Avadel Pharmaceuticals PLC (AVDL) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Avadel Pharmaceuticals Fourth Quarter and Full Year 2017 Earnings Conference Call.

(Operator Instructions) As a reminder, this conference may be recorded.

I would now like to introduce one of your hosts for today's conference, Ms. Lauren Stival, Senior Director of Investor Relations.

You may begin.

Good morning, and I want to welcome you all to Avadel Pharmaceuticals Fourth Quarter and Full Year 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 and pricing.

These and other risks are described more fully in Avadel's public filings under the Exchange Act, including the Form 10-K for the 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 joining the webcast.

They will be posted to the website following the call.

After prepared remarks, we'll be opening the call up to a question-and-answer period.

On the call today, we have: Mike Anderson, CEO; Mike Kanan, CFO; Greg Davis, our Chief Commercial Officer; and David Monteith, our Vice President of Research and Development.

At this time, it's my pleasure to turn the call over to Mike Anderson, our Chief Executive Officer.

Mike?

Thank you, Lauren, and good morning, ladies and gentlemen.

As always, we appreciate your joining this call to discuss our fourth quarter and full year 2017 financial results.

In addition to the financial results, we'd also like to spend some time additionally during the course of this call to provide you with an update on our impending launch of Noctiva, our FT218 product, and the progress on our REST-ON Phase III clinical trial on which we will be modifying today our previous NDA submission guidance and we'll discuss that more fully in a few moments.

We intend to structure this earnings call a little differently from our usual pattern.

After a few opening comments, Mike Kanan, our Chief Financial Officer, will walk through the financials for Q4 and 2017.

At the conclusion of Mike's remarks, David Monteith, our Vice President of Research and Development, will provide an update on FT218 and including an overview of the PK data.

We have not previously disclosed these PK data for competitive reasons and because our IP needed to be protected.

With the Phase III trial well underway and with appropriate patents having now been filed, we want to share some of that data with you, which we think will highlight the strong potential of this product and the reasons why we believe this will be a potentially superior and safer sodium oxybate product.

As you may be aware, the FDA granted us orphan drug designation in January on just that premise.

At the conclusion of David's remarks, Greg Davis, our Executive Vice President and Chief Commercial Officer, will discuss some of our market landscape findings related to sodium oxybate, with some very interesting insights into the use of the twice nightly version, new patient starts, persistency rates and the true rate of concomitant use of sodium oxybate with sodium valproate.

He will also bring you up-to-date on our rapidly approaching Noctiva launch.

Before we talk about those important catalysts, we want to provide you with an overview of the quarter and full year 2017, which by all accounts were both quite successful from an operational perspective.

We finished the December quarter and the year at the top end of our guidance with $34.2 million and $172.7 million in revenues, respectively, despite a gradual increase in competition and some pricing pressure across our hospital products throughout the course of the year.

We used the cash generated by these products to continue funding our REST-ON trial, effect a share repurchase program worth about $22 million and we transformed our company when we acquired Noctiva in September.

Noctiva, of course, is a urology-focused product, and is the first and only product approved to treat nocturia due to nocturnal polyuria.

Nocturia is the condition of waking 2 or more times per night to void and is extremely prevalent, affecting over 40 million Americans.

This is a unique opportunity for Avadel to market the first and only approved product for a large patient population, and I'm pleased to say that during the fourth quarter, our team did a fantastic job building the infrastructure necessary to support such a large launch which was another use of our cash generation.

In fact, as of 2 days ago, we made our first shipments to wholesalers.

And Greg, of course, will talk about this more in a moment or so.

Along with sleep medicine and our hospital products, urology will be a primary strategic focus for us moving forward.

As you know, we recently netted $137.7 million in proceeds from our February convertible offering and divested our pediatric products, both of which give us flexibility moving forward.

We are fully capitalized to complete our strategic initiatives, and again have the opportunity to continue exploring additional strategic acquisitions that may -- could be immediately accretive.

I'll now turn the call over to Mike Kanan, our Chief Financial Officer, to discuss the particulars of the fourth quarter and 2017 in general.

Thank you, Mike, and good morning to everybody on the call.

As you have seen from this morning's release, the fourth quarter results, including our top and bottom lines, were in line with our expectations.

Fourth quarter revenue was $34.6 million, which was above Street estimates and we finished the year strong with $174.2 million in revenues, which was at the top end of our revenue guidance, despite 4 new competitors to our hospital products business over the last year.

Our bottom line results in the fourth quarter included about $15 million in Noctiva launch investments as we prepare for an impending second quarter launch.

Most of these costs are in our SG&A numbers, but some amount was in R&D as well.

R&D in the quarter came in at the highest level in 2017, as our sodium oxybate trial continued to build momentum and we incurred some Noctiva-related R&D costs.

Following the recent successful issuance of our exchangeable notes, which you heard Mike say we netted about $137 million, we are now well capitalized to fully execute our strategic priorities, including the full scale commercial launch of Noctiva, completing the Phase III clinical trial of FT218 and continuing to explore strategically aligned and accretive acquisition opportunities.

Despite the significant fourth quarter Noctiva investments, we were cash flow positive in 2017.

Cash flow from our hospital business was strong and continues to be a primary financial focus for our management team.

In fact, over the last 3 years, we have generated about $120 million of operating cash flow.

The source of this cash flow came exclusively from our hospital business, which we expect will continue to produce some residual cash for years to come.

Coupled with the accretive effect of our recent divestiture of our pediatric business, which we expect will save us about $10 million a year in operating expenses annually and the proceeds from our recent convert, the company's liquidity is strong.

Now let's talk more specifically on how we performed in the fourth quarter.

Revenue for the quarter was $34.6 million, and as expected, was down $5 million from Q3's level of about $40 million.

The quarter-over-quarter decline was primarily due to lower pricing for Bloxiverz, the timing of certain year-end shipments for Vazculep and lower volume in Akovaz given the new competition in the market.

When compared to the fourth quarter a year ago, revenue declined $8.5 million, primarily due to lower Bloxiverz revenues, partially offset by increases in Akovaz revenues which was launched in the third quarter of 2016.

Revenue for the year was a strong $174.2 million, up organically 16% compared to the $150 million last year.

This increase in revenues was primarily due to Akovaz, which as I mentioned, was launched in the third quarter of 2016.

R&D expenses during the fourth quarter totaled $12.1 million compared to about $8 million in Q3.

This increase is a result of higher spending in our REST-ON clinical trial, including new patient enrollment initiatives, costs associated with the initiation and opening of additional clinical sites and increased spending associated with the testing and scale up of contract manufacturing services.

Our full year R&D spend was $34.2 million, flat when compared to 2016.

Higher spending on our FT218 and Noctiva was largely offset by savings from the restructuring of our French R&D site and the rationalization of certain product development programs.

SG&A was $23.1 million in the fourth quarter compared to $11.6 million in Q3.

On a full year basis, we spent almost $59 million on SG&A in 2017 compared to $44 million last year.

Most of this increase, as we've said, is related to the Noctiva launch-related investments.

On a non-GAAP basis, Q4 diluted loss per share was $0.28 and diluted earnings per share was $0.31 for the full year.

Included in our fourth quarter loss was about $0.24 to $0.25 of Noctiva costs.

Our non-GAAP effective tax rate for the full year was 59% and in line with what we guided, but down substantially from 2016 due to 2 factors: First, a portion of the income we earn on Akovaz sales is taxed in Ireland, where we developed Akovaz.

Akovaz sales and profits were substantially higher in 2017 compared to 2016, helping to drive a lower tax rate.

Some of this income is offset by research and development expenditures we continue to incur on FT218 in Ireland.

Second, the increase in marketing spend on Noctiva is eligible to offset some of the income we earned on the hospital products in the United States.

We believe that a large portion of the future Noctiva spend will be eligible to offset U.S. taxable income attributable to our hospital products.

As a result, this may eliminate or substantially reduce our U.S. cash taxes in 2018 and lower our effective income tax rate.

We also expect that the U.S. tax reform recently passed will help us achieve a more reasonable income tax rate in the future.

Let's move onto the next slide, which covers our GAAP results.

The primary difference in our non-GAAP and GAAP results relates to how we treat expenses associated with acquisition-related contingent consideration, amortization of intangibles and any restructuring costs we might have.

Please refer to the appendix to today's slide presentation for a reconciliation of non-GAAP to non-GAAP.

The largest GAAP to non-GAAP difference is related to our contingent consideration.

During 2017, we lowered our contingent consideration liability for GAAP purposes by $31.1 million due to changes in the value of Éclat acquisition-related warrants and changing market conditions for our 3 hospital products.

Our GAAP net loss for the fourth quarter was $9.3 million or $0.24 per diluted share compared to net income of $4.7 million and $0.11 per diluted share in the same period last year.

For the full year, our GAAP net income was $67.3 million or $1.61 per diluted share compared to a net loss of $41.3 million or $1 per share in the same period last year.

And I'm pleased to say that our full year 2017 GAAP effective tax rate was 26%.

Included in that 26% was a onetime cost of $3.5 million to write down certain deferred tax assets due to the 2017 Tax Cuts and Jobs Act.

Excluding this onetime cost, our GAAP tax rate would have been about 23%.

Moving on to our cash flow summary.

We ended the year at $94.1 million in cash and marketable securities, down from $154.2 million as of December 31, 2016.

As you can see in the slide, our base operating cash flow was a strong $87 million during the year.

This was largely due to our hospital products, which as you know, throws off a significant amount of cash for us.

Let me say a few words about our capital structure.

As you may know on February 16, we completed our exchangeable notes offering and netted about $137 million after an underwriting discount and some other expenses.

We also used $18 million to simultaneously acquire 2 million of our shares.

And just recently, we settled a portion of the Deerfield warrants.

As you recall, a Deerfield entity held 3.3 million warrants to acquire Avadel shares.

I'm pleased to say that the 2.2 million warrant tranche was net settled for a combination of cash that we received and the issuance of 603,000 shares.

The remaining 1.1 million of these warrants are scheduled to expire on March 12.

After the settlement of the Deerfield warrants and through our 2 share buyback programs, we have reduced our outstanding share count by about 3.5 million shares or approximately 8% over the last year.

In closing, let me provide some additional commentary around changes to our 2018 guidance.

We revised our revenue and SG&A guidance solely to give effect to the divestiture of the pediatric products.

Our revenue guidance is now $105 million to $125 million compared to $110 million to $130 million previously.

Our guidance for Noctiva revenue still contemplates a near-term launch and remains unchanged at $10 million to $20 million.

R&D spending also remains unchanged at $40 million to $50 million.

We have lowered our outlook for SG&A to reflect the disposition of the pediatric products to $80 million to $90 million from our previous guidance of $85 to $95 million.

We continue to expect about $50 million to $55 million in Noctiva spend, and I expect about $6 million of cash interest expense associated with the exchangeable notes.

And because of our anticipated losses in 2018, our effective tax rate is expected to be a tax benefit, and that benefit will range anywhere between 0 to 10%.

With that, I'll turn the call back over to Mike Anderson.

Mike?

Thanks, Mike.

Before David Monteith discusses FT218, I'll update the progress of our REST-ON trial.

As mentioned a moment or so ago, the REST-ON trial guidance is being modified.

The REST-ON study is well underway.

Patient enrollment started slowly in 2017, but ramped up during the course of the year as more clinical sites were fully activated.

We saw an understandable drop-off in screening and enrollment around the holiday season, which is typically the December and January time frame, and then anticipated an accelerated pickup following the new year.

However, a recent review of the overall progress with our CRO has caused us to reflect on our previous timeline estimates of filing an NDA by year-end.

Although we've experienced a pickup over the last month or so, it has not been to the extent that we and our CRO had anticipated.

Given these discussions, we believe we need to withdraw our guidance of filing the NDA by year's end.

I want to assure investors that the completion of this study is of paramount importance to this company and we're doing everything in our power, together with our CRO, to expedite and complete the study.

We have continued and further increased our efforts in identifying and initiating new clinical sites, implementing other recruitment tools and have engaged even more company interaction with the existing sites.

Last year, we've waited until the August timeframe to update enrollment timelines.

And for this reason, given these recent, albeit early concerns over the current enrollment ramp, we have decided to provide the update now rather than to potentially disappoint later.

Furthermore, in light of this recent development, we are reluctant to give a specific updated timeline at this time for completion of the study and the filing of the NDA.

We will do everything we can to complete this study as quickly as possible.

We want to be sure that we properly manage both ours and our investors' expectations, and we'll provide an update as soon we are able in the second half of 2018.

Irrespective of the challenges in recruiting eligible patients for the trial, we firmly believe that our product, once submitted and approved, will offer significant advantages to narcolepsy patients.

With that, I'll turn the call over to David Monteith to discuss our once-nightly sodium oxybate.

David?

Thank you, Mike.

As mentioned previously, we would like to take the opportunity today to give everyone some further insight into the status of development of FT218, the design of the product and in particular, to highlight some of the details around the product's pharmacokinetic profile.

We're able to give this detail today as the first of our once-nightly specific sodium oxybate patent applications has recently been published.

Before moving onto the PK profiles, I would like to add a comment about the status of the ongoing REST-ON Phase III study.

Although this is a very challenging study in a rare population, we do have tremendous support from our investigators and from the narcolepsy community in helping us identify and recruit the correct patients for the study.

The potential advantages and value that this new once-nightly form of what is a highly effective drug will bring to patients is recognized across the board.

We've continued to increase the number of sites participating in the trial, and we're working closely with our investigators to enroll and complete the study as quickly as possible to bring this highly anticipated product to the market.

We have high expectations for the outcome of the Phase III study, and particularly given the excellent and robust PK profiles that the product has exhibited and maintained throughout the development program.

I will now discuss this aspect of the product in a bit more detail.

So in the current slide, some of it -- we show some of the PK data from the initial pilot studies with [3 tentative] FT218 formulations studied in a crossover fashion of 4.5 grams against 2 by 2.25 grams of the currently marketed product.

These data formed the basis for the further optimization of the final drug product.

Highlights have been the best of these profiles is the fact that the Cmax for FT218 falls between the 2 peaks typically seen for twice-nightly sodium oxybate in controlled pharmacokinetic studies.

This avoids the sometimes very high peak levels of sodium oxybate encountered by patients upon taking the second fasted dose in the middle of the night.

Overall, the PK profile was smoothed out with blood concentrations maintained at higher levels through the first 4 hours post dosing followed by a gradual decline on the blood levels until the morning hours.

Total exposure to the drug, the AUC, is identical to the twice-nightly product.

Furthermore, and significantly, at 8 hours post dosing, the blood levels for FT218 are similar to or lower than exhibited by the twice-nightly formulation, potentially minimizing any concerns of a hangover effect from the drug in the morning.

In addition to the -- to this there is, of course, no variability in the sodium oxybate blood levels for FT218 associated with the timing of taking a second dose in the middle of the night.

Morning blood levels for the twice-nightly formulation are highly dependent on the time that the patient takes that second dose and we know from talking to patients that this is particular challenge for them.

The second dose is often taken later than expected or sometimes, missed altogether.

This will not be a variable with FT218.

In the next slide, we show the PK profiles for rising doses of FT218.

The product exhibits remarkable consistency and linearity of response as doses are increased.

Given these profiles and results from other PK studies that we've continued to run throughout the product's development, we are excited by how consistent the profiles are across studies and across doses from 4.5 grams to 9 grams.

We have now run several PK studies on our product, and we have demonstrated remarkable consistency and predictability of response.

We have PK data at all manufacturing scales in hand and we have great confidence in what is a very robust product.

Related to the consistency seen with the PK profits, I wanted to briefly describe the product that the patient will receive.

We plan to make the product available in unit dose-sachets or stick packs at 4.5 grams, 6 grams, 7.5 grams and 9 grams doses, the typical nightly doses of the twice-nightly products label.

The product is very easy for the patient to use.

The contents of each dose unit are reconstituted in a small amount of water and taken prior to going to sleep.

That's it.

There's no measuring, no splitting of doses required, no unattended second dose left on the nightstand and there is no variability in the timing of that second dose.

The ease-of-use further highlights the benefits and predictability and consistency of blood levels and potential response to FT218.

We believe that these attributes could have a significant benefit in terms of outcomes, including side effects, for narcolepsy patients taking FT218.

In conclusion, we have a very robust and reproducible product in FT218.

And we will have a robust clinical data set when the NDA is filed.

As we have stated previously, the PK data demonstrate the same AUC as the currently marketed twice-nightly product, and the profiles are consistent with a comparable onset of action and a comparable duration of action.

However, the patient only has to only take one dose.

The goal remains to complete the REST-ON safety study as quickly as we can and to file for approval of this product, which will provide a significant advance in the therapeutic options available to narcolepsy patients.

I will now turn the call over to our Chief Commercial Officer, Greg Davis, to discuss aspects related to the commercialization of both Noctiva and FT218.

Thank you, David.

As you can see, we are very confident and bullish on our formulation and the benefits of what we believe FT218 may deliver.

We also believe the FDA may agree with us given our recent orphan drug designation, based on the plausible case that FT218 may be clinically superior to the twice-nightly sodium oxybate product.

This is an important step for us as it is a meaningful advantage to be the first once-nightly sodium oxybate approved with the orphan drug designation confirmed.

We are confident that definitively, we have a robust and reproducible product that can potentially make a meaningful difference for patients.

In preparation for that, we have continued our deep market assessment, while developing and executing the required clinical, regulatory and legal strategies to prepare and advance FT218 for potential NDA approval.

We firmly believe there's a significant opportunity for a large group of eligible patients that need and deserve an improved treatment option.

Our interactions with the patients to date have helped us to uncover important needs that make us even more confident in the commercial potential of FT218.

We have learned a tremendous amount of information about now narcoleptics are diagnosed, treated and managed based upon the patient type and their treatment pathway.

As a result of a very recent, independent 3-year comprehensive longitudinal patient claim analysis and market assessment, we learned many things that are guiding us in all aspects of our go-to-market strategic choices.

Some highlights of this research project are as follows: Over a 3-year period, there were a total of 262,000 unique patients managed as having the condition of narcolepsy.

Of those 262,000 patients, 194,000 were treated pharmacologically.

And of those, only 19,000 unique patients, or approximately 10%, actually received the current twice-nightly sodium oxybate product.

What is even more startling, based on this claims analysis, of those 19,000 patients, less than 1% of patients on the twice-nightly formulation also received sodium valproate.

Albeit significantly lower than previously assumed, this insight only further aligns with our multi-pronged approach to address this matter head-on and in an appropriately aggressive manner.

Equally as interesting was that from a patient perspective, of those 19,000 unique twice-nightly sodium oxybate patients, nearly half of all who start as a new patient will have discontinued their treatment within the first 12 months of therapy.

We have heard on numerous occasions during our patient interactions that some of the primary reasons for this rate of discontinuation of the twice-nightly formulation are tolerability, difficulty with the middle of the night dosing and even cost.

Furthermore, when exposing these patients to the opportunity for a once-nightly product, there is significant interest.

While we understand tolerability can impact patients, the cost issue was also interesting to us, given there's only one option available.

And what we have learned in assessing cost, both from the patient's perspective and the payer's, is that the price of the current treatment has increased by over 1600% since 2006.

And over the last 5 years, when comparing the years 2012 to 2017, we estimate internally that approximately 70% of the revenue increase for the twice-nightly formulation is directly related to price, while volume, based on patient growth, represents approximately 30%.

To further emphasize this point, the WAC, or wholesale acquisition cost, of the current product in February of 2012 was $1,635 and as of February 2018, it is now $4,315.

This per a leading pricing compendia.

And for reference, the price in August of 2006 was $270.

As such, and based on the above, we believe there is a clear need in the market for a new alternative that can help patients and payers, and we remain fully focused on executing on all fronts to bring FT218 to market.

Now moving on to the Noctiva.

Previously we had guided that we would expect the full trade launch to occur in Q2, which was to be in conjunction with our major coming out and launch event at the annual AUA meeting near the end of May.

We are pleased to report that we've been able to accelerate our launch preparation, and as such, have begun shipping to our major wholesalers this week.

This is an acceleration of greater than 4 to 6 weeks from our original time frames, primarily due to the exceptional work done by our supply chain, distribution, patient access and our marketing teams.

All patient assistance programs are fully operational, as is both our retail distribution program and our specialty mail order distribution program.

We do expect it to take a few weeks for product to fully distribute into the retail channel.

And to assist us with that, we are distributing directly to high value, identified pharmacies that align with our territories, our targets and our identified patient segmentation.

We are conducting this distribution strategy in partnership with 2 major national retail chains, thus, providing upon launch, what we believe will be an adequate financial pharmacy stocking across every one of our sales territories.

From a sales rep perspective, we remain fully staffed and are undergoing product-level training currently, while continuing our condition and disease state awareness and education campaigns.

We expect to be executing our early prescription access program as of April 1. This will allow us the time to ensure our reps are fully trained and our distribution programs and retail outlets stocked, as we have designed.

We will be launching initially with the package insert as our core selling aid, along with additional nocturia condition awareness-related materials for both physicians and patients.

As we finalize our full campaign, we expect the timing of the full branded campaign launch to occur on or around May 1.

Furthermore, as shared previously, we expect to have a very prominent presence at the annual May AUA meeting as our seminal coming-out event as Avadel in neurology and Noctiva for nocturia due to nocturnal polyuria.

The last subject to cover, as it relates to Noctiva, is where we stand with payers.

Our team has been laser focused on Part D plans for clinical presentations and contract negotiations as we look to secure preferred access for the 2019 formulary process.

To support this effort, we are quite pleased that the 3 major compendia services that are the major sources for both payers and retailers as to how products are characterized have all placed Noctiva in its own category, at our WAC price of $425 per unit for 1 month of therapy, with no other competitors, and of course, with no therapeutic or generically substitutable and/or approved alternatives.

This progress has set us up very well in our discussions with payers, and we remain very pleased with the initial reaction to the clinical profile and the economic benefits that Noctiva offers as the first and only treatment for nocturia due to nocturnal polyuria.

Although we will experience some typical, albeit somewhat limited, mandatory 6-month blocks as a new drug to the market, that clock has already begun ticking.

And we have identified opportunities to work through some of those even more efficiently.

We are and remain confident that we will see progress in not only securing 2019 part D wins, but also in potentially rolling some of those wins forward for 2018.

This, of course, is in addition to our other primary payer objective of securing generally unencumbered access in and across the commercial book of business.

We are actively engaged on the payer front and have made meaningful progress with the top plans as our priority.

And we look forward to updating key wins throughout the course of 2018 with some, we believe, potentially coming quite soon.

With Noctiva, we have a significant opportunity that we believe will be a major catalyst for Avadel, as the only product approved and proven to effectively treat nocturia as a highly prevalent and highly bothersome condition.

As we continue to learn more, prepare and execute our plans, we've only become more confident and bullish on this opportunity for Avadel, the patients we serve and our shareholders.

Thanks, and I'll now turn the call back over to Mike Anderson.

That concludes our prepared remarks for today.

And so operator, we'd like to turn the call over to any potential questions.

(Operator Instructions) Our first question here comes from John Boris of SunTrust.

First question for David.

Can you provide some quantitative metrics around the number of patients that have been enrolled to date of the total number of patients?

And how many total sites you have up and running on FT218?

The second question has to do with the Jazz citizens' petition which was denied by the FDA, allowing a carve out for valproate.

Do you have an agreement with the FDA to have of carve out on valproate?

And final question on Noctiva.

Greg, you indicated that you're able to ship products 4 to 6 weeks earlier than expected.

How much did you put in to distributors?

How will you account for it?

Will you account for it when shipped?

And those are the essential questions.

John, this is Mike.

Before David begins answering questions, one thing, let me take on the comment -- or the question regarding the valproate carve out component.

We have what we think is a very excellent patent strategy that is multipronged.

At this point in time, we're not prepared -- it wouldn't be appropriate to discuss all that.

I will tell you that as you know the valproate citizens' petition was specifically designed as the regulations and law require for generics that are designed as -- identical alternatives to and designed to be used in lieu of branded products.

So most of that citizens' petition really applied as, to the best of our knowledge, to that component.

So as it regards the strategy itself with respect to the IP, I'll just leave that at that and I'll turn it over to David and afterwards, Greg will answer your Noctiva.

Okay.

So go back to the original questions, I think there were 2 components.

One was concerning the number of patients in trials and the second was against number of sites that we have initiated.

I'll start with the sites because maybe that's the easier one to address.

Of the original sites, 40, going back to when we first started the study, almost every one of them is up and running until we access -- there are 1 or 2 where we have continued really local state issues, with getting access to be able to run with the schedule 1 material.

But really, all of our original sites are now active and up and running.

Now a total percentage of current sites is running somewhere around 80% but the reason for that is because we have continued to look for high potential, high-value sites that we can add to this study and bring on board.

And as a schedule 1 material and it's a schedule 1 base study, it does take some time to get all of the sites all the approvals that they need to be able to run with it.

So we've had new sites that during the course of last year, that we've added to the study and have been activated.

We have some that have been added where we're working through the activation process.

And we continue to look and see if there's -- really looking for high potential sites that we can add to study.

In terms of the number of patients, I don't think I'd be able to give you a precise number this morning.

What I can say is that we're well into the study.

It's progressed some considerable distance.

But as Mike said, the numbers just aren't quite where we would like them to be at this point in time and projecting forward very recently, we feel that's why we had to say something about it.

David, can I just press you a little bit -- can I just question you a little bit on the enrollment?

What percent or a range of a percent of the trial has been enrolled?

Is it 1/3?

Is it 1/2 that led to or contributed to the delay?

Yes.

This is Mike.

We're not in a position today to talk about that specific information.

We will -- our best effort will be made to provide an update in the second half and hopefully, at that time, we'll be able to be more specific to answer your question.

But at this point in time, we would respectfully defer to answer the question that you've asked.

On the Noctiva front, we haven't said -- I would describe our distribution -- I would say we're not over stocking the channel.

We are precisely stocking pharmacies and drawing from our [stock-in and its] channel to stores that overlap with how we segmented the market based on patients, based on claims, based on prescribers, based on our territories.

So I would say that it's appropriately stocked relative to our outlook, without loading the channel per se.

We feel pretty good about how we partnered with 2 major retailers in a very sophisticated way to uncover those stores.

In terms of revenue recognition, Mike will correct me, but our expectation is that, that stock-in that's occurring right now will be recognized in Q1.

Yes, John.

We'll likely book revenue when we ship to the wholesalers, just like we do with our other products today.

So can you give a number?

Was it $2 million?

$3 million that you shipped into the channel?

We haven't said what that will be.

I will just tell you that our guidance is between $10 million to $20 million for the year.

And we expect to beat that guidance at this point.

And our next question comes from François Brisebois from Laidlaw.

Just a couple here.

So in terms of enrollment, obviously, when you add more sites, there's always the potential for variability.

What are the efforts taken when you look at sites to make sure that they're the right ones?

We have a very thorough feasibility process that we go through with any new sites.

We very carefully, first of all, gather information from the site to see if we feel that they're appropriate, both in terms of the quality of the site, so the previous experience, and as well as potentially the number of patients that they may have access to make sure that it's a high-value in what it's adding to the site -- to the overall study.

We have pre-study site visits to talk to the sites to make sure, again, before we commit to them that it's appropriate.

It's quite a process that we go through.

I think as I would say that we're very, very thorough in terms of making sure that the sites are appropriate for the study.

If I could jump in just quickly for one last one.

When you guys mentioned M&A and you're still looking, what is the best looking target for you guys?

What do you look at when you look at companies?

Obviously, the FSC is no longer there.

What else would make sense for the pipeline?

I think our near-term priority, Frank, would certainly be targeted to accretive opportunities that leverages the infrastructure we have built right.

So that is really where we're spending a lot of our diligence and search time in terms of looking for those sorts of opportunities ideally with growth potential.

But would come in behind on Noctiva, not ahead of it, right?

And certainly, the notion of repeating a Noctiva-like deal is not what we're thinking about in that regard at all.

Frank, if I can add to what Greg said.

I think he brought up an excellent point and that is that if you look at Avadel over the last several years, actually, we've engaged a lot of different activities.

We've relocated the business.

We changed the philosophy.

We've divested a group of products.

We've acquired a product.

I think we're at a point now where we need to focus principally on executing things like Noctiva.

And I'm confident that we're doing that as we speak.

So the point being is that as we look for acquisitions, and as Greg described, I think that our #1 interest would be something that would be accretive.

But number two, not something that we have to build from scratch.

We're not in a position today, with our resources and capabilities, to be able to do that.

Where we continue to look, we have a lot of opportunities as always in the hopper, most of which, as you know, don't come to fruition but we're looking, it would be great to leverage some of what we have.

But we have the opportunity now with the catalysts that we have to be very selective and focused in what we might acquire.

Yes, last comment.

We're very -- we have clear vision and line of sight of where we see we can go with Noctiva in neurology, and then from there.

And those are the things we're trying to work in and focus on in terms of where our resources are today and how do we leverage the P&L that we've invested in on this launch.

We're not compromising this launch at all.

And our next question comes from Matt Kaplan with Ladenburg Thalmann.

Just want to dig into the FT218 a little bit more in terms of what are the issues that you've identified that are impacting -- having an impact on enrollment?

And how are you addressing those?

It's a complex situation.

As you now, it's a rare condition.

So first of all, there are not that many of these patients available to us.

The study is quite demanding, of the patients as well.

And as you know, we're looking for sodium oxybate naïve patients.

So I mean one of the things that you find is that there -- a lot of patients who are associated with the clinical sites and particularly clinical research sites, maybe the likelihood is higher that they will have had previous exposure to Xyrem.

So one of the things that maybe we'll finding is that the prescreened rate, patients who would be eligible for the trial, is a little bit lower than what we had originally anticipated.

But we understand it, and we know that there's a much larger population out there where the previous exposure to the twice-nightly product is not going to be an issue.

So a number of the patient initiatives, the recruitment initiatives that we mentioned during the call, are specifically related to outreach to patients outreach to maybe physicians who are not necessarily strictly clinical research centers to try and access to a larger body of potential patients for this study.

It's hard to put a finger on one particular thing, but overall, there are a lot of inclusion/exclusion criteria for the study.

It's quite a demanding study.

It's a 50% placebo-controlled study.

We have to find the right patients who are willing to come in and be part in the study.

And the other thing that you should be -- just thinking back to where we are with the overall program, remember that the protocol that we have at this point in time is subject to an agreed special protocol assessment with the FDA.

And so certainly one of the -- what people may consider an easy option is, well just change the protocol and make it easier to enroll.

That would be a huge step for us to take and we have to think we're very careful about that, given the agreement with the FDA already in place.

And then you mentioned that there was a recent patent application that was published.

But can you describe the new IP, and then the IP surrounding 218?

So the IP is published.

If you go on to a patent site you'll be able to find it -- the January -- it was published in January.

And it really -- it describes the background for the formulation, the design of the product and the earlier pharmacokinetic data that we've got.

And now within that patent it describes ranges and different embodiments of the formulation.

It's not necessarily exactly the one that we're currently using in the REST-ON study but what's described on there would certainly would fall within the overall claims around that first patent.

We continue to work on additional IP around FT218 and we will have further applications.

Great.

And I guess, shifting gears to Noctiva.

At launch, I guess, by that beginning of May, what is the coverage do you expect to have overall in terms of percentage of lives covered?

And in percentage of lives covered in an unrestricted manner?

Yes.

I think our view in May is that, in the commercial book of business, we'll have fairly robust coverage.

In Part D, our estimation is that we'll have coverage, but it's going to be in a non-preferred position, probably in both books of business, for the most part.

But in Part D, that is a barrier in our view to uptake in Part D. So what we have done is built a distribution program and a patient access program that is designed to mitigate those challenges and move patients into treatment, despite their payer status from that standpoint.

We do it as an upfront investment to get patients on the product and get their experience with the drug, that as we turn formulary wins throughout the course of '18, that they will then roll into a covered benefit.

So our goal, if you will, is to ensure patients are not disrupted at the point of prescription regardless of payer situation, based on how we built in the requisite support programs to help them, whether that's through retail distribution or through our mail-order specialty pharmacy distribution.

Okay.

Just -- so I understand.

So you say robust covers on the commercial side, robust means 90%-plus?

No, I mean there would be lives that are blocked, right, it's benefit design-related but our feedback to date has told us that, by and large in the commercial sector, which we're not focused on in terms of getting preferential positioning, what we're focused on is just ensuring access.

And the reason why we've done that is because we've built the programs around those commercial patients to ensure that no patient pays more than $40.

So whatever the situation is for that patient, if their out-of-pocket is $67, then their -- in terms of the benefit design because they're nonpreferred Tier 3, then that patient is will pay $40, right, from that standpoint.

So the whole premise is to create the programs around that commercial patient as such of that from their standpoint, it's like they're in a preferred position from their out-of-pocket, while we work through the necessary contract negotiations and whatnot with payers.

And then just rolling back to the Part D. You said you're going to have very little coverage at launch.

Where do you see it kind of coming in?

Is it late this year?

Or really more kind of [coming on] next year?

Remember that in Part D to be on formulary in 2018, you needed to bid in 2016.

So we're bidding now.

We've got extensions from all the major plans, and we're bidding now for 2019, with language that we were looking to roll forward that bid to include 2018.

So those negotiations, clinical presentations, contract proposals are all -- have gone on and we're awaiting P&T decisions or in process, depending on the which payer you're referring to.

But all of the top 10 have been engaged directly and that represents almost 90% of those lives.

So our expectation is that by and large in Part D, until we get a win that rolls forward, we'll be primarily in a Tier 3 nonpreferred position, a little bit of NDC block from that standpoint.

But in both cases, it's -- the coinsurance rates in nonpreferred Part D are pretty high.

So our expectation is that patient would not adjudicate that claim, and as such, we have built a program that allows for that patient to participate in a cash pay program outside of Part D that we believe they'll find equally as interesting and until their formulary situation improves, which will mirror the $40 out-of-pocket.

The percentage of lives that are covered under Part D versus commercial coverage in the population you're going after?

Yes.

I mean, if you look at the data point in the demographic, 80% of patients who are adults, who suffer from this condition, are 50 and above, all right?

And of that 80%, a little bit more than half or 60% of that 80% are 65 and above.

Okay, that's helpful.

And then the last question.

Can you give us an update in terms of beyond FT218, what you have in your internal pipeline that you're progressing forward at this point?

Matt, this is Mike.

As you know, we've had some products that we've been working on through our R&D efforts in France.

Those products, for the most part now, have -- are included in our divestiture of the pediatric business.

We have a separate development and licensing agreement.

And because the partner, Cerecor, believes those to be confidential, we're not in a position to be able to talk about it.

But we do have some early stage opportunities that we're looking at as it relates to the continued development of our R&D efforts from France.

So I guess, beyond the pediatric indications, Mike -- or products?

Is there -- there's opportunities beyond those in terms of urology and sleep -- your new focus?

I didn't hear that.

I'm sorry.

In terms of internal pipeline candidates that you're organically developing, are there opportunities that are in your new focus in terms of urology and sleep-disorder?

(inaudible)?

It's Greg.

I would say that, there are opportunities, and given the relatively newness of Noctiva from a pipeline standpoint, those sorts of opportunities are under evaluation.

And we recognize the importance of building a pipeline aligned with those businesses.

And as such, we are looking at how do we apply our technology for opportunities as well as looking at other already developing assets that are in pipeline today as a means to build that strategy long term.

And our next question comes from Scott Henry with Roth Capital.

I'll hit a couple of different areas to start.

First, the Éclat business looked pretty strong in Q4.

Any kind of pushes or pulls in 2018 that would be helpful when we think about Noctiva, Bloxiverz -- or not Noctiva, but Bloxiverz, Vazculep and Akovaz?

So -- hey, Scott.

And I would say that we've seen the requisite markets we're competing in have been relatively stable.

We have had new competitors as we discussed at the end of last year.

We're seeing -- we've seen some activity on their part.

But at the same time, in Akovaz, we've seen quite a bit of disruption in the last few weeks with Akorn that has created opportunities for us and another participant to begin to benefit from.

We'll see how sustainable that is.

But clearly, there has been a little bit of shake up from that standpoint in the last couple of weeks on ephedrine.

But relative to everything else, we've seen a little bit of -- what I would characterize as expected pricing pressures.

But again, as we've described, each one of these categories -- each one of these segments are really governed for the most part by 4 major purchasers.

We have all our contracts and we're all defending our share.

So from that perspective, we believe we can hold serve.

That's helpful.

And then for Mike Kanan, giving him a chance to say a couple of things.

Mike, can you talk about the quarterly spend trajectory for the year?

And as well, with all the movements on the capital structure, what would be a ballpark shares outstanding number to look at when all of that flows through in 2018?

Yes.

Let me -- I'll start with the trajectory.

We've guided R&D between $40 million to $50 million.

That's roughly going to be in line quarterly.

There may be a bit of a ramp up as we continue to progress on new patient initiatives for sodium oxybate.

But roughly that will move pro rata throughout the quarter.

SG&A, will ramp up as Noctiva begins a full-scale launch.

So we would expect SG&A to go up likely from our first quarter run rate to something higher than that.

We haven't guided specifically to what that will be.

But overall, for the year, $80 million to $85 million on SG&A is what we're expecting.

With respect to the share count, you're right.

We have reduced our share count a bit here over the last year.

And right now, we are at a fully diluted count of about 40 million.

But our basic share count is more like 38 million shares outstanding so between 38 million to 40 million at this point is what we are thinking about on the share count.

That's helpful.

And then on Noctiva, it sounds like commercial promotion will start in May.

When should we start to look at prescription data -- just want to give you an opportunity to -- I guess, first, when could it possibly show up?

And then when do you think it will be relevant?

Yes.

I think you can begin to see it as early as in April, right?

From that standpoint because we will be out with a package insert, product will have made its way through the channel.

And although we won't have started the full campaign yet and we are initiating some -- or what we characterize as early access programs, patient experience programs that come with some sampling and some other things, you can begin to see scripts and -- probably in the back half of April, depending on how it's captured in IMS reporting.

Some of that will depend on how the channels for which patients pursue and secure Noctiva.

If they go through our distribution model, well, we may have to self-report that to a certain extent for some of those patients.

That being said though, I would expect to start seeing something in April.

In terms of the May timeframe, really, it's much more around the full campaign, right?

Instead of just the package insert.

In terms of anything material, I mean -- to me, it's material from every day, right?

So we're going to look at it every day, every week.

We -- ultimately the ramp up, in my view in 2018, will correlate both with driving patient demand and our programs kicking in, coupled with formulary wins that will convert them into a covered benefit.

So what's the right time frame?

We're going to look at it every week.

And so every week is going to be important from that standpoint.

And I think as the year progresses, I think you'll see, as we get out a few months, that the trajectory becoming obviously bigger and higher.

So...

Okay, great.

And then final question on FT218.

Because I know Mike probably wants another question on the timeline of that.

And you may not want to answer this.

Would it be reasonable to think you could have this trial enrolled in 2018?

I'm not asking about the filing, but is that still a reasonable expectation?

Scott, it's a great question, and I'm really enjoying all these questions today.

I think at this point in time, we'd rather not pontificate or suggest anything [really] until we -- until probably at least the second half, at which time we would provide some sort of an update.

We'd like to sort of see how the next several months and so forth go.

But we understand the need for people to under -- to be able to contemplate that and to be able to model it and so forth.

But at this point in time, we're really not in a position to be able to give you any kind of an update.

Sorry.

And I'm showing no further questions in queue.

I'd like to turn the call back over to Mike Anderson for further remarks.

All right.

Thank you, operator.

Thank you, again, for joining us today.

We will be presenting at a number of different conferences over the next several months.

And we'll look forward to providing you additional updates throughout the course of the year, both on the trial, of course, also on the Noctiva launch and other developments that may occur with the company.

And we appreciate it and wish you a good day.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the program.

You may now disconnect.

Everyone, have a great day.