Nektar Therapeutics (NKTR) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Nektar Therapeutics first-quarter 2013 financial results conference call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will follow at that time.

(Operator Instructions)

As a reminder, this conference may be recorded. I will now turn the call over to your host, Jennifer Ruddock, Vice President of Investor Relations. Please go ahead.

Thank you. Good afternoon everyone and thank you for joining us. With us today are Howard Robin, our President and CEO, John Nicholson, our Chief Financial Officer, Dr. Rob Medve, our Chief Medical Officer, and Dr. Steve Doberstein, our Chief Scientific Officer. On this call, we expect to make forward-looking statements regarding our business, including but not limited to clinical development plans, the timing of future clinical results and regulatory filings, the economic potential of our collaboration partnership, the therapeutic and market potential of our drug candidates and those of our partners, our financial guidance for 2013, which includes potential milestone payments, and certain other statements regarding the future of our business.

Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, and changes that are difficult to predict and many of which are outside of our control. Important risks and uncertainties are set forth in our quarterly report on Form 10-Q, filed today. We undertake no obligation to update any forward-looking statement, whether as a result of new information, future developments, or otherwise. A webcast of this call will be available for replay on the Investor Relations page at Nektar's website at www.nektar.com. With that, I would now like to hand the call over to Howard. Howard?

Thank you, Jennifer. Thanks to everyone for joining us this afternoon. I'm very pleased with our achievements over this past quarter. Including the start of two very important clinical studies, our Phase 3 study with Bayer for Amikacin Inhale to treat hospital-based pneumonias, and our second Phase 2 study for NKTR-181, which is a human abuse liability study. We expect to have data from this HAL study as well as the efficacy study for NKTR-181 in mid-to-late summer. We will discuss more on NKTR-181 in a moment. Nektar now has five highly valuable programs spanning multiple therapeutic areas that have completed Phase 3 or are in Phase 3. Our pipeline leverages an innovative technology platform that continues to generate new drug candidates in pain and oncology.

As I said before, Nektar is in the unique position within our industry with five key Phase 3 programs spanning several distinct therapeutic areas. Naloxegol, which has completed Phase 3 by our partner AstraZeneca, etirinotecan pegol, our NKTR-102, our wholly-owned program in metastatic breast cancer which is in Phase 3, BAX 855 which is in Phase 3 with our partner Baxter, Amikacin Inhale, was our partner Bayer, and Cipro Inhale which is also in Phase 3 with our partner Bayer. In addition to our Phase 3 pipeline, we have two wholly-owned development candidates, NKTR-181 and NKTR-192, which position Nektar to capture a significant opportunity in the chronic and acute pain markets. So let me start first with an update on naloxegol. AstraZeneca has met with the FDA and EMA, and plans for naloxegol will be finalized over the coming months incorporating the outcome of ongoing pre-NDA discussions with the FDA.

As you know, AZ and Nektar reported excellent efficacy and safety data from the KODIAC program which includes two pivotal efficacy studies, a 12-week extension study, and a one-year long-term safety study for naloxegol. Naloxegol 25-milligram dose met its primary endpoint in all of its secondary endpoints in the two efficacy studies. The comprehensive well-controlled 52-week safety study of naloxegol was the first and only long-term comparative study completed in OIC to prospectively measure potential symptoms of opioid withdrawal over 1 year of dosing and to externally adjudicate for major cardiovascular events, or MACE. In this study, called KODIAC-08, there were no reports of opioid withdrawal attributable to naloxegol over 52 weeks of therapy. Importantly, there was no imbalance in MACE events in the study. The study was randomized two to one and as I told you on our last call, there were two cardiovascular events in naloxegol arm out of 534 patients and two cardiovascular events in the usual care arm out of 270 patients. More than half of the patients entering into the long-term safety study were considered to be at moderate to high baseline cardiovascular risk based on the presence of one or more pre-existing risk factors such as prior history of heart disease, high blood pressure, high cholesterol, obesity, diabetes and smoking.

During the pre-NDA interactions with AZ, the FDA expressed a general safety concern that arose from regulatory reviews of data from other peripherally restricted opioid antagonist molecules that are pharmacologically different from naloxegol. Their first concern is related to a theoretical link between opioid withdrawal and cardiovascular events. Although they have not established that there's a causal relationship. They have also speculated that an opioid antagonist might interact with a delta subtype of opioid receptor which is theorized to be involved in cardio-protection. So what I'd like to do is walk everyone through these concerns and tell you how these concerns will be addressed with the agency. First is the FDA's concern about a drug called alvimopan, which as you know, conducted a 52-week safety trial in patients taking opioids for chronic pain. The study was very similar in size to the naloxegol safety trial and was also based on a two to one randomization.

In the alvimopan trial, there was a clear imbalance and cardiac events in the alvimopan treatment group relative to placebo. In that study there were 14 MACE events in the 528 patients treated with alvimopan as compared to zero MACE events in the 267 patients in the placebo group. Their study showed a clear imbalance in MACE events between the two arms as we just told you, naloxegol in the same patient population did not show an imbalance between the two arms. Second, the FDA is concerned about opioid withdrawal precipitating cardiovascular events. Naloxegol has a unique and highly effective mechanism of exclusion from the CNS, polymer conjugation. The KODIAC long-term safety study is the first study in this field to prospectively assess opioid withdrawal. We observed no notable differences in mean change from baseline and the withdrawal scale between naloxegol and control arms and there were no reports of opioid withdrawal attributable to naloxegol. Further, there is no connection between opioid withdrawal and any cardiovascular events in the KODIAC program.

Third, with respect to the FDA's concern regarding the delta subtype of opioid receptor, I will point out that naloxegol has a different finding profile than other opioid antagonists, in particular, it is a 30-fold greater selectivity for the mu-opioid receptor versus delta receptors. There were also other aspects of naloxegol's pharmacological profile that are distinctly different from other opioid antagonists. For example, naloxegol is the only OIC drug that is a neutral antagonist at the mu receptor, meaning it does not have any agonist activity once it binds to the mu receptor. It simply blocks the receptor. To contrast this, alvimopan and methylnaltrexone are both active at the receptor. Meaning they both have either positive or negative agonist activity once bound to the mu receptor and their pharmacology is much more active and complex. So clearly naloxegol has a distinct pharmacology that distinguishes it from these other compounds.

In the recent interactions with the FDA, FDA staff, and four in AZ, that a final determination as to whether a pre-approval cardiovascular study will be required for naloxegol will be a post-submission NDA review decision. However, their current opinion, prior to reviewing the naloxegol data package, is that based on the FDA's generalized concerns related to other mu-opioid antagonist programs, a pre-approval cardiovascular study will be required. As we said earlier, AZ has met with the FDA and MEA and their plans for naloxegol will be finalized over the coming months incorporating the outcome of ongoing pre-NDA discussions with the FDA. The FDA has informed AstraZeneca that the current naloxegol clinical data package is sufficient to support an NDA filing. OIC is a major unmet medical need and naloxegol has the potential to be the first oral once daily medication to treat opioid induced constipation.

AstraZeneca estimates there are up to 35 million patients in the US, Canada, UK, France and Germany, who take opioids for long-term pain relief and also develop debilitating constipation. OIC can interfere with adequate pain management and reduce quality-of-life, and an estimated 50% of OIC sufferers today do not receive sufficient relief from conventional laxatives. AZ will be presenting efficacy data from the two KODIAC pivotal studies at DDW on May 21 in Orlando. As you know, we worked very hard to build a Company with multiple Phase 3 programs that span various therapeutic areas and we've also created a highly valuable development pipeline. Now, I like to spend some time on NKTR-181, clearly one of the most exciting programs in our pipeline. Nektar 181 is a new mu-opioid molecule that has received Fast Track designation from the FDA. We're excited that data from the NKTR-181 Phase 2 program, which includes both an efficacy study and a human abuse liability study, are expected this summer.

Opioid abuse is a serious public health issue and one that the FDA is now directly addressing. Traditionally, the pharmaceutical industry has attempted to address the problem of opioid abuse with formulation approaches that attempt to sequester traditional active opioid drugs such as oxycodone. While the formulation approach helps, it is not the solution because at the end of the day, formulations still contain the drug that abusers want. The rapid rate of entry into the CNS of these currently marketed opioids like oxycodone or oxymorphone is well known to produce a dopamine rush and associated euphoria that abusers crave. As a result, abusers are highly motivated to manipulate the formulation to extract the active drug. With NKTR-181, we have a uniquely -- we have uniquely addressed the problem of opioid abuse with a new long-acting opioid molecule that does not require a formulation. This molecule simply can't be converted to a rapid acting abusable opioid as the formulations can. NKTR-181 is the first of a new type of opioid molecule being developed by Nektar that has the potential to truly address abuse and transform opioid therapy.

The NKTR-181 molecule has been designed to enter the CNS slowly to reduce dopamine rush and associated euphoria. The properties of NKTR-181 molecules should also result in reduced sedation and respiratory depression which would give NKTR-181 an ideal clinical profile to treat chronic pain. Remember, NKTR-181 is a molecule and not a formulation. The properties of NKTR-181 are intrinsic to the molecule itself and no amount of chemical or physical manipulation by our scientists have been able to convert NKTR-181 into a rapid acting abusable opioid. In March, we started our human abuse liability, or HAL study, which will allow us to assess the abuse potential of NKTR-181. Our study design is consistent with FDA's recent draft guidance, which describes the methodology of HAL studies very clearly and we are also able to review our design with the FDA under our Fast Track designation.

Our HAL study includes about 40 non-dependent recreational drug abusers who will rate the likability of NKTR-181 versus the standard comparator in these trials, oxycodone. It utilizes a randomized double-blind placebo-controlled and positive comparator controlled crossover study design. We have evaluated three therapeutic doses of NKTR-181, 100, 200, and 400 milligrams, compared to the standard therapeutic dose of oxycodone in this model, 40 milligrams, and also compared to a placebo. The study has already completed enrollment and we look forward to sharing the results this summer. In addition to the HAL study, our Phase 2 efficacy study of NKTR-181 is also ongoing. This trial is an enriched enrollment randomized withdrawal study, a design that is preferred by the FDA as a better way to assess analgesic efficacy. We are evaluating the efficacy of NKTR-181 in approximately 200 opioid naive chronic pain patients with osteoarthritis of the knee.

The study includes a titration phase, in which patients are titrated to effect on six doses of NKTR-181 from 100 milligrams to 400 milligrams twice daily. Once patients achieve a pre-specified clinically relevant reduction in their pain score and maintain that level, they are then randomized on a one to one basis and either continue on the therapeutic dose of NKTR-181 or receive placebo. The primary endpoint is based on the reduction in pain score from each patient's own baseline score as compared to placebo. We will also be assessing multiple secondary endpoints and analyzing CNS mediated side effects in order to establish a differentiated profile for NKTR-181 in the treatment of chronic pain. The Phase 2 efficacy study is expected to complete enrollment shortly and we look forward to sharing the results from this study this summer as well. We believe NKTR-181 could become a breakthrough product in the $10 billion opioid market.

Our next novel opioid molecule, NKTR-192, has a distinct profile from NKTR-181. It is also designed to have reduced abuse liability and fewer CNS mediated side effects, but is designed for the treatment of acute pain with a short acting PK profile. A second Phase 1 study is underway to evaluate single ascending doses of NKTR-192 with both PK and pharmacodynamic endpoints. We expect to complete this study in the first half of this year and we will then begin preparing for the start of Phase 2. With NKTR-181 and NKTR-192 in our pipeline, Nektar can address both the chronic and acute pain markets. We're extremely excited about the advancement of these important new pain molecules and we look forward to sharing more on them as they advance through the clinic. As I stated earlier, our strategy for the last few years has been to build a portfolio of Phase 3 compounds across multiple therapeutic areas. We've already discussed naloxegol, so let me talk about the four other valuable Phase 3 programs Nektar has in its pipeline.

Amikacin Inhale and Cipro Inhale with our partner Bayer, etirinotecan pegol or NKTR-102, our wholly-owned program in metastatic breast cancer, and BAX 855 which is in Phase 3 with our partner Baxter. Earlier this month, Bayer announced the first dosing of patients in the Phase 3 inhale program for Amikacin Inhale. The start of these Phase 3 studies is an important milestone for Nektar. Our economics for Amikacin Inhale are very significant with a 30% flat royalty in the US and an average 22% royalty in ex-US countries. The two Phase 3 studies in the inhale program are being conducted under an SPA with the FDA, and will compare Amikacin Inhale given adjunctive lead with current standard of care antibiotics versus placebo given with current standard of care antibiotics. The studies will use a primary endpoint of clinical test of cure and will enroll approximately 600 patients each. Gram-negative bacteria accounts for 70% of all ICU pneumonias and are associated with very high rates of morbidity and mortality.

Current IV standard of care therapies are limited by their ability or their inability to achieve effective concentrations in infected lung tissue and the wide use of IV antibiotics leads to resistance in the hospital setting, as well. Designed to target the lungs directly, with a proven and effective antibiotic, Amikacin Inhale could emerge as the preferred treatment for these deadly pneumonias. We estimate that the market potential for Amikacin Inhale is over $700 million annually. Amikacin Inhale is one of two Phase 3 programs we have with our partner Bayer. The other program, Cipro Inhale, is also in Phase 3 studies, is being evaluated for non-cystic fibrosis bronchiectasis, or NCFB. We estimate that this product could achieve sales of approximately $750 million annually, and under our agreement, Bayer is responsible for all development costs associated with Cipro Inhale, and we are entitled to escalating royalties with an average royalty of approximately 10%.

Next, an important update on BAX 855, a PEGylated long-acting ADVATE product. Baxter recently announced that they now expect to complete enrollment in the Phase 3 study of BAX 855 by the end of 2013, which is earlier than expected. The PROLONG-ATE study will enroll more than 100 patients with hemophilia A and will assess BAX 855 for prophylaxis and on-demand treatments. BAX 855 is designed as a longer acting ADVATE that will retain the proven efficacy and safety profile of ADVATE, the gold standard in treating hemophilia. Based on the enrollment completing this year, Baxter is planning a BLA filing in 2014 with a planned launch in 2015. Under our agreement, Nektar will receive milestone payments as well as significant royalties on net sales of BAX 855 upon commercialization.

Finally, let me update you on NKTR-102, or etirinotecan pegol. We are pleased to inform you that we are ahead of schedule for enrollment in the BEACON Phase 3 study in metastatic rest cancer. We now expect to complete the target enrollment of 840 patients by the end of Q3 2013. BEACON is an open label randomized head-to-head trial comparing single-agent NKTR-102 to an agent of physician's choice with the primary endpoint of overall survival. As the first and only topo I inhibitor being developed in breast cancer, NKTR-102 offers a much-needed distinct mechanism of action. Although there have been great progress made to treat women with HER2-positive disease, the majority of the women with metastatic disease, up to 75%, have HER2-negative disease and are in desperate need for new treatment options. In addition, all the current therapies for metastatic breast cancer are microtubule inhibitors or disruptors and share a common underlying MOA. As a result, drug resistance and overlapping side effects are huge challenges that will eventually negatively impact most if not all patient outcomes. That is why the investigators participating in our study are so excited about the potential for NKTR-102. We expect data from the BEACON study around the end of 2014.

In platinum-resistant and refractory ovarian cancer, we plan to meet in the second half of this year with the FDA and EMA to discuss the potential regulatory path forward for NKTR-102 in ovarian cancer. The data show NKTR-102 clearly has significant activity in platinum resistant and refractory ovarian cancer with a 17% overall response rate and progression free survival of 4.4 months. As a reminder, patients in this study were heavily pretreated with a median of three prior treatments. Finally, we also expect to have data this year from the investigator sponsored study of NKTR-102 in glioma which is being conducted by Doctor Larry Recht at Stanford University. Enrollment is going much more quickly than expected for this study and we look forward to Dr. Recht sharing the data from this study in the second half of 2013. With that, I will turn the call over to John for discussion on our financials.

Thank you, Howard, and good afternoon, everyone. I will start reiterating our financial guidance for 2013 which remains unchanged from our 2012 year-end call. For 2013, we expect our cash used in operations, including capital expenditures, to be between $95 million and $105 million. We expect to end 2013 with approximately $200 million in cash and investments. Revenue for 2013 is expected to be between $200 million and $210 million. This guidance includes $95 million in milestone payments for the acceptance of regulatory filings for our naloxegol, which breaks out as follows, $70 million for the US, and $25 million for the EU. 2013 revenue guidance also includes $20 million of non-cash royalty revenue from UCB Cimzia and Roche's Mircera. Our R&D expense guidance is still between $200 million in $220 million with approximately $17 million of this is non-cash items, such as stock based compensation and depreciation expense.

2013 G&A is still anticipated to be between $42 million to $44 million, which includes $10 million of non-cash expense. Total revenue in Q1 2013 was $23 million versus $17.9 million the first quarter of 2012. Revenue for Q1 2013 includes $4.4 million of non-cash royalty revenue from UCB Cimzia and Roche's Mircera. The increase in revenue for the quarter is primarily attributable to higher product sales and non-cash royalty revenue related to UCB Cimzia and Roche Mircera royalty monetizations. Total operating cost and expenses at first quarter 2013 was $68.4 million versus $55.9 million in the same quarter a year ago. The increase is primarily driven by higher R&D expense for clinical development and higher cost of goods related to increased product sales. For Q1 2013, our research and development expenses were $45.6 million, as compared to $35.1 million in Q1 2012.

R&D expense for the quarter included expenses related to our NKTR-102 BEACON Phase 3 trial, the production of Phase 3 devices for Amikacin Inhale, the Phase 2 studies for NKTR-181, and the Phase 1 clinical study of NKTR-192. Research and development expenses included $4.2 million of non-cash stock-based compensation and depreciation expense. For the quarter of 2013, G&A expenses $11.1 million compared to $10.4 million in the first quarter of 2012. There was approximately $2.5 million of non-cash expenses included within G&A in the first quarter of 2013. Interest expense this quarter was $4.6 million, related to senior secured notes issued in 2012 and non-cash interest expense related to the monetization of UCB Cimzia and Roche Mircera royalties was $5.5 million. Cash, cash equivalents, and short-term investments at March 31, 2013, were $261.2 million as compared to $302.2 million at December 31, 2012. With that, I now open the call to questions. Operator?

(Operator Instructions)

Cory Kasimov with JPMorgan.

Just a couple of questions on 181. Maybe if you could just describe the likability study in a bit more detail. I know you are looking to see less likability versus a comparator arm. Secondly, what the strategy with 181 might be if the data is positive the summer. Thank you.

Let me have Rob describe the study design to you. I think you'll find it quite interesting. Go ahead, Rob.

Certainly. The HAL studies, there's a methodology described in the recent guidance. Our protocol is very closely aligned with that. I've done several of these studies in the course of my career and have a real interest in this area, as many of you may know. What we do in these studies, we got recreational users. So the opioid preferring recreational users and they are folks who are not physically dependent upon the drug, that's a different population. But they come in and go through a series of tests to assure that they are not physically dependent and that they can distinguish between a placebo and a relatively low level of comparator drug.

The standard drug for comparison in these trials is always oxycodone. I think that's pretty telling. But oxycodone is what we use as a standard comparator. If they pass all those barriers, they go into a multiply randomized phase and there are several different orders that they can be randomized to. They assess liking using a variety of scales and a number of different ways of looking at it and those -- they assess for each of the drug arms and they are given sequentially, obviously separated by several days. So that results in a great density of data around what they are feeling after they get the drug and when they are feeling it. So, in a nutshell, the methodology. When we look at -- what we are looking at to see from the results of these trials, you are looking, in part, statistically and part qualitatively, what your -- what the difference is between the various drug arms. Placebo, we expect to see at or near baseline.

We know 40 milligrams of oxycodone as an immediate release produces a very robust liking affect, very early on that persists. We will see where we are expecting, based upon all of the data we generated to date, both in humans and the preclinical work, that the various doses of 181 will be closer to the placebo side than they will to the oxycodone side. Certainly the time course is profoundly different in terms of entry into the brain and that's what really drives the liking, that entry into the brain. So I hope that helps answer your questions.

The second part of the question that I wanted to answer, you asked the strategy. I think we said -- the studies are enrolled. The data should be available this summer. If the data is positive, which we are hopeful, then were going to prepare the program for Phase 3 studies. As you know, we have Fast Track designation for this program. So, we are going to try to move it very quickly forward.

Okay. Thank you.

Josh Schimmer with Lazard Capital Markets.

Just wondering if you have any indication from AstraZeneca at this point if they would be willing and prepared to fund the CB outcomes trial if it were required and how long you think it might take if that was the path that you had to go down?

Look, I think a good question. At this point, AstraZeneca is finalizing their plans. I can't comment as to what direction they will go with that. CB outcome study is challenging because one of the nice things we've observed in our Phase 3 trial is that there were no safety signals for naloxegol. So we didn't see any difference from the control arm versus the drug arm in cardiac events. They were quite balanced with two and two. Actual, remember it was a two to one randomization. Two events out of 540 patients and two events out of 270 patients. Naloxegol looks extremely good there. A little difficult to even fantasize what a cardiovascular outcome study might look like given the excellent safety profile we've ever observed. That said, I can't comment on what AZ would be willing to do at this point. I think they are assessing what the FDA has discussed with us. They're looking over the data. I think at some point they will come to conclusion as to how they would like to proceed.

Do have any sense if or how patients enrolled in the KODIAC long-term safety study compared to patients in the long-term open label study of Relistor?

I will let Rob answer that in more detail. I can tell you, as I said in the call, over half of the patients that were in our long-term safety study were already at significant cardiovascular risk, baseline risk. Rob, you want to comment further on that?

Sure. What we can tell based on what's been presented publicly on the long-term safety for methylnaltrexone, which of course I remind you was just an open label, single arm trial. There was not a comparator group here in that trial. But overall demographically it appears to be the same. I can't comment on their level of risk factors that were present. Typically in this population, you would expect to have the presence of risk factors for this type of patient. So you would expect this patient population to have at least some degree of moderate to high cardiovascular risk based on the presence of coexisting risks factors. It appears from what we can tell from public information, it's a similar population in all the demographics that we can see.

Go ahead, I'm sorry.

I'll let you finish and then just a follow-up.

I was just going to say, the FDA clearly has to review the naloxegol filing. They have to review our data. We have lots of, of course, individual patient data that has to be looked at by the FDA. They, as I said earlier, they have told AstraZeneca that they will accept the NDA for filing. So the current naloxegol clinical data package is sufficient to support an NDA filing. Of course, they have to look at the data before they can make any more judgments, as well.

In that case, is it your understanding that the FDA is interested in the pre-approval CB outcome study was based on the other drugs experience and not taking into consideration the experience with naloxegol. If so, do you get the impression that the FDA will reevaluate that perspective after they take a look at your data? Or, was part of their view towards the CB outcomes trial taken into consideration the fact that the KODIAC study long-term safety follow-up showed no imbalance.

No. I think this. Look, clearly the FDA is basing their judgment on what they've observed in other programs. As I tried to describe for everyone, the pharmacology of naloxegol is very, very different than alvimopan and methylnaltrexone. Clearly, they haven't seen our NDA yet. They haven't seen the data set. So they have to review that before they can make a judgment. Their concerns -- and I understand there are valid concerns -- are based upon what they've seen in other drugs. But, remember, naloxegol is a very different drug than alvimopan, a very different drug than methylnaltrexone. They all work very differently. They all have different mechanisms. They are all approached -- the receptors in a different fashion. So, I think we have to provide the information to the FDA let them make a more educated judgment once they see the data. But they certainly aren't making that decision based upon review of the NDA. We haven't submitted it yet, obviously.

Okay. That's fair. Thank you.

Bert Hazlett with Roth Capital.

Thank you. My questions were just taken, largely on the cardiovascular events. Thank you for that. We will move to BEACON. Is there interim data expected for BEACON at any point?

Rob, you want to comment?

Certainly. Bert, there is a planned interim analysis. It's the kind of thing you build into the beginning of the trial. We deliberately chose to spend very, very little alpha on this planned interim analysis which was to be at about half of events. As Howard mentioned, our enrollment has been very brisk. We are expecting to complete enrollment ahead of what we had originally projected. So in fact, the interim analysis will probably occur after we've completed enrollment. So it becomes sort of -- I won't call it a moot point, but we wouldn't be taking any action based upon the outcome of that. If, in the event with that low, low alpha it happens to be a positive trial, we would of course start moving to prepare a filing based upon that interim and of course, continue the trial.

Okay. Thank you for the color. Thanks.

David Steinberg with Deutsche Bank.

I was wondering if you could expand on some of your remarks on NKTR-181? Assuming the data is positive and you see some of the benefits of lower opioid abuse and addiction as well as the opportunity to reduce CNS adverse events, any thoughts on this product becoming the step therapy to OxyContin? Could you give us more granularity on what you think the demand for this type of non-abuse opioid would be? And then I know it's early but any initial thoughts on how payers would view a drug with this profile? Thanks.

Well, I will let Rob comment on some of the positioning against OxyContin, or oxycodone or OxyContin. I can tell you that the single greatest attribute to a drug like this is that it meets the needs of our public health crisis, which is that we have a molecule that provides excellent opioid-based analgesia which can't be converted into any kind of rapid acting or abusable form. I think that in and of itself, puts it in a great position to be very important for patients. From the point of view of pricing, we haven't gone through that and we certainly haven't selected pricing yet. I would expect this to be a fairly priced product compared to other opioids. I don't think this product has to grab its market share via price. In reality, if this drug does provide excellent analgesic results, as well as is not abusable, as well as another major feature, which is less sedation, if you take an opioid that is less sedating and non-abusable, I don't think you have to capture your market solely on price. I will let Rob talk about the overall positioning and step positioning relative to OxyContin.

Sure. Is a very good question and one that we spend a lot of time thinking about. I will just add that I'm a mere medic and not a marketing specialist. So, thinking a lot about where a product like 181, assuming the data comes out as we hope, where would that fit? I think in a couple of different ways. You have to look at the largest populations that use opioids in this country and that's osteoarthritis and low back pain. Anywhere between 40% and 50% of the use of opioids in this country is in that market. It's a natural place for us to be thinking and targeting. So I would be certainly looking into that, into that segment.

As to whether it's a step, was I think the word you used, prior to oxycodone or OxyContin, my thinking is that given the fact that from what we've observed so far in 181, it's got a much wider therapeutic index than other drugs. So, meaning the difference between efficacious dose and the doses that cause side effects like reinforcing abuse liability affects and sedation and so on, it's quite wide compared to something like, say, oxycodone. If that profile holds, it makes sense that this would be an appropriate place to start patients on opioid therapy. So, that's again, leads you to the OA, low back pain population by and large. I hope that gives you a little bit of color as to just how we think about approaching the market. That will of course be driven by the data that we generate in our Phase 2 program.

Very helpful. Thanks very much.

(Operator Instructions)

Steve Byrne with Bank of America.

Rob, I'd like it if you could drill into those KODIAC data little more. Particularly in the placebo arm. Are there any characteristics of the responders in the placebo arm that you can characterize as why they had a response, even on the placebo arm? Was it the duration of opioid use or something? I was wondering where you could take this. If there is perhaps a subset of this population where you might have a greater response rate relative to placebo.

Interesting question. Of course, when you do a trial or program like AZ has done, you generate a large amount of data. The topline that AZ always presents is simply the intent to treat analysis and that is sort of the most brutal way of looking at data. So anybody who doesn't complete for any reason, is a non-responder in that kind of analyses. So you can slice and dice and really look at populations that and get different response numbers. What you can't do is make naloxegol suddenly look like it doesn't work in a particular group. AZ has been very particular to look at the laxative and adequate responders as a powered subpopulation in the study. They've constructed their statistical analysis plan very specifically to look at laxative inadequate responders. That's a very important group. Just speaking as a clinician, now, and I'm a pain doc, as you may know.

When you treat patients, they have constipation and unfortunately and you can certainly find this in the literature, as well, when they don't get relief from standard laxatives, they often take matters into their own hands, if you will. There will stop taking the drug, they will change the way they are dosing it. They will take drug holidays. They do it all in unsupervised fashion, which is obviously not the safest thing for patients to be doing. So this population, LAR's population, is a very important population and I'm pleased that AZ has specifically looked at that because, they are really in need of a mechanism specific treatment. So, I hope that addresses some of your questions, Steve?

But does is surprise you that 30% of them would respond even without the laxatives?

Well, 30% of whom? Can you restate that question for me, Steve? I lost the first part of your question.

I just said that -- does that surprise you that you would have a 30% response rate in these patients that were non-responders under laxatives, but under the placebo arm you had a 30% response rate.

You know, I've been doing clinical research long enough that that doesn't surprise me at all. I don't know if you know anyone who has got migraines, but you can do migraine trials and you have 50% or more in some trials responding to placebo on migraine. That's got an endpoint that includes not only the headache pain but nausea, photophobia, and phonophobia. So you have got 50% response rates there. So, patients and placebo response rates -- it's a curious thing and a whole field of study within clinical trial methodology, so 30% is not shocking at all to me. It's hardly surprising at all. It's kind of what we ballpark placebo responses to be. We often think that intuitively you raise the bar on an endpoint, you are going to change the placebo response. That's actually probably not the case. Probably varies the other way, because placebo responders tend to by and large have higher responses.

So, there's a lot of dynamics that go into placebo response and you can, as I said, look at multiple layers of data. If you look at patients who are censured for not completing the trial, look at why they didn't complete the trial. Look at the numbers of patients in the various groups who have inadequate response. Then, you'll start to see a very different picture emerge. I obviously can't share all of that data with you. That's a different way to look at numbers like this. Why do patients stop taking the drug? So, there's -- again, I encourage you to look at the data. It's topline, it's ITT. It's absolutely everybody who enrolled in the trial. So, I am pleased with results that we do see here and there is obviously a lot more data and it's very encouraging when we look at the response with this drug.

That's very helpful. If I could just ask one on your 181 HAL study. We'll each of these 40 patients evaluate each one of the doses along with the oxycodone and the placebo? Is that sequentially they work their way through all of those arms?

Yes. We use a complete Williams square design. Since there are five arms, there are then five sequences, and in each dosing period the patients are randomized to one of those five sequences. So, it gets to be, as you can imagine, quite a mix. But each patient will receive, assuming they complete the entire trial, each patient will receive each dose and that's, of course, separated to wash out between doses and we will evaluate all of the five arms in the trial.

Josh Schimmer with Lazard Capital Markets.

Thanks for taking the follow-up. Just curious whether you got a sense what range or what CB risk does the KODIAC study rule out? Was kind of the upper bound of the hazard ratio that you saw in that trial and where would that fit relative to what the FDA may have historically been looking for to narrow the risk of -- narrow the cardiovascular risks for drug's pre-approval.

Right. That's a sort of a very in-depth statistical question that I'm not -- I can't feel qualified to answer that one. I know AZ has certainly looked at that and is confident that their data represents, with no imbalance, represents a good look at the cardiovascular safety profile of naloxegol. As far as the specifics around confidence intervals and upper bounds and so on, I can't speak to that.

Okay. Thanks.

I'm currently showing no further questions at this time. I will now turn the call back over to Howard Robin, CEO.

Thank you, everyone, for joining us today. I want to close again by thanking our employees for their dedication and hard work to advancing our clinical pipeline and our research efforts and I think we have in our industry one of the most exciting pipelines. I will see many of you shortly at the UBS conference in New York. So we appreciate your support as shareholders and I will see you in a few weeks. Thank you.

Thank you ladies and gentlemen. That does conclude today's conference. You may all disconnect and have a wonderful day. [End of transcript]