Avadel Pharmaceuticals PLC (AVDL) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Avadel Pharmaceuticals Third Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to turn the conference over to Lauren Stival, Director of Investor Relations. Ma'am, you may begin.

Good morning. This is Lauren Stival, and I want to welcome you all to Avadel Pharmaceuticals Third Quarter 2017 Earnings Conference Call.

Before we begin, I will start with some cautionary statements. The following presentation regarding Avadel Pharmaceuticals plc includes a number of matters that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements. These risks include risks that products in development stage may not achieve scientific objectives or milestones or meet stringent regulatory requirements, uncertainties regarding market acceptance of products and the impact of competitive products on pricing. As a note, although FDA-approved, Noctiva has not yet been launched and is not yet commercially available in the United States. These and other risks are described more fully in Avadel's public filings under the exchange act, including the Form 10-K for year ended December 31, 2016, which was filed on March 28, 2017.

Except as required by law, Avadel undertakes no obligation to update or revise any forward-looking statements contained in this presentation to reflect new information, future events or otherwise. We will be using a slide presentation for today's call, which can be accessed by going to the Investors section of our website and selecting the Events and Presentations page. After prepared remarks, we will be opening the call to a question-and-answer period.

On the call today, we have Michael Anderson, Chief Executive Officer; Mike Kanan, our Chief Financial Officer; and Greg Divis, our Chief Commercial Officer. At this time, it's my pleasure to turn the conference call over to Mike Anderson, our CEO of Avadel. Mike?

Thank you, Lauren, and good morning, ladies and gentlemen. As always, we appreciate your joining us this morning to discuss the quarterly results of Q3 and our ongoing operations.

The third quarter of 2017 represented another solid financial performance for Avadel, with $39.7 million in revenues and operating cash flow of $30 million on a year-to-year basis. The third quarter saw continued growth in the business, and we continue to transform the company, just like we've stated we would. We delivered strong cash generation with our hospital products, and then used that cash to acquire a unique and patent-protected asset with long-term growth potential.

Around this time last year, we were just kicking off our first Phase III clinical study for FT218, a once-nightly formulation of sodium oxybate, utilizing our proprietary Micropump technology for narcolepsy. This was a meaningful step forward for us in our effort to grow and to become a diversified specialty pharma company.

Our REST-ON study is now well underway, and we still expect to file the NDA by the end of 2018. The third quarter of 2017 was a continuation of this transformation as we acquired the rights to Noctiva in early September. Noctiva is the first and only product approved by the FDA for the treatment of nocturia due to nocturnal polyuria. Nocturia, which is the condition of waking 2 or more times per night to void, is suffered by as many as 40 million Americans, and only approximately 3 million of these patients are diagnosed and on some form of treatment. Noctiva is a proprietary low-dose formulation of desmopressin administered in a patented nasal spray. Although it is the only proven means to reduce nocturia due to nocturnal polyuria, or overproduction of urine at night, because of some of the historical PK and BA issues associated with the drug -- generic formulations of desmopressin are not widely prescribed. And the drugs that are primarily OAB and BPH drugs have not shown to be effective for treatment in these patients. Noctiva is not your father's desmopressin. It was developed specifically to address these historical issues. It is tailored to increase bioavailability, and its targeted proprietary intranasal formulation provides accurate absorption of the API while limiting the duration of action to between 4 and 6 hours. The doze of desmopressin is between 7 and 27x lower than that of other generic desmopressin products and in 2 pivotal trials, has been proven not only to be effective, but was able to show strong safety profile. This was further demonstrated in the 2-year safety extension study, where there were no instances of hyponatremia, a major concern with other forms of desmopressin.

Noctiva provides Avadel with the opportunity to be the first player to market for a very prevalent condition with no approved treatment options. We are moving full steam ahead as we build our sales and marketing organization to support this product in preparation for launch in the second quarter of 2018. Greg Divis, our Chief Commercial Officer, will join us for the question-and-answer period and will answer any additional questions about the specifics of the launch in 2018.

Additionally, on Monday, November 13, we will be hosting an Investor and Analyst Meeting for a comprehensive overview of nocturia, the condition and its consequences. We will also talk about Noctiva, including its clinical profile and commercial launch update. We encourage all of those interested in further detail to turn into our webcast.

Although we will increase our spend for the launch of Noctiva over the coming months, as Mike Kanan will discuss shortly, we should be able to reap a number of tax benefits, which we have not been able to do historically. Overall, we are very excited about this opportunity and confident that this is going to be a meaningful long-term growth driver for our company.

Driving growth through a number of different avenues is an important factor for us in the months and years ahead as we continue to see an increase in competition across our hospital portfolio. Although these products continue to produce good cash flow, which is, of course, key to executing growth through the application of our proprietary technologies and through acquisitions, they will not carry us and will not continue generating enough operating income to support our business of the long term.

Vazculep remained stable during the quarter, as it has for the last few years now. However, neostigmine continued to see increased competition as there was recently a fifth player approved. And sugammadex, a unique molecular entity, has continued to gain share, although it appears to have leveled off at just over 50% of the neuromuscular blockade market.

During the third quarter we managed to keep our share of Bloxiverz in the mid-30% range and remained the market leader. That fifth approval late in Q3 may continue to put downward pressure on both share and price in Q4 and beyond.

We held approximately 40% of the market volume for ephedrine sulfate during the third quarter, but also saw the addition of a new generic competitor to Akovaz. While we could see additional competition in 2018, today, the market is composed of Akovaz, 2 generic approvals and an unapproved but marketed drug by Akorn, which inexplicably appears to still be on the market. It's important to note that despite the increasing number of competitors across our hospital portfolio that over 80% of the entire market volume comes from just a handful of customers. We have been in these markets with these customers for a long period of time and have established strong relationships here. As we have demonstrated over the years, we intend to vigorously defend our position in the market and maintain market leadership.

From a revenue perspective, 2018 is going to be a challenging year for us. And we are working to make sure we hit the number of catalysts during that period, including the launch of Noctiva; filing an NDA for our fourth unapproved hospital product, both planned before midyear; and completing our REST-ON study. Each of these milestones will ensure that 2019 marks the beginning of long-term sustained growth for our company and a pivot away from the declining branded generic products.

Now regarding our REST-ON Phase III clinical study of FT218, which remains paramount to our organization. I'm pleased to say that enrollment has been increasing steadily over the last few months, and we feel, at this pace, we will be able to maintain our time line of filing an NDA by the end of 2018. We have implemented a number of tactics from a clinical perspective not only to keep up with our current progress, but to increase it as well. I've mentioned in the past that we're using a number of alternative and unique methods to raise awareness and interest in our trial. From establishing a patient advisory group, utilizing social media, which have been very successful in driving potential patients to fill out initial screening forms. To date, we have had over 1,000 people fill out our initial screening form through our Link2Trials website. And although only about 1/4 of these patients make it to the formal screening process itself, it confirms that these methods are effective ways of reaching potential patients. It also validates the very high interest that patients have in a preferable and more convenient form of sodium oxybate.

We are also working with our CRO to add additional study sites in both the U.S., the U.K. and in other countries as well. Should there be any change in our existing filing time line, we will be certain to update shareholders. From a financial standpoint, we ended the third quarter with $115 million of cash and marketable securities and still no bank debt. Although we have several projects utilizing our proprietary technologies, Micropump and LiquiTime feasibility, until we have a readout and potential clinical pathway forward for these, we'll continue to search for in-licensing and acquisition opportunities to add to our new urology sales force or our existing pediatric sales force.

We recognize our pediatric portfolio on a whole as underperformed since its acquisition. However, we have seen some very remarkable growth from our lead product here recently, Karbinal ER. Scripts for Karbinal over the past 4 weeks have increased 196% on a year-over-year basis, while the market has remained relatively flat. Sequentially, Karbinal is up nearly 20% in Q3 compared to Q2, while the market during that time frame has declined by about that same percentage. While Karbinal ER in itself is not enough to make the pediatric segment profitable, we have seen a sustained and consistent improvement in our performance and continue to look for additional products to fold in. In short, we continue to look for ways to enhance the inflection of the pediatric growth.

In summary, the third quarter was another solid quarter of execution, and continuing to execute our growth strategy over the next year will set us up for long-term success.

I'll now turn the call over to Mike Kanan to discuss our financial results in more detail. Mike?

Thank you, Mike, and thank you all for joining us today. As you have seen in this morning's release, and as Mike said, let me also echo that we had another good quarter financially. Our top and bottom line exceeded expectations, and we were cash flow positive for the 9 months as we've generated $30 million in operating cash flow.

Now let's talk more specifically on how we performed in the third quarter. Revenue was $39.7 million and as expected, was down $7.7 million from Q2's level of $47.4 million. Quarter-over-quarter decline was primarily due to lower pricing for Akovaz and Bloxiverz and lower Bloxiverz volumes. Vazculep was essentially flat to Q2 of 2017 as the market for Vazculep has remained stable for quite some time now with no new competition. When compared to the third quarter a year ago, revenue was up organically 24% as Akovaz has yet to be fully launched. Our gross margin remained strong at 90% in Q3, unchanged from Q2's gross margin, but slightly lower than Q3 of year.

Research and development expenses during the third quarter totaled $8.1 million compared to $6.8 million in Q2. This 19% increase is a result of higher spending associated with our REST-ON clinical trial as a substantial portion of our clinical sites are now up and running.

SG&A was $11.6 million in the third quarter compared to $12.4 million in Q2 and $12.7 million in Q3 of last year. The slight decline in SG&A is attributable to slightly lower professional consulting and business development expenses.

Contingent consideration expense was $7.3 million in Q3. This non-GAAP expense comprised the cash payments and accruals we made associated with our contingent consideration liabilities. As many of you know, as part of the acquisition of Éclat, we pay 20% of the gross profit on Bloxiverz, Vazculep and Akovaz to a related party. This amount will obviously vary quarter-to-quarter depending on the sales and gross margin levels for those 3 products.

On a non-GAAP basis, diluted EPS was $0.09 per share for Q3. Our non-GAAP effective tax rate for the third quarter was 58% compared to 43% in Q2. The higher effective tax rate, when compared to Q2, was driven by a decline in the Irish pretax income due to lower sales and profits related to Akovaz. As many of you recall, a large portion of Akovaz revenue is recorded in Ireland, where the product was principally developed. The remainder of our revenue from our hospital products is earned in the U.S., where it is taxed at the current U.S. corporate tax rate of 35%.

Nearly all of our R&D expenses are incurred in France and Ireland, where we have no history of income and therefore, cannot record for accounting purposes any tax benefits. In addition, as we've said in the past, we don't receive any tax deductions for our contingent liability payments. These factors create an effective tax rate which exceeds both the U.S. statutory and Irish statutory tax rates. With that said, however, I am pleased that our non-GAAP effective tax rate has meaningfully declined in 2017 when compared to last year.

As I discussed in our conference call announcing our Noctiva licensing arrangement, we will incur significant commercial launch costs for Noctiva over the next several years. We believe that a large portion of these costs will be eligible to offset our U.S. taxable income attributable to our hospital products business. As a result, this may eliminate or substantially reduce our U.S. cash taxes over the next 3 years and lower our effective income tax rate. We are also exploring the potential opportunity to carry back initial Noctiva losses to obtain refunds on some of the cash taxes we have paid in the last several years, which could help with our cash flow and help pay for some of the initial launch costs for Noctiva.

We're also keeping an eye on the tax reform bill, which was recently unveiled, to see what impact it might have on us if it ultimately gets passed.

Let's move on to the slide, which covers our GAAP results. Please refer to the appendix to today's slide presentation for a reconciliation of our non-GAAP results to our GAAP results. The primary difference between our non-GAAP and GAAP results relates to how we treat the acquisition-related earnout and contingent liabilities and restructuring costs. For our non-GAAP numbers, we substitute the cash payments and accruals for the amounts we record for GAAP purposes. We believe this is a better way to measure operational performance of our business.

For GAAP, however, we use a fair value approach as required by the accounting rules. In the third quarter, we lowered the fair value of the acquisition-related liabilities for our first 3 hospital products primarily because of changes in pricing for Akovaz, another competitor in Bloxiverz and a slightly long-term sales and gross profit outlook due to the entrance of a fourth competitor. As a result, we recorded a gain of $9.9 million to lower these liabilities. Keep in mind, these gains are reflected on a GAAP basis only and are not reflective of the cash payments we make on a quarterly payment -- on a quarterly basis.

In addition, we owe contingent royalties on total revenues of Bloxiverz, Vazculep and Akovaz to certain related parties. We adjust the fair value of these liabilities and recorded a small again on a GAAP basis in the third quarter for the same reasons I just noted. This true-up is included in other income called income expense changes in fair value of related party payable.

Additionally, in our GAAP results for Q3, there was a small gain on the curtailment of certain retirement plan obligations in France associated with our workforce rationalization. As you recall, we reduced our footprint at our Lyon, France site by approximately 50%. We have made meaningful progress on this, and we expect the reduction to be substantially complete by the end of 2017 and to incur employee severance benefits and other costs of up to $4 million, which will likely be recognized through December 31, 2017. Once fully implemented, the company anticipates annual cost savings of approximately $3.5 million to $4 million.

Our GAAP net income for the third quarter was $21.7 million or $0.52 per diluted share compared to net income of $28.9 million or $0.68 per diluted share in the second quarter of 2017 as compared to a net loss of $20 million or $0.48 per diluted share in the same period last year. And I'm pleased to say that our effective tax rate on a GAAP basis was 21% for the third quarter. The quarter-over-quarter decline in net income was largely due to the lower revenues I mentioned and the lower gains on the changes in the fair value of this related party contingent consideration.

Moving on to sales by product. Sales of Bloxiverz were $9.9 million in Q3, down from the $13.7 million that we recorded in the previous quarter. Our share of the neostigmine market declined slightly and ranged from the mid- to high 30% range for most of the third quarter of 2017. When compared to the prior year, Bloxiverz revenue declined $5.7 million due to 2 new competitors in the neostigmine market who entered in the first quarter of 2016 and in June of 2017 and a new molecule approved by the FDA in the late 2015.

Sugammadex, which was introduced to the U.S. in the second quarter of 2016, is an alternative molecule to neostigmine, now accounts for about 50% of the neuromuscular block reversal market.

Sales of Vazculep were $9.6 million, essentially flat from Q2 in the same period last year. Pricing and volumes remain stable in Q3.

Akovaz sales were $18.6 million in Q3 compared to $20.9 million in Q2. The decline in Akovaz revenue compared to Q2 was a result of some aggressive competitor pricing in order to gain share. Akovaz share in the total market, which includes GPOs and repackagers, continues to be -- or slightly exceed 40%. We are pleased with the continued progress we have made with our GPO customers as well as customers outside of the traditional GPO markets, which continues to be an important channel for us.

In Q3, our pediatric sales totaled about $2 million. Sales of Karbinal ER, our most important and primary promoted product, were up almost 90% quarter-over-quarter on strong seasonal sales. Additionally, compared to last year's third quarter, sales of Karbinal have increased nearly 5.5x, a true reflection of the progress we have made with our sales force. Although the market has declined about 20%, we have seen market share increases and significant prescription growth compared to Q2 of 2017 and year-over-year for this product.

Moving on to our cash flow summary. Our operating cash flow for the 9 months ended September 30 was a strong $30 million. After the initial funding of the Noctiva license, we ended the quarter with about $116 million in cash and marketable securities compared to $154 million at December 31. We used $52 million for the initial Noctiva license funding, which includes some business development expenses, and $17 million for share repurchases. We continue to have a strong balance sheet, which gives us the financial flexibility to fund the Noctiva payment from cash on hand.

Our current cash on hand is adequate to fund our clinical pipeline and the Noctiva launch in the near term. However, given the significant amount of investment that will be required to commercialize Noctiva, we cannot rule out that a capital raise may be necessary. The amount, timing and nature of any capital raise is not definitive yet. We are working closely with our advisers and major institutions on several options to raise capital at the most efficient cost. There continues to be a lot of interest in Avadel, and I am optimistic that any capital raise can be executed at a reasonable cost of capital.

In closing, let me provide some additional commentary around our changes to our 2017 guidance. Our revenue guidance remains unchanged at $165 million to $175 million. We expect to spend between $8 million to 10 minute on our R&D in Q4, which would put us at a total R&D spend of between $30 million to $35 million for all of 2017, most of which is related to sodium oxybate. In Q4, we expect to spend approximately $15 million on sales and marketing launch costs for Noctiva, most of which are recruitment and salary costs for the sales force and other Noctiva related positions, advertising, promotion and marketing costs, and other critical launch preparation investments. Inclusive of the Noctiva launch costs, we expect SG&A in the fourth quarter to range between $24 million to $29 million, which would put us at a total SG&A spend for all of 2017 in the range of $60 million to $65 million, and that's inclusive of the Noctiva costs.

We now expect diluted EPS to be in the range of $0.25 to $0.35 for all of 2017, which includes an adjusted effective tax rate of 55% to 65%, slightly down from our previous guidance of 60% to 70%.

With that, I will now turn the call over to Mike for some additional comments. Mike?

Thank you very much, Mike. Our company executed a strong quarter, and we will strive to continue executing our near- and long-term growth strategies in our mission to become a leader in the specialty pharma area. Over this past summer, management developed a compressive strategic growth plan to serve as our road map going forward. Along with FT218, the acquisition of Noctiva was an important step in our plan to ensure a successful future for the company. As such, we have set ambitious goals that within 5 years, we expect to be a rapidly growing specialty pharma company with no less than $500 million in annual sales, a market cap of over $1 billion and feature distinctive product offerings for patients and for their providers.

Thank you again for joining us. We look forward to hosting our Noctiva-Focused Investor and Analyst Meeting next week and providing you with updates on our key business drivers as appropriate.

With that, I'll now turn the call over to the operator for any questions.

(Operator Instructions) Our first question comes from Matt Kaplan of Ladenburg Thalmann.

So I just wanted to get a little bit more detail on the REST-ON study. Where are you in the enrollment of that study? And what is the timing at this point for the Phase III data announcement?

Matt, we have not updated the specific number of patients that have enrolled -- that are enrolled or randomized in the study today. We're not prepared to do that. We may have more color on that closer to the end of the year, but we still are on target to have the study enrollment completed by the first half of 2018 and still expect to file the NDA the latter end of next year. That's about the best. As you may have seen from clinicaltrials.gov, the number of clinical sites it's up and running is now pretty much -- we're almost at full scale. And obviously, as we mentioned earlier, we're continuing to add new sites along the way as well.

Okay, that's helpful. And then in terms of -- just want to delve into the pipeline a little bit in terms of where your program is with Parent.Co and then more importantly, your internal programs as well. Can you give us an update there?

So the Parent.Co program, which was contracted a couple of years ago. It was -- I'll describe it. It was -- has been sleep for a number of quarters. It is back under discussion today. Parent.Co, as far as where we're at, has an interest in getting the program moving forward. We have a couple of small business issues to resolve. And once those issues are resolved, we would expect to see that program continue on at the pace it had when it was first contemplated and signed. So that's the story on Parent Co. As it relates to our internal projects, which we, frankly, have talked about for some time now, we made a conscious decision that rather than to begin talking about specific products and then engaging in -- or having -- being subject to some sort of technical challenge that we didn't contemplate, that -- we've made the conscious decision that before we do all that, we're going to validate the commercial viability of the product, the willingness, we believe, of third-party payers to pay for what we create. And that's more a challenge today than it has been in the past. And then also to make sure that, technically, we're capable of doing them. We have a couple of, what I'll call, advanced projects in our laboratories (inaudible). And as soon as we can reach those designated points with those particular products, we'll be talking about them in a lot more granularity, including identifying them, what the target profile is and so forth.

Okay. And then I don't want to kind of front run your presentation on Monday, but on Noctiva, can you give us a little bit more detail in terms of your launch plans? And a sense of how much the launch is going to cost over that period, perhaps next year? You've given us detail on the fourth quarter, but help us understand.

I'm going to ask Greg to answer that. And we hope you'll understand that with a full-fledged program coming on Monday, we kind of don't want to preempt that too much. But we'll answer your question as best we can.

Yes. And high level, I would say that by the end of Q4, the organizational build-out will be nearly complete in terms of adding the requisite people and teams to begin the process of going to the market. When we think about the launch in 2018, we really think about it in 2 steps: We think about it in terms of a prelaunch effort that we'll begin in Q1. That will really comprise of disease data education, some early access programs and a patient experience type of program. And as we advanced through Q1 into Q2, we would expect to have a more broader, full commercial launch in Q2 and more compressive in that regard. And that's how we think about it from a timing perspective. Although those 2 efforts will overlap to some extent because the disease day campaign and patient experience campaigns will go on beyond Q1, we will start in a much more narrowly focused effort. Furthermore, without going into too much detail, it is really designed in this phase of the brand plan, to really be a specialist-focused launch. We'll be targeting those physicians who really treat nocturia today, have diagnosed and patients in their practice today and going there first, which predominately are urologists and urology subspecialties.

Our next question comes from Jason Butler of JMP Securities.

It's Roy in for Jason. Had a couple on Noctiva. I just wondered if you could just give us a sense on the timing on visibility on your ability to apply the former losses for Noctiva. And can you quantify those losses?

We -- yes, you're talking about, I assume, the tax benefits around Noctiva. We haven't -- other than the $15 million that we've previously described, we haven't further described what our launch costs will be into 2018. We would likely do that as we issue guidance some time in January of 2018. But at this point, we haven't really said what those launch costs would be, although they will be meaningful and significant. And we would hope to be able to apply some of these losses to recover previous years' taxes, which currently under law, we can go back 2 years to recover the cash taxes that we've paid from our U.S. business, which is principally the hospital products business.

Okay. So you -- would you be able to go back for 2017 and 2016? Is that the idea?

It would be -- yes. Well, depending on when we file a tax return, it would be 2 years. So it would likely be '16 and '17, yes.

Okay, okay. Great. And then can you remind me about the ex U.S. development plans for Noctiva and how all that in fits into the tax planning?

Well, I can -- the ex U.S. opportunity is Canada from that standpoint. So we have the commercial rights to Canada for Noctiva, which is not approved or filed. So there's work being done and an analysis being done on that opportunity as we speak.

We have no rights, yes.

Okay, great. And then, I guess I had kind of a follow-up on (inaudible) on Noctiva. Do you guys have a sense of a time line for a pediatric product to support that program, I guess? So what do you expect you to keep spending on it if it's not bringing anything?

Yes. So we're doing a very careful evaluation of the pediatric business. I think from the day we acquired the business, which was now what goes to 20 months, we out of the gate acknowledged and have always recognized that the licenses that we acquired in the business were not going to be in themselves, not carry the business to the promised land, so to speak. And we have -- we've looked at a number of opportunities over this past 18 to 20 months for potential acquisition, something that we could put it into that portfolio to make it more promising and more valuable for our shareholders. We've -- at this point in time, we have not been able to find an opportunity that we felt like matched our capabilities or that we thought had long-term value. And we're looking for something that's a little bit of a differentiator. We continue to look. We have business discussions ongoing. But generally speaking, we're looking at options and things that we can do with that business to make it more productive for our shareholders. So just one thing we'd ask you to do is stay tuned.

Our next question comes from François Brisebois of Laidlaw.

Just wondering, Bloxiverz did very well here, $9.9 million. I was wondering if you can just give us a little more of the outlook. It's obviously kind of coming down. But more on a granular basis why you think that it's still around $10 million.

So Frank, thanks for the question. I think a couple of things, fair comment. I think, number one, when we started and had an approval for Bloxiverz, the market size was somewhere in the neighborhood of 5 million bottles per year. It was the drug of choice and the gold standard for bursting neuromuscular block. Within the past 2 years, Merck, with sugammadex, which they call BRIDION, has actually taken about half of that marketplace. It's a different molecule. It's had some advantages over historic neostigmine. And they've done remarkably better in the U.S. than they had done in Europe and in times past. So first of all, the market is a lot smaller today by about 50%. And then you've had a number of different competitors come into the marketplace. It's impossible, and there's really not a very reliable way to understand when people are coming in the specific marketplaces or the generic business. I think 5 players in that business is probably at the top of what we would have expected. But I do think that having started out of the gate strong, having been very careful and pragmatic about our pricing approach and holding onto business has really kind of served us well in this marketplace. We haven't seen a great deal of pricing decline since the last competitor came in and got situated, but it's always there. It's a generic market. It's the way you have to look at it. And that's clearly -- and while we think there'll be -- continue to be legs with the product for a long period of time, it's clearly a reason why it's important to, from a strategic perspective, to grow your business with proprietary products that you can protect and build and not have to worry about somebody coming in and taking part of your price down or part of your share every 6 months. So we feel good about being able to hold on to what we have. There are very few customers in this end of the business, if you will. Decisions are made by one of a handful of different GPOs and some repackagers. And kind of people line up and they decide to defend that business. And that's what we'll do.

Okay, great. No, that's very helpful. And then, yes, I guess, I'll leave the Noctiva questions for Monday. I look forward to that. And then just on REST-ON, just the efforts. What's proven to be the most beneficial for you guys in terms of enrollment and keeping that time line for 2019 here?

Well, I think initially, we had articulated that out of the gate, we had some difficulty getting some sites registered for having the ability with the DDA to handle schedule one drug. So that was a little bit of a handicap. As you sit back and reflect, I would also suggest that because the patients in our study are sodium oxybate-naïve, that's turned out to be a little cumbersome as well. It's essential that the study -- is a double-blinded -- is a placebo-controlled study that patients do be naïve. But particularly in Europe, where sometimes the product's already available, if a patient has suffered from narcolepsy and have cataplexy and can't stay awake during the day, they're offered an opportunity to take a drug today or participate in a clinical trial that has a 50% chance of giving them a placebo, some people would opt for that. And we expected that out of the gate. We've seen some of that out of the gate, but I would say that those are the 2 principal reasons that we kind of got off to a slow start. Again, we think we've come a long way and the study is on track now. I'll also say that just as a result of that Link2Trials data that we just provided, there's clearly a need, as demonstrated by patients, to have a product that they can take and not have to get up in the middle of the night to do so. So those have been, for the most part, part of the reasoning for having gotten out of the block. It's a little slower initially, but it's picking up quite well now. Thank you.

Our next question comes from Scott Henry of Roth Capital.

Just a couple questions. Most of mine have been asked. I guess for starters, I just wanted to make sure I understood correctly the pediatric division, not that it's a huge driver. But I heard $2 million in the call. But when I look at the numbers, I see other being $1 million. Where is the disconnect there?

Scott, it's Mike Kanan. The -- yes, the other line comprises other things, others than just pediatrics. So there's another product that's in there as well. And we had some gross-to-net adjustments that we ran through the third quarter that created that difference that you're referring to. We had some higher returns on a certain product that we had to accrue for in the third quarter, which creates that disconnect that you're noticing there.

Okay, so there's a contra account of, it looks like, just over $1 million in that line?

Roughly. But it's -- what's important to note is Karbinal, which is the most important pediatric product, had a good third quarter. It was up quarter-over-quarter from Q2 seasonally. But also, it's doing well from that standpoint, and it's up meaningfully year-over-year. So I don't want to get lost in some of the accounting minutiae that goes on there. What's important in that line item is really Karbinal.

Scott, this is Mike. Let me add one thing. I don't know if you're aware of it. But since the inception of what was at one time called Éclat, we have been serving as an authorized generic for a dextroamphetamine liquid product, and it's a pretty much very small product under the radar screen. We don't promote it. We're just simply 1 of 2 generics in the marketplace to a product called for ProCentra. And so a lot of those gross-to-net adjustments related not to the pediatrics business, but to what we've called the (inaudible) business.

Okay, great. The other question is just really strategic. It sounds like commercial launch will be in 2Q of '18. You're going to spend a decent amount of money before then. And you mentioned the possibility of raising capital. The question is, in the event you decide to raise capital, would you want to do it before the launch starts or after the beginning of the launch? And that's obviously, at this point in time, how you're thinking about it, and that may change.

At this point, Scott, I think it's way premature to discuss when we would do a capital raise, what the capital raise would be and that sort of thing. But we -- I think Mike did a great job of explaining. And we've -- as had the initial discussion when we licensed Noctiva, we certainly had the cash to be able to launch the product as well -- in the proper way and to continue to do our FT218 clinical study as well so...

(Operator Instructions) And I'm showing no further questions. I would like to turn the call back to Mike Anderson for any closing remarks.

Thank you, once again. We appreciate your joining us this morning to allow us to update you on the Avadel Pharmaceutical Q3 operating results. We'll look forward to sharing additional updates with you in the future, and we'll hope that you'll be able to tune in to our Noctiva Investor Day on Monday. Thank you very much for your time.

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