Supernus Pharmaceuticals Inc

NASDAQ:SUPN

Earnings Call Transcript 2018-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to Supernus Pharmaceuticals’ Second Quarter 2018 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Peter Vozzo, Westwicke Partners, Investor Relations for Supernus Pharmaceuticals. You may begin.

[Peter Vozzo, Investor Relations-Westwicke Partners]

Thank you, Sonya. Good morning, everyone, and thank you for joining us today for Supernus Pharmaceuticals’ second quarter 2018 financial results conference call. Yesterday, after the close of the market, 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 ir.supernus.com. Following remarks by 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 reflects 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 2017 Annual Report in Form 10-K, which was filed on March 1, 2018. 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 August 8, 2018 at approximately 9:00 AM 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 required by applicable securities laws.

I will now turn the call over to Jack.

[Jack Khattar, Chief Executive Officer]

Thank you, Peter. Good morning, everyone, and thanks for taking the time to join us as we discuss our 2018 second quarter results.

Starting with the quarter’s financial highlights, our continued commercial execution on both Trokendi XR and Oxtellar XR drove another quarter of strong performance, setting a new record for quarterly net product sales, operating income and earnings per share.

In the second quarter, we achieved solid growth compared to last year in net product sales with an increase of 32% to $97 million, and operating income with an increase of 37% to $35.7 million, and in diluted earnings per share with an increase of 78%, reaching $0.57 per share.

Driving this financial performance is primarily continued solid prescription demand for our products. Total prescriptions for Trokendi XR and Oxtellar XR in the second quarter of 2018, as reported by IMS, increased to 214,841, a 36% increase over the same period last year.

For Trokendi XR, prescriptions in the second quarter of this year reached 177,000, which is a 43% increase over the same quarter last year. And for Oxtellar XR, prescriptions were 37,789, representing an increase of 10% over the same period last year.

During the second quarter, the migraine market saw the introduction of the first anti-CGRP medication for the prevention of migraine. Despite that, Trokendi XR exited the second quarter in June with an all-time high share of the topiramate market of 4.9%, and all-time high share of the call-on universe of physicians of 10.9%. For the first half, Trokendi XR has performed in line with our expectations, with prescriptions coming in at 103% of our forecast.

While the second half of the year is expected to experience potentially two additional anti-CGRP product launches, we believe that topiramate, with its numerous mechanisms of action, will remain as one of the most important foundational therapies in the prevention of migraine.

In addition, in a real-life clinical practice assessment among migraine sufferers, Trokendi XR showed stronger responder rates, with 55% of patients experiencing 50% or more reduction in migraine frequency and 24% of patients experiencing 100% reduction. These responder rates stack up very well against any competitive prevention product. And as a reminder, Trokendi XR is not immediate-release topiramate.

As reported in this clinical practice assessment, Trokendi XR delivered such efficacy with significant improvement and tolerability and side effects compared to the immediate-release topiramate.

Moving on to our pipeline and starting with SPN-812, a novel non-stimulant for ADHD. I’m pleased to report that enrollment is complete in the first of four Phase III trials. We expect top line data from this trial in patients 6 to 11 years old during the fourth quarter of 2018.

Regarding the remaining three trials for SPN-812, enrollment is at approximately 89%. We expect data from these trials in the first quarter of 2019. Recall that this program consists of four, three-arm placebo-controlled trials, two of which are in patients 6 to 11 years old, and two of which are in adolescent patients.

Regarding SPN-810 currently in development for impulsive aggression in pediatric patients who have ADHD, enrollment continues in both Phase III trials. The first trial is now at approximately 91% enrolled, and the second trial is at approximately 77%. We expect to have data from the first trial by the first quarter 2019 and data from the second trial by mid-2019. In addition, patient screening has been initiated in the additional Phase III trial for SPN-810, treating impulsive aggression in adolescents who have ADHD.

Enrollment into the open-label extension studies for both SPN-812 and SPN-810 continues at approximately 90%. These studies are important in collecting longer-term data on an increasingly larger number of patients on both product candidates.

Moving on to Oxtellar XR for the treatment of bipolar disorder; our plans for the Phase III program are shaping up with a targeted start in the second half of 2019. As we enter the second half of 2018, we remain focused on the successful completion of our clinical programs, and look forward to providing top line data from the first Phase III trial for SPN-812 in the fourth quarter of 2018. Finally, we continue to be active on the corporate development side, looking for neurology and psychiatry assets that represent a strategic fit with our portfolio.

I’ll now turn the call over to Greg, who will provide more details on our second quarter financial performance.

[Greg Patrick, Chief Financial Officer]

Thanks, Jack, and good morning, everyone. As I review our second quarter 2018 financial results, I’ll remind listeners to refer to the second quarter earnings press release issued yesterday after the market closed.

Net product sales for Trokendi XR for the second quarter of 2018 were $76.4 million, a 36% increase as compared to the prior year period. Net product sales for Oxtellar XR in the second quarter of 2018 were $20.6 million, a 19% increase as compared to the prior year period.

Total revenue for the second quarter of 2018 was $99.5 million, a 31% increase as compared to $75.8 million in the second quarter of 2017. Total revenue for the second quarter of 2018 included net product sales of $97 million, non-cash royalty revenue of $1.5 million and licensing revenue of $750,000 as compared to net product sales of $73.3 million, non-cash royalty revenue of $1.2 million and licensing revenue of $1.3 million in the second quarter of 2017.

Turning now to expenses; for the second quarter of 2018, research and development expenses were $20 million as compared to $10.8 million in the same quarter in the prior year. This year-over-year increase, $9.2 million or 85%, is due primarily to the initiation of the four Phase III clinical trials for SPN-812 in the second half of 2017 and, to a lesser extent, the open-label extension studies for SPN-810 and SPN-812.

Selling, general and administrative expenses in the second quarter of 2018 were $40.1 million as compared to $35.1 million in the same quarter of the previous year. This increase in SG&A expense of $5 million was primarily due to the 40 headcount expansion of our sales force, which was fully deployed by the fourth quarter of 2017, marketing programs to support our commercial products and an increase in share-based compensation.

Operating earnings in the second quarter of 2018 were $35.7 million, a 37% increase over $26.1 million in the same period in the prior year. The improvement in operating earnings was due primarily to increased net product sales, partially offset by a year-over-year increase in operating expenses.

GAAP net earnings in the second quarter of 2018 were $30.7 million or $0.57 per diluted share as compared to $17.1 million or $0.32 per diluted share in the same period last year. GAAP net earnings for the second quarter of 2018 reflected an effective tax rate of 9.2% as compared to 34.3% in the second quarter of 2017. The tax rate in the second quarter benefited from the U.S. corporate tax reform legislation enacted in December 2017 as well as from employee exercises of stock options.

Net interest expense and non-cash deferred financing costs associated with the sale of our $402.5 million of convertible senior notes in March 2018 had the effect of reducing GAAP net earnings in the second quarter of 2018 by approximately $4.3 million or $0.08 per diluted share in the second quarter of 2018.

Weighted average diluted common shares outstanding were approximately 54.2 million in the second quarter of 2018 as compared to approximately 53.2 million shares in the same prior year period. As of June 30, 2018, the company had $677.7 million in cash, cash equivalents, marketable securities and long-term marketable securities as compared to $273.7 million as of December 31, 2017.

This increase reflects net proceeds of $364.9 million from the sale of convertible senior notes and warrants, offset by purchases of convertible note hedges in March 2018 as well as cash from operations of approximately $33.7 million in the six months ended June 30, 2018.

Now turning to financial guidance for 2018; we are updating prior guidance as follows. We expect full year 2018 net product sales to be in the range of $385 million to $400 million compared to the previously expected range of $375 million to $400 million. We continue to expect R&D expenses to total approximately $80 million for the year.

We expect operating income to range from $130 million to $140 million, higher than the previously expected range of $125 million to $135 million. We continue to expect that full year 2018 operating earnings will include approximately $7 million of licensing and non-cash royalty revenue. We expect an after-tax rate of approximately 23% to 25% for the third and fourth quarters of 2018.

I will now turn the call back to the operator for questions. Thank you.

[Operator]

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

[Annabel Samimy, Stifel]

Hi, guys. Congratulations on a solid quarter. Clearly, I only have some questions about Trokendi. And thank you for the details around Trokendi’s efficiency. I think that’s very helpful. I was wondering how the entry of CGRPs has changed the conversation that you guys are having with physicians. From your impression or the feedback you’re getting, is there an eagerness for this new mechanism? Is that eagerness overwhelming the conversation? Or are you seeing greater entry for discussion around topiramate optimization?

Clearly, we’ve seen Aimovig prescriptions tick up very rapidly. So do you sense that they’re taking away from your target patients? Or are the patients going on those who’ve warehoused because they failed everything? So just if you could help us understand the conversations that you’re now having with physicians, and how that is in light of the Trokendi profile. Thanks.

[Jack Khattar, Chief Executive Officer]

Yes. Hi, Annabel. Clearly, as you experience or when you experience new product launches in a category, and especially with a different mechanism of action, actually, these conversations not only start different initially and shift over time, clearly, our positioning, our strategy will be adjusted as time goes on.

So when the product was first introduced, the anti-CGRP product was first introduced, they had a lot of patients that came onboard, a lot of patients who also switched from the trials that they have done as well as with the heavy sampling program that they had that you have the bolus activity, which you would expect with any product launch initially.

So as far as our positioning in the marketplace and defending our franchise, Trokendi XR, as I tried to emphasize in the prepared remarks, is not immediate-release topiramate. Trokendi XR is topiramate, which is one of the best molecules in prevention of migraine by the fact it’s 50% of the market, and by the fact that the mechanism of Trokendi XR in treating migraine is multi-faceted. It’s not only working on CGRP or something else or one unique way of treating migraine versus the anti-CGRP products.

So topiramate is more of a broad spectrum, we view it, molecule that could treat migraine regardless of what the reason is. And therefore, we continue to believe that it will always be a foundational therapy on which you can add whatever else you want, an anti-CGRP, botox or whatever, amitriptyline, beta blocker.

Now in addition to all that, Trokendi XR is a much better topiramate. Trokendi XR is not immediate-release topiramate. And we’ve shown that and data has shown that. And numerous studies and numerous experiences by our patients in different posters and abstracts that has shown Trokendi XR actually is a very different drug and product than immediate-release topiramate.

So the idea would be expecting us to have – to be having these kind of conversations with physicians, obviously, to highlight to them the benefits that Trokendi XR bring to the table here, and the fact that topiramate is a molecule, that’s a mainstay molecule in therapy in migraine overall. So it will be interesting to see how the market evolves. We’re watching it very, very closely, clearly, on a day-to-day basis as far as the feedback we get from physicians and from the field.

[Annabel Samimy, Stifel]

And sorry, if I could just ask a follow-up. Are patients that are going on CGRPs right now, do you know whether they are staying on background topiramate therapy? So is it being used as an add-on? Or they’re just switching completely to CGRPs? So – and have they taken – in the clinical trials, have they been on topiramate as a background just to understand the interactions between the different drugs better? Thanks.

[Jack Khattar, Chief Executive Officer]

Yes. Given the initial positioning and the initial approach by the anti-CGRP product into the market, and given also the access strategy from a managed care point of view, these patients should have failed two previous treatments, where before at least two previous treatments before they get into an anti-CGRP.

So by definition, that patient, who got an anti-CGRP medication, must have been on one of the other products, most likely topiramate is there, given that topiramate is 50% of the market before this product came to the market or was launched. And therefore, by definition, they have failed a topiramate or they have failed a beta-blocker or they have failed an amitriptyline.

Now the big question is really, after they get the anti-CGRP, given the responder rates that not 100% of patients respond to any treatment in general, you would expect, after a while, they’ve been now on the market only for 10 weeks. But at some point, you’ll start to expect some of these patients to turn over back to other treatments. And those could be back to Trokendi XR or could be to other – or Botox or any other treatments because not everybody is going to respond well to anti-CGRPs either. So as time goes on, you’re going to have a continuous inflow and outflow of patients, clearly, on any of these drugs.

[Annabel Samimy, Stifel]

Okay. Thank you.

[Operator]

Question comes from David Steinberg of Jefferies. Your line is now open.

[David Steinberg, Jefferies]

Okay, thanks. Just a follow-up on Trokendi and CGRPs. So Amgen is giving away product for two months for free. And I was just curious, do you see any need to further extend any co-pay assistance or change any of your marketing tactics, given the two months free supply?

And then I just wanted to turn to Oxtellar in bipolar. You announced that you’re starting a Phase III program. Does that mean that you’ve seen some of the open-label data? And if so, do we see that it was positive, given that you’re starting the Phase IIIs next year? Thanks.

[Jack Khattar, Chief Executive Officer]

Yes. On Trokendi XR, if you don’t mind, I can’t be too specific, obviously, with our competitive tactics or countertactics. So I’m just going to leave that question alone. As far as Oxtellar XR, with the investigator trial that you’re referring to, as a quick update from last call, we actually did get the IRB approval. And we have about 30 patients in screening, but we haven’t had really anything data to observe from that. But it’s been always our conviction that we think this program is a solid program as far as the risk involved here and the chances for us to have successful programs.

So if you remember from last quarter, we said the investigator trial is not on the critical path. So we are proceeding forward with the Phase III – the pivotal Phase III program, regardless how fast or slow the investigator trial proceeds. So as time goes on, if we read anything specific, clearly, we will implement that or incorporate some of the feedback into the Phase III pivotal program. But no, it’s just part of our planning. We try to speed up our planning for the pivotal program, and that’s what we’re trying to accomplish here.

[David Steinberg, Jefferies]

Okay. And then just staying with Oxtellar. So you kind of surprised everyone in the last call with indicating your filing a supplemental NDA in monotherapy, and you expect approval by the end of the year. So if you could just give us more color on your thoughts for the launch trajectory.

I assume that it would be a more muted trajectory than Trokendi in migraine since, with Trokendi, you’re adding a whole new indication in migraine versus prior epilepsy indication. Is that the case? Could you give – would you this be awash to have a very sharp takeoff or more steady, gradual climb? And any thoughts on what peak sales could be for that specific new indication? Thanks, Jack.

[Jack Khattar, Chief Executive Officer]

Yes, sure. Quick reminder. As far as the monotherapy, the market itself, starting in epilepsy with partial seizures, you have about 19.8 million, 20 million prescriptions annually for partial seizures. And about 69% of that is monotherapy. So monotherapy represents about or approximately 13.6 million prescriptions on an annual basis. So the question for us is, how much of that can we actually penetrate? And how much market share we can grab from the partial seizure monotherapy market, which is about 13.6 million prescriptions?

Clearly, a lot of it will depend on the kind of label we get based on the approval. The supplement that we’ve put in place is based on a lot of the data, the Trileptal, which is the reference drug, has. And Trileptal, I think we mentioned that before, is one of the most studied molecules or anticonvulsant in monotherapy. It has very, very robust data showing strong efficacy in monotherapy setting.

So depending on how much of that data ends up in our label and how we can promote that, clearly, that impacts our trajectory and penetration into that market. Clearly, we will be launching it as a new drug in monotherapy. We’ll try to maximize that opportunity behind Oxtellar XR.

As far as how that compares to the Trokendi migraine, it’s a little bit hard for us to give a specific comparison. Now in general, epilepsy is always a little bit slower than migraine. Just this is more of a general statement. So is it going to be that same quick update as we did with Trokendi XR and migraine? Maybe yes, maybe no. But also, in Trokendi XR, maybe we did have some estrogen migraine before. In Oxtellar XR monotherapy, we have a little bit as well. So I mean, there’s a lot of factors that could come in play here in trying to draw that comparison.

[David Steinberg, Jefferies]

Okay. Final question. So you’ve got almost $700 million in cash now. It’s burning a hole in your pocket. Cash is building up. Any plans to use it anytime near term? And are you seeing any changes in the asset prices perhaps under on-market products or early-stage private assets you may or may not be looking at?

[Jack Khattar, Chief Executive Officer]

Yes, sure. I mean, the primary use of the proceeds, when we raised the money, the $400 million convertible debt deal that we did was primarily corporate development. So clearly, we raised it with a clear objective in mind. And you could assume we’re working very, very hard, and we’re very active in the BD area looking for assets on the neurology and psychiatry side. Our strategy there really has not changed that much. We continue to prioritize later-stage assets, whether commercial or near commercialization, and then followed by earlier-stage assets.

So we’re very conscious about the fact that in the next six to nine months or so, we will have a lot of data coming in on 812 and 810. And hopefully, that is positive data. And these two products are moving full speed ahead towards commercialization and, therefore, we have to reload the pipeline. And reloading the pipeline will mean a diversified pipeline with different assets at different stages from early stage to mid-stage. So our efforts at this point are looking at all kind of assets at very different stages in development.

[Operator]

Our next question comes from John Boris of SunTrust. Your line is now open.

[John Boris, SunTrust]

Thanks for taking the questions and congrats on the quarter, Jack. First one has to do with, obviously, Trokendi XR. In the headache specialist market with neurologist, what is the – I’m just trying to contrast to epilepsy. If you ask an epileptologist, the subject of their goal is to get people to be seizure-free. In the headache side of the equation, you have only 20% of patients that you can get headache-free, as you articulated, 55% that you can get a 50% reduction. But what is the objective of headache specialists? Do they want to get patients headache-free? Second part is on mix shift. It looks like there is a shift going on to higher doses. Can you give some commentary around that, along with the impact on gross to net? And then just a quick – a couple of quick follow-ups.

[Jack Khattar, Chief Executive Officer]

Okay. Let me try to remember all of them, and I’ll take them in order. As far as the goal for headache specialists, clearly, I mean, for any doctor, whether it’s the epileptologist or the headache specialist, they’re trying to get you seizure-free or headache-free. I mean, that’s the ultimate goal, clearly. Although the nature of these diseases, whether it’s epilepsy or migraine, unfortunately, with the more moderate to severe patients, the refractory, there are a lot of refractory patients.

At the end of the day, you’ll try to minimize the number of migraines as much as possible. And many of these patients end up on more than one molecule because no one single agent is going to get you there in a lot of cases, especially with these refractory difficult patients. And that’s why my comment earlier that we believe topiramate will continue to be a mainstay foundation on which – on top of which you could add different medications and trying to get to that goal of migraine-free. And of course, our data, I mean, is very positive about Trokendi XR, I mean, showing 24% migraine-free or 100% reduction in migraine in 24% of the patients. That’s a very high response rate for getting that, for achieving that goal. So that’s why we continue to be bullish as far as to what we see on Trokendi XR, as far as the experience from patients and so forth.

As far as shifting daily doses into much higher doses, I mean, that has been our strategy from day one when we launched the migraine, where we tried to encourage physicians to stop using 50-milligram in general, which was a sub-optimal dose that they were using on the immediate-release topiramate, and go right to the 100-milligram because the 100-milligram is actually a very effective dose, but has not been very commonly used by migraine specialists because of the side effects of immediate-release topiramate. With Trokendi XR, you could – with much more comfort get into the 100-milligram from the beginning, and even titrate up to 200 if you need to, especially with those patients who have the refractory because of the much improved tolerability that Trokendi XR allows you to have versus the immediate-release topiramate.

And forgive me. I forgot the last question. On the gross to net, as you know, John, I mean, we’re not going to get into the specifics of the gross to net. So I mean, our focus continues to be on giving sales guidance and meeting or beating that sales guidance. I mean, that’s what we try to work hard at every single day here. And you will always have fluctuations quarter-to-quarter. That’s normal. I can tell you that from an inventory point of view, we haven’t seen any new fluctuations from an inventory point of view, Q1, Q2 or Q1 versus fourth quarter. I mean, those continue to hold very steady, very consistent.

[John Boris, SunTrust]

And on Oxtellar XR, is it one trial or two trials that you have to conduct? And the impact on year-over-year R&D for 2019? And then BD, just your interest in neurology and psychiatry, do you have any interest in being in the sleep area?

[Jack Khattar, Chief Executive Officer]

As far as Oxtellar XR, we expect that we need 2 Phase III studies. It’s a new indication, so 505(b)(2). Because it’s a new indication, you need two successful Phase III studies. I mean, we haven’t given guidance on R&D for 2019 yet, but we’re going to have a phaseout of the current Phase IIIs on SPN-812, but we will continue to have open-label extensions going on 812. Also, we expect 2019 to hopefully start adult monotherapy. So I mean, it’s going to be a fairly busy activity from R&D, and then the bipolar for Oxtellar XR. So I mean, overall, as far as R&D spending, we haven’t come up with a specific number, but it will be an investment year for us as well.

[Operator]

Our next question comes from Bill Tanner of Cantor Fitzgerald. Your line is now open.

[Bill Tanner, Cantor Fitzgerald]

Thanks for taking the question. Jack, you mentioned on 812 data in the fourth quarter through this year. And you mentioned, too, that there are two trials in kids 6 to 11 and two in adolescents. And looking at clinicaltrials.gov, I’m just curious if you could identify the trial that’s going to read out first as to whether – yes, go ahead. Sorry.

[Jack Khattar, Chief Executive Officer]

Yes, sure. Yes. It’s the first trial, which is P301, which is in 6 to 11 years old. And it’s actually one of the bigger trials. That was the lead trial. So that’s the one that’s going to read out first.

[Bill Tanner, Cantor Fitzgerald]

And then just looking at the descriptions, I mean, is this – it looks like these are one trial for each of the ages. Their age groups is low dose, and one is high dose. Is that correct? And what is the dose on the first one?

[Jack Khattar, Chief Executive Officer]

Oh boy. I believe this is the 100 to 200 milligram. I might be wrong. But that’s – I’ll double check and get back to you on that. But the answer is yes. That’s why we have two trials on 6 to 11, and we have two trials on the adolescent because we’re testing a range of doses on both of them.

[Bill Tanner, Cantor Fitzgerald]

Yes, okay. And not to ask you another question that you may not know the answer to, but do you know – do you have an idea as to how the sequence of the trials is going to work? I know the other three would read out sometime in the first quarter of next year, but do you know if we’re going to get both of the 6 to 11s before you get the adolescent? Or – apologies for my next question.

[Jack Khattar, Chief Executive Officer]

Yes. I mean, the 6 to 11 seem to be recruiting quicker. So maybe the next trial that we’ll have data, it is likely that, that will also be the 6 to 11 ahead of the adolescent. But every week, these trials, one jumps in front of the other as far as enrollment. So it’s a little bit – but at this point, as of today, we’re going to have the first one in the fourth quarter. Then the second trial that could have data is also more likely to be the 6 to 11 years old, yes, at this point.

[Bill Tanner, Cantor Fitzgerald]

And then my final question is just in the history of ADHD drug development, the concordance of data for those two patient populations, what does that look like? My point being is that my guess is The Street is going to take the first trial data and read that across the entire program. So if you see good data for the 6 to 11, does that tend to – or does that portend maybe success for the adolescence as well just looking at the history of ADHD drug development?

[Jack Khattar, Chief Executive Officer]

What I can tell you from our own studies on 812, given specific – more specific on 812, we have two proof-of-concept studies that we’ve done. The Phase IIa study, people remember, we actually did it in adults. So we have positive data against placebo in adults, and we have positive data against placebo in the 6 to 11 years old. So that I can tell you. So there’s no reason to believe for us that if the Phase III in 6 to 11 works, I mean, I don’t see reason why it shouldn’t work in adolescent if the previous Phase II study has worked in both adults and kids. So hopefully, that should read through the other trials if the first one is positive. Only data will tell, obviously, at the end of the day.

[Bill Tanner, Cantor Fitzgerald]

Sure. Okay, thanks very much.

[Operator]

Our next question comes from Patrick Trucchio of Berenberg Capital Markets. Your line is now open.

[Patrick Trucchio, Berenberg Capital Markets]

Thanks, good morning. At the recent congressional hearing, HHS Secretary, Azar, said, we may need to move toward a system without rebates, where PBMs and drug companies just negotiate fixed-price contracts. So I’m wondering, can you tell us, first, do you think such a system is feasible? Second, how such a system may impact the formulary physician for Oxtellar and Trokendi, if at all? And third, how this may impact the list price assumptions implicit in your forecasting for the potential commercialization of 810 and 812?

[Jack Khattar, Chief Executive Officer]

I wish I knew all the answers to these, Patrick. I don’t think the folks on The Hill know the answers either. This is obviously one of the toughest questions that the administration is wrestling with and trying to work on to see how they can impact. At the end of the day, it’s not necessarily list prices or rebates. Their objective and their primary objective is the net cost of the patient at the end of the day. So how do they get there, whether that will be a system that is free of rebates or a system that is with list prices that are not associated with very unreasonable or very high price increases over time, obviously, nobody knows at this point how that’s going to shake out.

As far as we’re concerned, clearly, we monitor the situation from a policy point of view and what happens on The Hill here in D.C. And try to, obviously, be proactive and try to adjust, if needed, as far as to our overall pricing, overall programs, and helping, obviously, the patient at the end of the day getting the medication, whether Trokendi XR or Oxtellar XR. But unfortunately, I don’t know any more specifics than you probably know yourself from what we’ve seen publicly. And it’s a little bit difficult for us at this point to predict where and how will they end up accomplishing a net lower cost to the patient, whether that’s through rebates, elimination of rebates or is it through different pricing mechanisms through the supply chain. I mean, that’s a little bit difficult for us to predict at this point.

[Patrick Trucchio, Berenberg Capital Markets]

Just a follow-up then on SPN-812, so the first top line data release expected in the fourth quarter. Can you tell us what we should be looking for specifically in terms of separation from placebo in the primary endpoint from a regulatory perspective? But more importantly, from a clinician perspective, where stimulants dominate the market, and where another competitor, dasotraline, may actually be on the market by the time we see 812 data?

[Jack Khattar, Chief Executive Officer]

Well, I mean, on SPN-812, our goal has always been to get a very good efficacy. And what is good efficacy? I think we try to explain that as far as people trying to draw comparisons versus stimulants or other non-stimulants. It is very unreasonable to expect a non-stimulant to beat a stimulant. So our objective is, as long as we get it as close as possible to a stimulant, we don’t have to be the Vyvanse or an amphetamine or a methylphenidate. But if we get data that is consistent with our data from the Phase IIb or even a little bit better, we are testing a little bit higher dose, the 600-milligram in adolescent, which is higher than the 400-milligram that was the highest dose in the Phase IIb study.

So if the data is very consistent with the Phase IIb or slightly better, we’re very happy. We think we have a very good solid drug, given also its tolerability and safety profile. And we say that in comparison to the existing non-stimulants as well as to the stimulants, and their issues as far as tolerability and side effects and controlled substances and DEA and so forth. So from that perspective, if the Phase III data is consistent with the Phase IIb, we think we have a very good drug here that can be positioned even as a first-line treatment.

As a parent, why would I jump into a stimulant if I can have a good non-stimulant that will work fairly quickly? And that is something we’re trying to measure, obviously, in our trial versus Strattera, for example, that used to take sometimes weeks for it to kick in. So that is an important measure on the efficacy side. And the other end point is really your typical ADHD-RS scale. So that’s, in general, what we’re looking for. And we’ve been hoping SPN-812 will have that kind of profile. And the data so far that we have in hand point to a well-differentiated profile. That may end up being the case as a very solid first-line option for physicians to start patients on that kind of treatment instead of stimulants.

[Patrick Trucchio, Berenberg Capital Markets]

Okay. Thanks very much.

[Operator]

Our next question comes from David Amsellem of Piper Jaffray. Your line is now open.

[David Amsellem, Piper Jaffray]

So just a couple. So first, on 812. I wanted to drill down on the competitive landscape, but then I wanted to get your thoughts on competitive positioning versus dasotraline, the Sunovion product, and how you’re thinking about relative differentiation. And then secondly, given that Strattera is a generic, and given that there’s another brand on stimulant out there, how should we think about the extent to which the product’s going to be heavily contracted in gross to nets? And then lastly, on Oxtellar monotherapy, and you may have answered this, so I apologize, but can you give us a sense regarding the extent to which oxcarb is actually used in practice as monotherapy?

[Jack Khattar, Chief Executive Officer]

Yes, sure. On 812 versus other non-stimulants that could be in the pipeline or waiting approval and so forth, again, we look at 812 as a product that’s going to stand on its own from an efficacy and tolerability point of view. I really don’t want to get into the specifics of the – I believe, it’s the Sunovion product that you’re referring to. We haven’t seen a final label yet, so it’s hard for us to really see how different 812 is. But from the data that we’ve seen on their clinical program, it’s an okay product. I really don’t know. I didn’t see anything that is, wow, this is a product that’s going to really be very, very different in the marketplace.

As far as our differentiation versus Strattera, as far as managed care reimbursement and all that, SPN-812 is a new chemical entity. And the way I try to frame this, and I try to help folks hopefully understand this issue as to how it might evolve when we launch the product, is that in a very competitive environment such as Trokendi XR and Oxtellar XR, where we are actually competing with the immediate-release, same-molecule genetic market, with viloxazine or SPN-812, there will be no immediate-release viloxazine generic molecule in the market when we launch SPN-812. There is no such thing. It’s a new chemical entity. It will have its own differentiated clinical profile with tons of clinical data and differentiation.

And that, we believe, will carry the data on its own because the product will be differentiated, hopefully, as we expect it to be. And therefore, there will be, from a managed care point of view, an environment that will be probably a little bit more favorable than we have currently with Trokendi XR and Oxtellar XR. And I think so far, with Trokendi XR, Oxtellar XR, we’ve done okay or even more than okay in a worse kind of environment, achieving market share penetrations between the 3% to even 5% or 4.9% that I mentioned today on Trokendi XR.

So even if we achieve a similar penetration with SPN-812, which would be in a better environment, even if we achieve the same kind of penetration, this will be a $1 billion drug. So assuming that the penetration is the same, although the environment will be better, we believe, because it’s a differentiated molecule. It’s a new chemical entity. And hopefully, we’ll have much more differentiating points versus a generic Strattera or a generic Intuniv. We think viloxazine could be a very, very big opportunity for us.

And as far as the second question, which is oxcarbazepine, and the use as far as monotherapy in practice, it is commonly used in monotherapy because of the data that Trileptal has had. Now you have to remember, oxcarbazepine Trileptal went generic back in 2007, if I’m not mistaken. So that’s been a long time since physicians actually saw that data or since any company talked to them about that data. So that will be part of our launch in monotherapy to remind physicians about the strength of that data in monotherapy. So that’s what we are hoping. And that’s why my previous comment that depending on what data we end up having in our label and our ability in promoting that specific data, I think, will speak to potential opportunity in front of us.

[Operator]

[Operator Instructions] Our next question comes from Ken Trbovich of Janney. Your line is now open.

[Ken Trbovich, Janney]

Jack, thanks for taking the questions. I just want to circle back on 812 and maybe ask a question a little differently. Is there any level of efficacy that your market research would suggest would enable you to avoid step edits at launch? Or is that something that just really isn’t on the table?

[Jack Khattar, Chief Executive Officer]

That’s very difficult to pinpoint, Ken. I mean, that with a specific effect size or a specific efficacy level you can avoid to step edit or anything like that. Because efficacy is not just one endpoint. Efficacy is a complex facet of the product that could be on different – not just one endpoint. It could be onset of action. It could been an end point. It could be different things. And when you’re looking at a step edit or no step edit, it’s not just efficacy either. It could be also improved tolerability, improved safety. So it’s really very hard to answer this kind of question, that if you get X, you should have no step edits. And if you get Y, you will have a step edit. I think that’s a little bit difficult for us to answer.

[Ken Trbovich, Janney]

Okay. And is there a single sort of endpoint with regard to the Phase III studies that you think we should be most mindful of across those programs with regard to the ability to differentiate the product? I know, obviously, you talked about dosing differences and adverse event profiles. I just – as we prepare for multiple studies, I’m just trying to make certain we understand which one or two endpoints you think are sort of the most critical to the ability to differentiate the product from your perspective.

[Jack Khattar, Chief Executive Officer]

I mean, clearly, once – and at that time we issue the data, we will highlight, of course, exactly what you’re asking about. I mean, we will highlight what the data means, and which measures and which factors and which endpoints and which aspects of the study that really highlight the product or bring it up to a certain level from a differentiation point of view. So we’ll make sure we clearly talk about all that to help folks understand the data within that context of the competitive landscape. Absolutely, we will be doing that.

[Ken Trbovich, Janney]

Perfect. Thank you.

[Jack Khattar, Chief Executive Officer]

Sure.

[Operator]

Thank you. And ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn the call back over to Jack Khattar for any further remarks.

[Jack Khattar, Chief Executive Officer]

Thank you. In the first half of the year, we delivered 43% growth in net sales and 106% growth in net earnings compared to the same period last year. We continue to be focused on maximizing the Trokendi XR and Oxtellar XR brands, while advancing our late-stage pipeline towards commercialization. We’re excited to be entering a catalyst-rich period with data on several Phase III trials from SPN-812 and SPN-810. We look forward to sharing with you such data, and thank you so much for joining us this morning.

[Operator]

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone, have a great day.