Good afternoon, and welcome to the Depomed Reports Second Quarter Fiscal Year 2014 Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to August Moretti, Chief Financial Officer. Please go ahead.

Thank you, operator. Good afternoon, and welcome to our second quarter 2014 financial results and business update conference call. With me today are Jim Schoeneck, President and Chief Executive Officer of Depomed; Matt Gosling, Senior Vice President and General Counsel; and Jack Anders, Vice President, Finance. Before we get started, I'd 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 commercialization of Gralise, CAMBIA, Zipsor and Lazanda, and achievement of our financial guidance for 2014. 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 the Risk Factors section and other sections of our Annual Report on Form 10-K for the year ended December 31, 2013, and of our quarterly report on Form 10-Q that we filed with the SEC earlier today. Depomed disclaims any obligation to update or revise any forward-looking statement made on this call as a result of new information or future developments. 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. References to current cash, cash equivalents and investments are based upon balances as of June 30, 2014. All guidance, including that relating to the company's expected product revenues, total revenues, EPS and adjusted non-GAAP EPS and cash usage, is as of today, August 6, 2014. I'll now turn the call over to Jim Schoeneck.

Thanks, Augie, and thank you all for joining us on the call today. We appreciate your continued support and your interest in Depomed. I'd like to summarize the financial and operational accomplishments since our last earnings call, then I'll turn the call back over to Augie to discuss our finances, after which we'll open the call for questions. Gralise and our recent acquisitions, CAMBIA and Lazanda, led the way to a strong quarter. We doubled our net product sales over the same period last year, booking $28.2 million at the second quarter of 2014. Net product sales were up 31% over first quarter 2014, as we saw growth in prescriptions, demand units and shipments for each of our 4 products. Net sales for Gralise and Zipsor were up substantially from Q1 2014 and the comparable quarters of 2013, plus we gained traction with CAMBIA and Lazanda, the 2 drugs that we acquired in 2013. Lazanda sales doubled from the second quarter -- in the second quarter of 2014 from the first quarter, and CAMBIA net sales in 2Q were up 9% from Q1. For the first 6 months of the year, product sales were $49.8 million, an increase of 114%, compared to $23.2 million for the prior year. We're pleased with the revenue growth in Q2 2014, and we expect to deliver increasing sales for our 4 products during the remainder of the year. Let's look at each product, beginning with Gralise. As many of you know, Gralise's gabapentin formulated in our Acuform delivery system for the once-daily treatment of postherpetic neuralgia. Gralise net sales for the quarter were $15.1 million, an increase of 76% over second quarter 2013. Gralise total prescriptions were approximately 70,000 in 2Q, an increase of 7% over first quarter of 2014 and 22% over the…

Thank you, Jim. Before I summarize our financial results for the second quarter and the first half of the year, I want to remind everyone of the impact of the accounting for the PDL BioPharma transaction. In October 2013, we sold interest and future royalty in milestone payments in the type 2 diabetes therapeutic area to PDL for $240.5 million, which we received at the closing of the transaction in October. Depomed is accounting for the transaction under the debt accounting method. This method requires us to: recognize as revenue the underlying royalties and milestones that we sold to PDL; to record the proceeds of $240.5 million as a liability; and to impute an ongoing interest charged against the amount of the liability that is deemed to be unpaid. As we discussed in our earnings call in March, in addition to GAAP presentations, we have presented non-GAAP financials in today's earnings release, along with an appropriate reconciliation to give our investors and other readers of our financials a view of our operations that, among other things, eliminates the PDL noncash royalty income and the noncash interest charge. In the second quarter of 2014, we recognized $25.6 million of PDL noncash royalty income and $4.9 million of PDL noncash interest expense. In the first half of 2014, we recognized $68.4 million of PDL noncash royalty income and $10.3 million of PDL noncash interest expense, and reduced the amount of the liability to PDL by approximately $64.3 million. I'd now like to summarize the financial information for the quarter and the 6 months ended June 30, 2014. Total product revenue for the quarter ended June 30, 2014, was $28.2 million compared to $14.1 million for the quarter ended June 30, 2013. Total product revenue for the 6 months ended June 30, 2014,…

Thank you, Augie. We've been pursuing and delivering on a consistent strategy over the last 3 years, and our corporate goals for 2014 have 2 significant components. First, we're focused on growing the top line for our 4 branded products: Gralise, CAMBIA, Lazanda and Zipsor. Second, we seek to use our strong balance sheet to acquire or in-license marketer [ph] or late-stage differentiated assets that will help us meet our short and longer-term financial goals. We believe that we've established ourselves in the pain and neurology markets and that we have valuable offerings for physicians and patients. From an operational standpoint, we're on track to achieve our 2014 guidance. Achieving that guidance would mean that Depomed has grown from less than $1 million in product revenue in 2011 to well over $100 million this year. To sustain and further stimulate this growth, we have strengthened our management team with the addition of Srini Rao, as our Chief Medical Officer, and Scott Shively, as our Chief Commercial Officer. We believe that we're well-positioned to continue to this momentum and to continue to drive value for shareholders. We look forward to updating you on our progress throughout the year, and we want to thank you for your continued support. And at this point, we'd like to open the call for questions.

[Operator Instructions] And our first question comes from Scott Henry of Roth Capital.

I guess just getting started with CAMBIA. The scripts are growing pretty strong. It looks like about 20% year-over-year. And you've had the product now in your bag for a little bit. Could you talk about what you view as peak sales for that product out, say, 2 or 3 years?

Scott, it's Jim. We haven't actually put any numbers out there on peak sales. I mean we do think it can grow substantially from where it is, but we haven't given any specific numbers on it. I think the big thing, as I mentioned earlier, is that we've now got a -- really 5x the number of people selling it that the prior company Nautilus did. And as I mentioned, many of those customers have not previously seen CAMBIA, so we're in the early stages of launch, really, with those customers. So we'd expect that growth to pickup through the end of this year and into next year from those customers.

Okay and is it reasonable -- if you look at the $5 million in this quarter, you add the $300,000 kind of contra account to that, and then you factor in an 11% price increase, you're already getting to -- pretty close to a $6 million run rate before growth, is that math accurate?

Yes. I think that's accurate. And as I mentioned earlier, we actually have had a prescription high in July, which isn't traditionally the strongest month of the year for the pharmaceutical business. So I do think we're starting to see some real pickup from this effort we've been on since relaunching it in February.

Okay. And then, shifting over to Gralise, I know it's picked up as of late, but it's kind of picked up to where it was at the end of 2013. So I guess my question is are we bouncing around within a range? Or do you expect it to kind of break through that ceiling and start to grow beyond that?

No, Scott. I think we're seeing it grow beyond that. As I've mentioned during the script, we really -- we've seen some very strong weeks again in July with Gralise, which is really encouraging that we're seeing 3 of the top 4 weeks we've ever seen in the month of July. So I think we're seeing growth. And I think the fact that we're 22% above last year puts us in good shape for the rest of the year as well.

Okay. And then I'm not sure what kind of color you can give to the ongoing litigation. But when you say "a decision in short order" are we talking about days or weeks? Or -- I know some of the stuff can drag on even further. So can you just put any kind of parameters on when you would -- it's a guess, obviously, you would expect a decision? And can we rule out any possibility for a settlement at this point in time?

I'm going to turn that over to Matt.

Yes, Scott. Of course, it is just a guess. I mean this judge does great job, generally in kind of sticking to timelines and so forth. So if he says in short order, obviously, we can't know for sure what that means. But it's -- I would expect it's not in the -- it's in the relatively near future. Whether that's sort of sometime this month or not, hard to say. But I don't think it's next year.

That's helpful. And then just a couple minor questions for Augie on the modeling. This noncash PDL, that $33 million you took in the second quarter -- or your received in revenues in the second quarter, how should we think about that line for second half of '14, if you haven't already commented on that?

Scott, in moving our guidance up, we made -- we increased our total revenue guidance. We increased the band [ph], $15 million. And as I said on the call, that's all based on our view of the PDL royalty income based on Glumetza sales in the second half. We don't have much visibility into that, around that number, obviously. we're in the posture of simply receiving the royalties on the notice which we -- and the royalties we pass on the PDL.

Okay. I should be able to triangulate it from there.

Scott, this is Jack here. If you take a look at the reconciliation of our GAAP and guidance to non-GAAP guidance, we do kind of call out what expectations from a GAAP earnings per share is and what the effect of the noncash PDL royalties are.

Okay. Great. I'll take a look at that. And then just a final question. Augie, you mentioned SG&A run rate is inflated in kind of Q1 and Q2 of 2014 for legal expenses. Do we have any -- about how much of that is legal expenses? Are we talking about, about $2 million? Or -- just trying to get an idea of how we should see that spending decelerate in the second half.

We've never broken out our legal expenses as a line item. I think, for those on the call, we went through a patent litigation preparation in the first quarter and litigation in the second quarter. It's -- I think my only comment would be it's an expensive process.

And, Scott, I'm going to go out there on a limb a little bit with my financial guys in here. I think you could see it go down by $2 million to $3 million because of the legal, compared to where we've been in the first and second quarter.

Our next question is from Jason Butler of GMP Securities.

Let me start with a PDL[ph] question first. You said your not able to -- or you're not going to give any color on [indiscernible] the transaction. But just thinking about the fact it's been a little more than 9 months now since the PDL transaction, you've have that cash for that length of time, does that suggest that you are not finding what you would hope to find? Or that you are finding stuff but the price isn't right? I'm just wondering if you could give us any color on what you've been seeing in the marketplace and what your view of having that cash on your balance sheet is for a substantial period of time?

Jason, this is Jim. I think that the biggest thing I would say on it is that these things take a while. I mean it's -- these -- their transactions are unpredictable, as I mentioned and you said. And in this case, it just -- it can take a while to get them done. And there's no certainty on getting them done until it's actually signed and the money changes hands. So I think, at this point, we continue to be full pedal to the metal on it on multiple potential areas, and it's just getting one or more of those across the finish line, and get the other party to cooperate and move at the same speed we'd like to.

Okay helpful. Then just moving on to product sales. You'd said on the last earnings call that first quarter has been somewhat negatively impacted by inventory drawdowns, and second quarter, at that time, had -- you've seen it bounce back. Can you maybe give us an idea of where inventories finished the quarter and to what extent inventory restocking positively impacted sales in the second quarter?

Yes. I'll give you a top line, and I'll let Jack jump in with the rest, give more specifics on it. I think it's -- we did see them come back to normal levels. So there is an effect in there, and I'll let Jack address it directly.

Jason, we did see our wholesaler inventory levels grow by about a week compared to the end of Q1. But if you do recall, at the end of Q1, they did drop to about 1 week under what they normally where. So this is a bounce back, I would say, to the norm.

Okay, great. And then just last question, just wanted to clarify the guidance on the PDL-related revenue. If I -- just backing into what you've guided the numbers up to. You're still -- from what I can -- we're expecting dramatically lower revenue from the PDL-related revenue in the second half of the year than you saw in the first half of the year? Am I reading that differently than you are?

I think that, that's a fair reading of the adjustment that we made.

And, Jason, as we look at it, prescriptions on Glumetza look about -- look flat quarter-to-quarter. Even though we've seen the uptick in the royalty that we received. And so, with that and the fact that there's not a true material effect on the finances of Depomed, we just are being conservative in that until we actually see things materialize, if they indeed are stronger than what we forecast.

[Operator Instructions] And our next question comes from Brian Jeep of WallachBeth Capital.

First question, you mentioned that business development takes a lot to get the deals done. Does that imply that you found the targets and the timeline is just related to, actually, execution or does the search continue and that's part of the timeline too?

Well, Brian, it really is never over until it's over. One, any of these processes are competitive for one. Second, the seller can always decide that they want to take a different route or even keep the assets. So I think you've got multiple irons in the fire and you got to just keep pushing as fast as you can on our end of it. And that's just where we are. We're doing that on multiple fronts and looking for opportunities to enhance the business that way.

But there's no shortage of opportunities out there that you think are attractive and you're just negotiating on pricing or trying to get it completed?

It's -- since I been here, we've -- that team has just been busy. And if anything, they're always asking for more resource to be able to do what they need to get done. And that's just where we are today.

Okay. And curious, when do you expect the Zipsor and CAMBIA pediatric studies to finish? And once complete, should we expect a pretty substantial drop off in R&D expense?

I think it's going to take as a couple of years to get through the full amount of the studies that we inherited on the premium[ph] side. But I'll let Augie just comment on the expense side.

Brian, there is some expense in the R&D relating to those studies, but it's not a large number and we would expect that we'd start to incur expense for those trials as we get toward the end of this year and on into 2015.

Okay. So looking at the R&D line. And I'm curious kind of -- the run rate, it looks like, I don't know, it could be roughly $7 million this year. And I guess I've gotten the impression previously that you're not spending a tremendous amount on developing product at this point. So curious if you could just give us some color about what's in that R&D spend.

So I'd say it's direct expense of the employees that are in that department. It is the expense of projects that we are working on. And we're always looking at some projects, thinking about applications of our technology, et cetera. And then there are allocations of corporate expense into that department that work into that number as well.

Okay. I understand. And then last question, have you ever discussed kind of long-term expectations for XARTEMIS XR and MNK-155?

The short answer to that is no. And just -- we've continued to just rely on the outside estimates of it. We keep good track of what those mean, both stated publicly by Mallinckrodt and what the -- your fellow analysts that follow them are -- they've got out there. And consider those ranges as we're doing our financial planning.

Our next question is from of Chiara Russo of Janney.

Great. So my first question is going to be on Gralise. Obviously, this is a drug for more of an aging client type. And then Medicare Part D is going to be a big part in growing your prescription base. So I was wondering if you could give us a little bit of color on how you plan to grow in that Medicare Part D space?

So, Chiara, the population, as you say, is -- it tends toward an older population. A bit over 1/3 of the people diagnosed with PHN are over the age of 65. Right now, we have about 35% of the Med D plans that cover Gralise. And the others, the patients are able to appeal to try and get coverage. And even in the ones where we're not on formulary, we can see fill rates of up to 50% in those plans that don't actually even have it on formulary. We are continuing our efforts to focus on getting Gralise on more plans. A lot of its financial discussion of Med D plans tend to be very price-sensitive and tend to go more toward a generic formulary. So anytime you're dealing with a brand, you're generally in a discussion with them around price. And we continue to have those discussions for 2015, but those are similar to the biz dev stuff. Until they're done, until you see it and have an approval from them, it's not done.

Okay. Got you. Great. My next question again sort of tends towards Gralise sales. Obviously, we're heading towards second half of the year. Last year, we had a tough winter and you guys had mentioned there is a bit of seasonality in Gralise sales, particularly the weather around the Sun Belt. Just kind of want to maybe get ahead of myself here, pay more attention to what's going on. I'm just wondering if you could talk to sort of what factors we should be paying attention to going into the second half of the year that could have an effect on Gralise sales?

Yes. So for the rest of the year I would say there really isn't any that I would highlight. When you look at the Gabapentin market, December is typically the strongest month of the year for gabapentin prescriptions or Lyrica prescriptions or our prescriptions. And so that I think is something that we'll build toward -- through the year. Part of it is I think because people get prescriptions filled right at the end of the year because they've met co-pays and deductibles for those products. I think, if anything, going into the first quarter of next year, people reset in terms of their deductibles. We see some of the people that have high deductible plans that tend to back off a bit in terms of their prescription fills or they try to front-load them in the fourth quarter before it resets. I think that's probably the biggest factor. The pure weather factor that we had last year was a bit of a fluke, with the amount of snow and ice storms we had through the Southeast. So that one -- I'm not going to try and play weatherman.

Okay. Great. And, obviously, you've had some changes with the new Chief Medical Officer and the new Chief Commercial Officer. Any sort of changes in tone around the Depomed offices? Is there sort of a good excitement, good anticipation there?

Yes. It's probably always better to ask other people than me since I'm the one [indiscernible] a decision on them. But I think the general answer on that is Srini is already here. I think he's bought a new energy to the whole R&D area, and I think that's great to see. So I think that's a -- it's a great way for us to think about our business to start thinking about line extensions and creative ways. And as we continue to do diligence on potential in-licenses, it brings a new view in there that I think is really helpful. Scott is not here yet. Scott will start in early September. So that I'll just need to see once he's here in the building, but I anticipate a similar type of effect.

[Operator Instructions] And our next question is from Jason Napodano of Zacks.

I think most of my questions have been answered. I just wondered, you mentioned you haven't heard anything from any formularies on notice of exclusion for products like Zipsor or CAMBIA. I'm wondering if that's a window that around now is when we hear that kind of stuff. I mean, obviously, we heard about [indiscernible] going to exit. So I'm just wondering if we haven't heard by now, or we haven't heard by the of the month, if you're in the clear on stuff like that for 2015?

I think a couple of things. One, this year, both of the CVS Caremark and ESI published their exclusion list for 2015 last Friday. So I think that's really where we are. They've now put out the drugs that have been added to the list and drugs that have maintained on it. And in the case of ESI, the ones that were on the 2014 exclusion that are coming back into their formulary for 2015. So they definitely are a couple months ahead of where they were last year. Last year, they made these announcements in early October. This year, they seem to want to get ahead of the curve a bit more and did it on August 1. So I'm not sure if that's going to be a pattern for the PBMs coming up, but certainly, they are significantly ahead. And at least from the way it looks, I don't think they've ruled out that this is it, and they wouldn't do anymore. It seemed to be a pretty definitive press release or a pretty definitive release from them of those products. So we're hopeful that, at this point, it actually is past us for 2015, rather than anything is still pending.

And this concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

So I do want to thank everybody for your continued interest in the company. As you can tell, we are dedicated here to building a company that can provide value to the physicians and patients, and to the payors that are part of our unique customer base that we have in the industry. And with all that, and to build value for both our shareholders and for the folks here at Depomed. And with that, I'd just say thank you again, and I look forward to updating you through the rest of the year.