Good day, and welcome to the DepoMed Fourth Quarter 2011 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Augie Moretti. Please go ahead, sir.

Thank you, operator. Good afternoon and welcome to our fourth quarter and year-end 2011 financial results and business update conference call. With me today are Jim Schoeneck, President, Chief Executive Officer of DepoMed; Matt Gosling, Senior Vice President and General Counsel; and Jack Anders, Senior Director of Finance. Before we get started, I would like to remind you that the matters discussed on this call contain forward-looking statements that involve risks and uncertainties, including those relating to the commercial launch of Gralise, the efforts of Santarus to the commercialize Glumetza, our projected revenue and expenses and the ability of DepoMed to support operations based on existing cash resources. Actual results may differ materially from the results predicted and recorded results should not be considered an indication of future performance. These and other risk factors are more fully discussed in our annual report on Form 10-K that is being filed with the SEC today, most particularly, under the caption of Risk Factors. DepoMed disclaims any obligation to update or revise any forward-looking statement made on this call as a result of new information and future developments. As a reminder, DepoMed's policy is to only provide financial guidance and guidance on corporate goals for the current fiscal year, and to provide, update or reconfirm its guidance only by issuing a press release or filing updated guidance with the SEC in a publicly accessible document. Financial guidance relating to current cash, cash equivalents and investments is based upon balances as of December 31, 2011. All other guidance, including guidance relating to the company's expected expense levels and corporate goals is as of today, March 8, 2012. I'll now turn the call over to Jim Schoeneck.

Thanks, Augie, and thank you all for joining us on the call today. 2011 was indeed a transformational year for DepoMed. And the first 2 months of 2012 have been very significant for our business. I'd like to summarize the developments in 2011 and the first 2 months of 2012, then I'll turn the call back to Augie to discuss our finances, after which we'll open the call for questions. In January 2011, Gralise received approval from the FDA and this triggered a $48 million milestone payment from Abbott, which we received in February. Then, in March, we negotiated with Abbott for the return of the product, and in connection with the termination of our agreement, we received all rights of Gralise and an additional $40 million. I joined DepoMed in April, as our President and Chief Executive Officer and we set out to launch Gralise. We hired our sales and marketing leadership team in second quarter. Steve Greco joined us as our VP of Sales and Kevin Weber joined us as Vice President of Marketing. We entered into an agreement with inVentiv, a contract sales organization, and we launched Gralise in October with our complement of 164 sales specialists. Ensuring the successful commercial launch of Gralise is our principal goal in 2012 and we believe, based on results so far, that we are off to an excellent start. In August 2011, we restructured our agreement with Santarus relating to Glumetza. We agreed to transfer control of most aspects of the product to Santarus, along with the NDA, in return for a royalty on net sales of 29.5% this year, increasing to 32% in 2013. We think Santarus is doing a very good job with Glumetza and we expect that we will receive $35 million or more in royalties this…

Thank you, Jim. I'd now like to summarize the financial information that's included in the Form 10-K for the year ended December 31, 2011, that's being filed with the SEC today. I'd like to be clear, at the outset, that because of the $88 million received from Abbott in Q1 2011, the restructuring of the Santarus agreement in August of 2011, and the sales and marketing expense in Q4 2011, in connection with the Gralise launch, year-to-year comparisons of 2011 and 2010 results are complex. Going forward, 2012 will be difficult to compare with 2011, as 2012 will reflect a full year of Gralise revenue, a full year of Glumetza royalty, and a full year of Gralise sales and marketing expense and will not include the Abbott payments. In this regard, keep in mind that in 2011, the $48 million milestone payment we received from Abbott was recognized as revenue, and the $40 million payment received in connection with termination of the agreement was recorded as a reduction in expense. With that in mind, here is the summary of the quarter and the year ended December 31, 2011. Total revenue for the year ended December 31, 2011, was $133 million compared to $80.8 million for the year ended December 31, 2010. The increase in revenue in 2011 was principally the result of recognition of the $48 million-milestone payment from Abbott. Total revenue for the fourth quarter of 2011 was $12.1 million compared to $20.9 million in the fourth quarter of 2010. The decrease in revenue in the fourth quarter of 2011 was principally the result of lower Glumetza revenues. Prior to the restructuring of our Santarus agreement that occurred in August 2011, we recognized top line Glumetza revenue and paid Santarus an amount that was reflected as promotion expense. Since…

Augie, thank you. Our efforts in 2012 are highly focused. Our strategy has 3 significant components and, as a result, our 2012 corporate goals are straightforward. First, we'll focus on growing our top line with our branded, marketed products, Gralise and PHN, which we are commercializing ourselves, and Glumetza, for type 2 diabetes, which is being sold by Santarus. Second, we'll focus on continuing monetization of our Acuform technology. We will support our current BD deals and seek to complete additional deals that will include potential royalty and milestone upside. And finally, we will seek to acquire in-license or co-promote, marketed or late-stage differentiated assets that meet our short and longer-term financial goals. As we stand here today, I'm even more excited about the future of DepoMed, than I was when I arrived last spring. We look forward to updating you on our progress throughout the year and I want to thank you for your continued support. We'd now like to open today's conference call to questions.

[Operator Instructions] And we'll go first to Scott Henry with Roth Capital.

A couple of questions. I guess, first on Gralise. Just trying to get an idea of how to track that product. By my math and I use Wolters Kluwer's data, they were about 5,000 scripts in Q4 and at $150 revenue per script rate, that would be either closer to $800,000, $900,000 versus the $500,000 you reported. Not a big difference, numerically, but percentage-wise, it is. And I just want to get a handle on what you think the kind of revenue per script for Gralise is and why there is a discrepancy?

Yes. Scott, I think, part of it is the size of the script. It's a -- not everyone is at a full dose, particularly in these early days, so those people are working up to a full dose. We priced that where the 300 milligram and the 600 milligram are the same price per tablet. And I think we'll see the number of tablets per script go up. We're seeing some that already month-to-month. But I think that's one of the primary reasons. So it's not as much the discounting or the amount off of the wholesale price, it's more so the number of tabs per script.

Okay. But you do think around the $150 mark, maybe a good long-term revenue per script, once you get out of the steady-state, or maybe down...

I think steady-state probably ends up closer to maybe the $135 mark or so.

Okay. All right. That is helpful. Second question, what kind of feedback are you getting from the channel in terms of the fill versus written script ratio? When the patient goes in and gets written a script at the doctor, what percent are translating into filled Gralise prescriptions?

We're actually seeing a good fill rate. We're seeing a fill rate that at this point is approaching 70%, as you know, a lot of products launch at about 50%. Some of that is coverage that we're still getting, some of it is what gets classified as abandonment at the pharmacy. That can have to do with co-pay or just a decision to switch to a generic at the pharmacy. But we're certainly starting off in a good place, we're just under 70%, we're seeing now month-to-month increases.

Okay. And when we think about 2012, and you think about a trajectory for the Gralise launch, how do you think of it? Is it -- do you expect an inflection point or should we just look at it as kind of a steady path? How should we think about that?

I think you've got the -- the underlying demand will continue to pick up. You'll continue to see refills come into play and I think that helps us out a lot. The category, I mean, last year, the total scripts written for gabapentin and pregabalin were $43 million, up 9% over the year before. And so I think what you'll see is, as physicians get comfortable with the drug, and then start to expand their usage of the drug. And so I think you will see that steadiness, perhaps a bit of an uptick from that standpoint. I think the other thing that will be an effect on the line will be as we get increasing coverage on the managed care side. We've got very good coverage on the commercial side. We still got some work to do, as it happens on the launch on the Med D side. And so we're in Med D, we're covered right now by about 1/3 of the plans, I'd expect that to continue through the year. And we'll also have a couple of the outliers on the commercial side start to kick in, as you know, United Healthcare has a 6-month moratorium on covering new drugs and, generally, they don't kind of cover until somewhere 6 to 9 months out and so we'd expect to see some additional coverage then. I think the managed-care coverage will help increase the slope on the line as well.

Okay. Final question for me. Obviously, these patent challenges for Gralise are a little bit concerning. If the Orphan Drug exclusivity does in fact come through, it pushes a lot of these concerns out of the way. I guess, how should we think about Orphan Drug exclusivity and kind of what are the data points? As best you can, I know you're in kind of uncharted territory but when should we expect to think about updates on that front?

It's all -- why don't I turn that one over to Matt.

Scott, we are a bit in uncharted territory here but I think the fundamental point from our perspective is that we do believe we're entitled to Orphan Drug exclusivity for Gralise, primarily because, one, we don't think that we're required to show clinical superiority relative to generic gabapentin, and two, we don't think there's a basis to decouple the approval of an orphan-designated drug from the Orphan exclusively. And we have been continuing to seek to have a productive dialogue on this Orphan exclusively matter to no avail thus far but we will certainly -- it remains a very high priority and as time goes by we'll certainly need to consider other alternatives.

And we'll go next to Jason Butler with JMP Securities.

Just to follow on Scott's question now on the launch trajectory for Gralise. It's obviously too early to think about giving a guidance but you have given this goal of reaching $100 million run rate at some point in 2013. Can you help us think a little bit more about how you get to that number and what the variabilities that go into your thinking there?

Yes. I think just on the variabilities, Jason, I mean, certainly, at a launch, you're going to have variabilities in it. And so, as we all know, why projecting launches is one the tougher things to do in this business. And just to be clear on the goal on that, it's to be to that run rate by the end of 2013, just so that everybody's got that in mind. I think in terms of the acceptance, first, by the specialist, and I think as you've probably seen in the data, we've had very good initial uptake by the pain specialists. A little bit slower by the neurologists but we've been very happy with what we've seen with on the pain specialists. I think as those specialties start to drive primary care where an even greater percentage of the prescriptions are -- is when we'll start to see a real difference in some of that uptake and what helps get us there. And that's done both through the direct promotion by the sales force, the non-direct promotion as part of our marketing programs, and finally, the medical education pieces that are there through the speaker programs that really are going to start to get the word out. Your primary care often times is waiting for the specialist to have the experience and kind of tell them what to do and what the best thing to do is. And the feedback we're getting is that, from the specialist, is that Gralise is fulfilling its promise. And I think that's probably the most positive thing I can say from the field. The claims that we're making around the product of once daily dosing, better tolerability, good tolerability and then the ability to titrate in 2 weeks, are all being well received. But I think the most important thing is the doctors are telling us that what you've saw on your trials were actually seen in our practice. And that doesn't always happen when you take pharmaceuticals from a clinical trial environment out to the big market.

Okay, great. And maybe again it may too early to say anything here, but can you make any comment on the refill rate? And if you can't make anything specifically on the refill rate, patients who get the end of the titration phase and/or can't get to end of the titration phase and need to stay on a lower dose?

Yes. So let me take the second part of that first, Jason. We're not hearing anything that's different than in the trials. In the clinical trials, over 90% of the patients were able to get to full dose in 2 weeks using the titration pack. And we're not hearing anything that would not follow that. In terms of refills and we're seeing that start to build, our recent presentations, we've had some data in it showing that as of December, 21% of the scripts are actually coming from continuing patients. Now it's a little bit different than looking at refills because the starter pack is going to be a different script than the 600 milligram that follows it. So you'll see, I think, a little bit slower separation of NRXs and TRXs than you might normally see on the launch of a chronic drug but indeed, as we track and who's coming just from a different, another Gralise SKU, to say, the 600 milligram, we're seeing good uptick there, at about 21% of the patients continuing therapy, even just as of the December data, we're just still obviously very early in the launch.

And we'll go next to Jason Napodano with Zacks.

Just to clarify something that you said earlier. When the doctor writes a script for the starter pack and then writes that, that counts as one script and then when the patient comes back for their full dose, that counts as another script?

It counts as an another new script, yes. And normally, if you had somebody on a drug and they were just to continue, it show up on the refill on that second script. But with Gralise, as you come off the starter pack, that's a script, the new script and then as you start on the 600 milligram, it will be a separate new script.

Okay, that makes sense now, Okay. As far as what you're seeing with nurse practitioners and the physicians' assistants writing over 10% of the scripts, that was surprising to me, I don't want to -- interested to know if you thought it was surprising as well. And do you think it's a result of the non-scheduling compared to Lyrica and what are you guys are planning to do that maybe go after that market a little bit more?

So I would say and I've actually characterized it this way in a couple of our that, that on the splits on where the scripts are coming from is the most surprising thing. The fact that you've got 11% of the scripts now coming from physicians' assistant and nurse practitioners. I think one idea on it, as what you just mentioned, which is that fact that pregabelin or Lyrica is a Schedule V drug and is restricted in some states, where Gralise is not scheduled. Certainly it opens it up to some places for those guys who prescribe it. We're actually doing some deeper -- a little bit research into it to see if that's really what's driving it. So at this point I would count that more as a hypothesis than a fact, in terms of what's driving that prescribing. And then we'll see what there really is even push that market further. I will also say that there are a number of PAs and nurse practitioners that work with pain clinics, or as physician extenders in the pain clinics, and so I think that maybe some of it as well.

As far as your sales force, the 164 contract sales reps, what would change your opinion or not change your opinion but what would make you decide to bring those people in-house? What would be the driving force there?

Yes. So we originally put that group together as, what we would call internally as a build-the-hire, which was really with an intent of building it and getting us up and running quickly with all the support services from inVentiv, as a partner, with the intent of converting those people to DepoMed people down the road. I think some of it is going to be around the volume that we're seeing in Gralise sales. Some of it will be around the performance of the individual representatives on deciding who we bring in but those would be really the factors in terms of making a decision on an overall basis to bring people in and then secondarily on the individuals.

Who are potentially in licensing another products?

That would potentially come into in our contract, and this public with -- inVentiv says that we cannot make that conversion before a year after launch, so the soonest we could do that would be October.

Okay. And then just a last question. And I don't know if you'll be able to answer this. But Covidien announced in December that it would be spinning off its pharmaceutical division, I assume your relationship is going to stay the same with the company, but do you have any thoughts on them spinning off their pharmaceutical company into a separate division, to a separate company. I could see that they would be keen to get new products to the market but they're also losing financial backing of the parent.

So I actually was really happy to hear that they had made the decision to spin out the division. I was actually more concerned earlier in the year, when they announced that they were going to sell it and try and sell it with their chemical API business. Because there, I think, you put everything in the limbo that and how much would be, with someone buying be dedicated to the pharmaceutical business, will they be buying it for some of the other parts of the company? And now with them spinning the pharmaceutical piece out, they've got, I think, a laser-focus there and really, as you say, looking to bring things out to market and considering that what they're developing with us are known entities around acetaminophen with opioids, and that being a key part of their business, I would think they would keep the pedal to the metal and keep things forward.

And we'll go next to James Molloy with Thinkequity.

I have some more on Scott's rather insightful question on the Orphan Drug and why -- getting that back. I know back last year, when the Orphan Drug exclusivity got pulled, there have been some discussion, it is my understanding that the FDA wanted to see some kind of meta-analysis or some kind of comparison between Gralise and Lyrica and Neurontin. Just to show that the safety that you have in the label is in fact an apples-to-apples comparison. Has there been any discussion with the FDA on what you might need to do, if there is any additional data you need to show them?

I'm going to put throw it back over to Matt again, Jim.

Yes, Jim, after that point, we run into the same issue there. We would love to have a -- engage in dialogue with FDA on this and we've been seeking to do that. Have not yet had the opportunity to do so. So that's all we have to say after that particular point right now, more to come as events unfold.

Yes. Unfortunately, as we mentioned before, I mean the Orphan Drug office is not under any of the PDUFA deadlines, and they also had 2 changes in leadership over the past year, where their long-standing director left last June, and an intern was named. And then a different acting director was actually named in October, so that certainly has not helped facilitate a meeting with them.

Is that sort of [Audio Gap]

Yes. Not with Orphan Drug, unfortunately, you don't have the same timing restrictions.

Fair enough. Could you talk about the relative strength of the patents in 2016? The first patents to go, those are ones that were in the past, a number of years ago, you beat Teva, you beat Bristol. Clearly, very strong patents, can you talk about the relative strength of those, vis-à-vis some of the longer dated ones?

Yes. Jim, I mean, you already pointed out with respect to the 2016 patents, we've seen very good results there. With respect to Gralise, however, we've got the same 4 patents that cover Glumetza, plus an additional 2 formulations, specific patents that go out to 2022 and 2024. So we feel like, in addition, as Jim pointed out, we've got a 10 or so additional patent applications in prosecution and we've got some defensive-issued patents that protect Gralise, so we feel that the intellectual properties around Gralise is very strong and will hold up well.

2 last questions. And one, I know you talked -- touched briefly on Serada, and I know first half is what you're hoping for, the next meeting with the FDA, is there an tighter bandage you can put around that? Have you had any discussions with them, in advance of that meeting? And then last, any expectations for time and the potential of bringing another product in to put into the Gralise salespeople's bag?

So on the first one, on Serada, at this point, the only guidance I can give is first half of the year and say we have not met with them yet. So we still anticipate they'll meeting with them in the first half of the year. And unfortunately, I can't provide anymore for you on that. On the second, in terms -- we've had a dedicated team looking at nothing but potential second and third products for the bag since last July, and that team continues to be very active. This is a field, as you know, it's not done till it's done, and secondly, you've got to turn over a lot of rocks to be able to find the right situation and make sure that it's on the right type of financial terms, and we continue to both turn over lots of rocks and continue to have the financial discipline.

And we'll go next to the Difei Yang with Arrigo.

A couple of quick ones. The 2012 guidance, especially with regard to SG&A guidance for $90 million to $97 million, if I am looking back, if I look back for the Q4 SG&A expenses, it seems like it's trending towards $85 million. So could you help us to understand whether this is more of a conservative guidance or maybe there are things that you have plans for with regard to marketing and the sales?

I think that the range of $90 million to $97 million reflects our current thinking with respect to marketing initiatives and also the full year's expense for the contract sales force.

So Difei, I think, it's -- as we have some additional marketing initiatives kicking in, in full force that starting -- we actually launched kind of -- we basically launched middle of October, the sales force was on for the full quarter, but the full marketing expense wasn't quite there for the quarter. Just because of the timing of the launch and so now we're into a full quarter of launch and still in that launch mode and so I think that's why you see a little bit of an uptick on the overall SG&A.

Yes. Thank you. And could you comment on some of those additional marketing initiatives?

Yes. I think it's around -- in particular, I think, in this area, some of the physician education pieces we believe are very important. The peer-to-peer influence is important. I mean, one of the things that we are still putting concentrated effort on, is the development both of key opinion leaders, Gralise and also then the influence of key opinion leaders onto other physicians. We didn't have the normal 18 to 24 months that you would normally have going into a launch, just based on the timing of getting the product back from Abbott. So we're investing in those type of activities, in particular, to be able to move Gralise forward. And we've also got a couple of things going on, on the Phase IV side to be able to further establish the drug.

That's very helpful. Another question is really a housekeeping question with regards to the Glumetza revenue income. On the moving forward basis, do you see that goes into the line of royalties?

Yes, it's going to be reflected in the royalty revenues.

Okay. And then with regards to the Q4 number, that I see your licensing revenue goes up a bit more than -- I think, it is -- I'm sorry, I looked it a wrong line, so thank you, that's all my questions.

And we'll go next to John Gordon with Deltec Asset Management.

My hearing isn't what it used to be and I think you may have said what you anticipated R&D spending was going to be for 2012, but even if you did, I didn't hear it. Was there a number mentioned for what you anticipated that to be in 2012?

Yes, John. The range we're guiding to is between $10 million and $15 million in R&D expenditure in 2012.

Okay. And would you characterize that as being related to things that investors know about or is some of it related to cooking in the kitchen for things that we don't know about?

There are some things that are at a more basic level, but certainly, the Parkinson's program fits into that. Any additional things we're doing with Gralise actually end up falling now under SG&A now that the product's on the market. So it's not Phase IV workaround Gralise, it's things, literally as you're saying, that are more kind of cooking in the kitchen with the lead piece of that being the DM-1992 program.

Okay. And with respect to the inVentiv sales force of 164 people, obviously, that's a nice precise number. But now that you're sort of 6 months into it, if you had to move one way or the other from 164, either adding some more or subtracting a few, which way would your body lean be?

So I think, John, if you put it that way, I think probably we're in a -- one of those things where we're just right. I am actually happy with where we are in terms of the ramp and the penetration, the doctor coverage. I can't say that we would adjust it a bit, one way or the other at this point, simply because I think we're getting what we need and we're getting the coverage that we expected without a lot of surprises on it. I mean, I would say the one thing on the philosophic basis is I don't believe in doing small tweaks once you're on the market, simply because the physician disruption that you can end up with and that rep to doctor relationship is so important, that it's not worth making small tweaks once you're on the market. I think you'll look at that to say when is the time where we might do something on an larger basis and, at this point, I don't have any data that would suggest I'd go one way or the other with it.

One thing I'd be curious about, I think you mentioned in a prior call, but at least I know I heard it mentioned, at some point, that there this is fortuitous development that Pfizer was focusing on trying to extend LIPITOR and so had moved additional troops to that front and maybe taking them off the Lyrica front. Is that still the case or are things reverted to their prior circumstance of them focusing a lot on Lyrica?

At least, at this point, John, we haven't seen anything that's changed their promotion on Lyrica from what it was the end of the year. So in the audits we see around activity, on sales calls, they're about where they were, so they did have that drop off, as you mentioned, more about the September timeframe, with putting people on the LIPITOR, and we haven't seen it come back to prior levels.

Okay. And just skipping around, Jim. As it relates to Glumetza, I think I read that there is a price increase that was implemented at the beginning of the year by Santarus. I'd love to have that confirmed or refuted, and if it, in fact, did happen, what happened to scripts?

So John, a couple of things. One, Santarus reported earlier this week and reported Glumetza revenue at $28.5 million for fourth quarter. This is just kind of a baseline. They then took an 8% price increase in January. And in addition to the price increase, took their sales force from 110 reps to 150. So they've upped the promotion considerably. We haven't seen anything that is, I would say, is price increase-related in terms of scripts. And I think probably the biggest evidence of that was when they took the large price increase last August, we've seen scripts go up pretty continuously since that time, even though at that point, the price increase was 60% and 62% on the 2 SKUs.

Right. Okay. And Jim, as it relates to business development activities, I gather that there's been a fair bit of activity, the thing I would be curious about is if you had to differentiate the activity between incoming phone calls and outgoing phone calls, how would that shake out? Because I would assume that, at this point, at least some people and maybe it's venture-capital firms, as opposed to actual companies, know that you're on the prowl. And so they may be seeking you, as well as you seeking them. How would you describe that back and forth?

Yes. I mean I think if you want to make something happen, you've always got to be the aggressor on it. So certainly when we've seen something that we'd like, we've been the one making the phone call on the outbound side. With that said, we have received some things on the other side, often times, it's been things that we've already looked at, already considered internally. So I can't say there's been any really surprises that way on the inbound side. But we're in a spot here where we are definitely looking at us to make something happen rather than waiting to see what comes in.

Right. Okay. Jim, and then just finally, is there any thought to trying to do something with Gralise internationally this year?

John, we've been doing a look both at the regulatory environments around the world where there may be an opportunity along with our patent coverage, and then what the reimbursement would look like. And so I think we've got over the last few months, a much better understanding of some of those opportunities. We are just now starting to get to the point of formulating the plans around that, as we've gotten that more thorough understanding.

That does conclude our question-and-answer session. At this time, I would like to turn the conference back over to Jim Schoeneck for any additional or closing remarks.

I want to thank you for spending time on the call today and you with your interest in DepoMed. We are very excited about the year. We are very proud of what we accomplished last year. And we think it truly was a transformational year for the company and we are really excited going into 2012 and '13, as we grow our business and move it toward both cash positive and profitable. And we thank you very much for all of your following and support.

That does conclude our conference. We thank you for your participation.