]

SP-9 Yes. So from an expense guidance perspective, overall expense guidance was held neutral, but then we had, like you said, Chris, an increase in SG&A, a slight decrease in R&D. And I just think that's a reflection of some of the onboarding of sites. I think we mentioned in Eiry's prepared remarks in the Ukraine, and some of the spending behind those programs was a bit delayed.

And then on the SG&A side, saw continued places for investment that would allow us to continue to market INGREZZA more effectively. So felt prudent to update the operating expense guidance for those sort of reclassifications of how we're allocating our spending.

[Operator]

We will take our next question from Charles Duncan with Cantor Fitzgerald.

[Charles Duncan, Cantor Fitzgerald & Co.]

Congrats on the commercial successes this year. I had a quick pipeline question, actually a multipart question for 104. And that is in essential tremor and CSS. I guess I'm wondering, as you contemplate moving forward with that, would the candidate actually leverage the existing neurology sales force? Or does it represent an opportunity to move into rare epilepsy? And would that result in perhaps expanding the sales force to capture that? And then can I re-compare and contrast the, call it, burden of disease in essential tremor versus CSWS?

[Matthew Abernethy, CFO]

So Chaz, this is Matt. And similar to the question on TAH, we'll provide more insight as we get closer on the commercial call points. But clearly, some of the neurologists treat patients with epilepsy, but we would have to expand the call activity if we did go into epilepsy, especially for -- on the rare side. When you look at a broader indication like focal onset, which is the second indication that we're exploring with the compound that -- I'm -- but from an epilepsy perspective, those would be what you leveraged together and it wouldn't be specific to our current call activity.

[Eiry Roberts, Chief Medical Officer]

Yes. Just to comment on the 2 different indications. Obviously, essential tremor and CSWS are very different in terms of their indication. I would make a couple of comments, though. First of all, I think from a mechanism of action perspective, there's good reason to believe that we have an opportunity potentially in each of those indications to add value to patients. The second thing I'd say is there's significant unmet need in both of those indications. For essential trend, there's obviously been no medications approved since propranolol back in the 1970s. And for CSWS, there are no medications currently approved for those individuals. And so I think we believe it is will be of exploration in both of those indications. And obviously, we're not going to have to wait too long to understand whether we have some positive signal and adequate tolerability to be able to move forward.

[Operator]

And we will take our next question from Laura Chico with Wedbush securities.

[Laura Chico, Wedbush Securities]

I just wanted to ask a follow-up with respect to ET commercial opportunity and market access. So in -- with the case of ONGENTYS, we've seen a little bit of trouble driving revenue there, and you've talked to some of the challenges. I'm just wondering if you could discuss a little bit about the ET market? And what gives you confidence that those barriers would not replicate from Parkinson's to the essential tremor opportunity?

[Eric Benevich, Chief Commercial Officer]

Yes. I'll jump in here, Laura, that -- as we're going through this program, essential tremor is the largest disorder that exists with nearly 10 million patients in the United States and a little bit more over in Europe. We're at the very beginning of this program. We did initial work that's shown for a very good commercial opportunity here. But it will be several years until we will be out in that marketplace. And so a lot is going to change between now and then. So I think anything that we would say now about any type of commercial plans to what the marketplace looks like will almost certainly be obsolete by the time that we're on the market. So as we get closer, we'll then start talking about those aspects of the program. Right now, we're solely focused on the signal-seeking study that we have ongoing that we'll report out here shortly.

[Operator]

Take our next question from Vamil Divan with Mizuho Securities.

[Vamil Divan, Mizuho Securities]

Congrats on a -- looks like a solid quarter. So maybe if I could just sort of follow up on the 104 questions from before. And I think you've spoken a lot around ET and kind of expectations. Can you maybe just frame how you're thinking about, I guess, in terms of CSWS? And what exactly are the key sort of things you'd be looking for in that Phase II data? What are the key factors to the slide whether to move forward with that program and that specific indication?

[Eiry Roberts, Chief Medical Officer]

So the Phase II study we have ongoing in CSWS right now is in 24 patients. It is a -- the thing with CSWS is that these individual patients, in addition to having significant issues with seizures, they have a characteristic signal on their EEG measure, the spike in wave measure on the EEG. And so that is the primary endpoint in this initial Phase II study, is the ability for 104 to reduce the signal that is seen on that EEG overnight in patients -- in inpatient setting when you compare baseline to primary end point. And so in addition to that, obviously, we will be looking at seizure frequency in this patient population together with, obviously, additional safety and tolerability endpoints and measures of functionality, both clinical and physician assessed. And so from that point of view, I think again, we'll be looking at the totality of the information that we see from this early Phase II study in order to determine whether we're seeing a signal of appropriate magnitude to be able to move forward.

[Operator]

We will take our next question from Marc Goodman with SVB Leerink.

[Marc Goodman, SVB Leerink]

Kyle, you were talking about business development and the strategy and stuff, but I was curious what was going on just behind the scenes with respect to just discussions with companies and with valuations down so significantly. Whether discussions have been enhanced if companies that you were talking to before that didn't have an interest because of valuation, if those have changed. Just a little more color there. And then, Matt, can you just confirm the tax rate discussion that we've had before, 5% this year, 24% next year is still confirmed.

[Kyle Gano, Chief Business Development and Strategy Officer]

So on the business development side, the questions here, I think I'd just make 2 points. One is I don't think we've had sufficient time during this downturn that we've seen for companies to fully come to terms with the current valuation. There's still a line of sight to where they were 12, 18 months ago. So we're having to deal with a little bit of that.

But other than thinking about time, being something that would be a benefit to us and seeing stock prices for companies that are diminished continue, the thing that we noticed, and I'm sure that you have as well is that quality companies with quality programs, they don't tend to be the ones that have been hit as hard in this downturn that we've seen.

So for a lot of the things that we're interested in and looking at, valuation and decreased valuation really isn't a topic of discussion. So I think that's something that we have seen over time, those things that are good quality assets tend to do well.

[Matthew Abernethy, CFO]

And on the tax rate, yes, I think from a cash tax perspective, you could expect us to be a state cash tax payer this year with a bit of cash tax on the federal side by the end of this year. You may know this, but there's a tax legislation in place that you now have to capitalize your R&D and take that as a deduction over a long period of time. And because of that, that's going to cause us to burn through NOLs more quickly than we otherwise would have. And I know this is an issue not just for us but across the industry and others.

Hopefully, it does get either delayed or pushed aside permanently because it could impact innovation. But for us, it puts us in a place where we would spend around $10 million exiting this year; and then next year, we would be a full cash taxpayer on the federal and state side of the equation. Our medium-term effective tax rate, I would just say, as we always have, around 24% to 25% is what you should expect.

[Operator]

We will take our next question from Jeff Hung with Morgan Stanley.

[Jeff Hung, Morgan Stanley]

For the INGREZZA sales team expansion, I realize it might be a bit early, but what are you seeing in the leading indicators? And typically, how much of a lag is there from the leading indicators to seeing new patient starts being generated? Is it more 2 to 3 months or more like 6 to 8 months?

[Eric Benevich, Chief Commercial Officer]

Yes. I think leading indicators from my perspective is really related to promotional activity, sales calls, peer-to-peer speaker programs, use of samples, et cetera. And the lag that we typically see in the industry, I think is relevant here for the INGREZZA brand. It's within a quarter. So the activity that we're doing now typically is going to lead to patients being identified and started on treatment in a month or 2 down the line. That's a pretty normal kind of lag time that we'd see.

[Matthew Abernethy, CFO]

Yes. So from a sales force expansion perspective, what we saw 2 years ago or 3 years ago when we did the most recent , it was 2 quarters where we started seeing some of the benefit and by the end of the third quarter, they were producing -- or performing at a similar rate. So there's a lot of leading indicators in KPIs that we're looking at to measure how much traction we're gaining, but it does take a few quarters for it to start generating incremental revenue.

[Eric Benevich, Chief Commercial Officer]

Yes. I will clarify with Matt's comments that it takes a little while for someone that's new to get the same level of traction is someone that's experienced in the market. So that's what we're focused on right now, helping our new folks to get up to the same level of productivity as the legacy team.

[Operator]

We will take our next question from Amy Fadata with.

[Unidentified Analyst]

This is asking for Amy. I was wondering if you can elaborate more on how you differentiated 104 program from the competition right now in the market. There are some other companies pursuing 2 type and ET, and they're relatively in the same -- in the race as you. So if you can add more color on that, that would be great.

[Eiry Roberts, Chief Medical Officer]

Yes. I mean I think 104 is a highly potent T-type cost channel antagonist. And CNS preferring in terms of its distribution. And so from that perspective, based on the preclinical data where we have a favorable profile to take into the clinic to assess. Obviously, we're designing the study such that we're able to look at both efficacy and tolerability in these initial Phase II studies and at that point in time, when we have more information, I think we'll have a better understanding.

[Operator]

We will take our next question from Yatin Suneja with Guggenheim.

[Yatin Suneja, Guggenheim Securities]

I have a question on the M4 program that you have. Can you maybe just talk about like how your program differentiated from other M4 agonist or the PAMS in development given a couple of them are significantly ahead? And how are you thinking of differentiating there? Is the specificity on the M4 or the potencies where you think it differentiated or is on the -- or the differentiation is around the tolerability profile? And what are the next steps there beyond the schizophrenia program that you're planning to initiate?

[Eiry Roberts, Chief Medical Officer]

So the M4 program that we have in hand through our collaboration with is a highly selective orthosteric agonist. One of the potential advantages in agonist is -- from some of the competition is the fact that there's no requirement for to be present in order for the be effective. Now obviously, we do not have clinical data yet. We are starting that Phase II program in schizophrenia later this year. And as you can imagine, we are considering a range of other indications. And as we move forward potentially with those, we'll be able to talk more about that.

[Operator]

We will take our next question from David Amsellem with Piper Sandler.

And there are no further questions on the line. We will go ahead -- I will turn the program back over to Kevin Gorman for any additional or closing remarks.

[Kevin Gorman, CEO & Director]

Thank you very much. I really appreciate everyone's participation today. As you can see, we're trying to get through all of the questions that's important to us that everyone gets an opportunity to ask us questions. I'm just going to close with that. Right now, the company is to use the metaphor hitting on all cylinders, as I would say. We're very pleased with the trajectory of INGREZZA and our ability to bring that into more and more TD patients. And that is even without the impact of the sizable investment that we've made with the new sales forces that are out there.

I'm also very pleased that with a large and growing pipeline that we have aggressive this year. And Eiry said, yes, the conflict that has taken place, the tragic conflict over in Ukraine, that has impacted a couple of programs that we were going to be starting up some clinical sites over there. But we're going to work through that. And the challenges we face are -- I don't have to say obviously small compared to the challenges that people in Ukraine are suffering. We will get through this with only minimal impact on the company.

All the other programs are working out quite well. And we're very much looking forward to sharing the results later this year for the T-type calcium channel 104 in both ET and then in CSWS.

And then finally, I would say, the following year, 2023, is going to be a wealth of data readouts that we're going to have. So we're very much looking forward to the rest of this year to be able to progress our business in what is shaping up to be a much more open and normal environment that we're going into. No guarantees, but we're very pleased with the way things are shaping us for us -- shaping up for us throughout 2022. Looking forward to getting together with many of you in person in the coming months. Thank you very much.

[Operator]

This does conclude the program. Thank you for your participation. You may disconnect at any time.