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Edited Transcript of AKAO earnings conference call or presentation 6-Aug-18 8:30pm GMT

Q2 2018 Achaogen Inc Earnings Call

SOUTH SAN FRANCISCO Aug 17, 2018 (Thomson StreetEvents) -- Edited Transcript of Achaogen Inc earnings conference call or presentation Monday, August 6, 2018 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Blake Wise

Achaogen, Inc. - CEO & Director

* Gary Loeb

Achaogen, Inc. - General Counsel, Corporate Secretary & Chief Compliance Officer

* Janet Dorling

Achaogen, Inc. - Chief Commercial Officer

* Kenneth J. Hillan

Achaogen, Inc. - President, Director and President of R&D

* Zeryn Sarpangal

Achaogen, Inc. - Chief of Staff

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Conference Call Participants

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* Adnan Shaukat Butt

Guggenheim Securities, LLC, Research Division - Senior Analyst

* Alexandre N. Bouilloux

Mizuho Securities USA LLC, Research Division - Research Analyst

* Ami Fadia

Leerink Partners LLC, Research Division - Director of Specialty Pharmaceuticals & Generics and Senior Analyst of Specialty Pharmaceuticals

* Antonio Eduardo Arce

H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst

* Kevin Kedra

G. Research, LLC - Research Analyst

* Laurence Alan Carr

Needham & Company, LLC, Research Division - Senior Analyst

* Pamela Ann Barendt

Cowen and Company, LLC, Research Division - Associate

* Stephen Douglas Willey

Stifel, Nicolaus & Company, Incorporated, Research Division - Director

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Presentation

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Operator [1]

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Good morning, everyone, and welcome to the Achaogen Inc. Second Quarter 2018 Earnings Call. Today's call is being recorded. At this time, I would like to turn the conference over to Gary Loeb, General Counsel. Please go ahead, sir.

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Gary Loeb, Achaogen, Inc. - General Counsel, Corporate Secretary & Chief Compliance Officer [2]

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Thanks, Christy, good afternoon, everyone, and thanks for joining. This conference is being recorded and will be available on our website, www.achaogen.com for 30 days. Before we get started, just a reminder that this call contains forward-looking statements. Other than historical facts, all statements in this presentation, including future results of operations and financial positions, business strategy, commercial opportunities and trends, availability of funding, product approvals, clinical or regulatory pathways, timing of activities and likelihood of success for our activities, including the commercial potential of ZEMDRI and future results of current and anticipated products are forward-looking statements, reflecting the current beliefs and expectations of management made pursuant to the Safe Harbor provisions of the United States securities law. Because forward-looking statements are subject to risks and uncertainties, some of which cannot be predicted or are beyond our control, you should not rely on these forward-looking statements as predictions of future events. Our actual results and the events identified in our forward-looking statements may not occur and actual results could differ materially from those projected. For a further description of these risks and uncertainties as well as risks relating to our general business, see our annual report on Form 10-K for the fiscal year ended December 31, 2017 and other periodic public filings with the Securities and Exchange Commission. Except as required by law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise. This conference discusses products other than ZEMDRI that are under clinical investigation and have not yet been approved for commercial use. For example, C-Scape is currently limited by federal law to investigational use. No representation is made as to its safety or effectiveness for the purpose for which it is being investigated.

I'll now turn the call over to Blake Wise, Achaogen's CEO.

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Blake Wise, Achaogen, Inc. - CEO & Director [3]

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Thank you, Gary, and good afternoon to everyone. I'm excited to be talking to you today as a commercial stage company. It's been a busy time for Achaogen this past quarter as we transitioned from a clinical stage company to that of an integrated company with commercial operation. This is an important and rare milestone in our industry. For Achaogen, the recent quarter was characterized by a tremendous amount of work, excitement and pride surrounding the FDA approval of ZEMDRI. And most recently, the official launch of ZEMDRI to the infectious disease community and some very encouraging indicators in our first 2 weeks of commercialization. This transition to becoming a commercial company was followed by our decision to improve our cost structure and to narrow our focus to 3 core priorities. I am confident that this decision, while difficult, will position Achaogen for long-term success. In my remarks today, I'll share my perspective on the progress we've in the launch of ZEMDRI and then address the recent changes we announced on July 26. Kenneth will also share his on perspective on the ZEMDRI journey and the impact of the restructuring on our pipeline and research priorities. Janet will provide an update on ZEMDRI launch activities and the momentum that is building in the launch. Zeryn Sarpangal, who is transitioning into her role as CFO effective October 1, will walk us through the financials for the quarter, providing highlights on the financial impact of the restructuring.

To begin with ZEMDRI. I am very pleased to report that the launch is off to a fast and successful start. We achieved our goal of launching ZEMDRI in July with a fully deployed field force, including 54 hospital account managers whom we hired from a pool of over 3,000 applicants, plus our 12 medical scientists, who have been in the field for the past year. They are rapidly engaging with priority accounts in the hospital and outpatient settings. Initial feedback indicates that our key clinical messages are resonating, and in fact, we experienced our first formulary acceptance within days of our launch. In my own discussions with several infectious disease doctors, all have emphasized how grateful they are to have ZEMDRI available for patients who desperately need new options. They cite ZEMDRI's once daily 30-minute dosing regimen, particularly important for outpatient treatment, its potential to address difficult to treat infections and the comfort with the safety profile as important attributes that will impact treatment decision. To underscore just how prepared we were to launch ZEMDRI, I'd like to share one precedent-setting accomplishment by the launch team that successfully led to 2 antibiotic susceptibility testing diagnostics being cleared by FDA in record time. This allows physicians to determine whether a patient's infecting pathogen is susceptible to ZEMDRI. Our team achieved FDA clearance of one device in 15 days from the approval of ZEMDRI, which is the fastest such approval that we are aware of. And we also got clearance of the second device by FDA last week. The availability of AST options is important to the uptake of a new antibiotic. We're now seeing the benefit of our preparedness in ensuring this availability at launch. I'm also extremely pleased that the ZEMDRI -- that ZEMDRI was granted new technology add-on payment or NTAP by CMS as part of the annual application and review process. NTAP provides additional reimbursement of up to 50% of the cost of ZEMDRI for Medicare patients in the inpatient hospital setting. This reimbursement is in addition to the Diagnosis Related Group or DRG-based reimbursement that hospitals receive. This is an important and meaningful designation, particularly at launch, that will help facilitate hospital and patient access to ZEMDRI. In summary, our launch activities are progressing exceptionally well and we are extremely confident about ZEMDRI's market potential. Janet will expand on our launch progress in a moment. I do want to emphasize that the restructuring will not affect the commercial and medical affairs groups, since executing a successful launch of ZEMDRI in the U.S. is our top priority. Now turning briefly to the changes we announced on July 26. We have made strategic choices to improve the company's cost structure and reduce some activities. While this is a very hard decision for us to make, we feel this puts us on a viable path to long-term success and to fulfilling our mission to help patients who critically need new antibiotic therapy. Our 3 core priorities going forward are: one, successfully commercializing ZEMDRI in the United States; second, advancing the potential commercialization of ZEMDRI in the EU with the submission of the Marketing Authorization Application or MAA in 2018; and third, progressing our pipeline by developing C-Scape and advancing our novel aminoglycoside program, both of which have non-diluted funding support.

On a more personal note, with our sharpened focus and the elimination of approximately 80 positions, many valued colleagues will be leaving the company, including 3 executive team members; Kenneth, Toby and Lee. I want to thank each of them for their leadership, service and countless contributions to building this company.

I also want to thank all Achaogen's employees for everything they have done to make Achaogen what it is today. Kenneth joined Achaogen shortly after the plazomicin phase II program was initiated. And he has seen every milestone since then. As such, I would like him to provide his perspective on the success of ZEMDRI so far and our focus going forward. Kenneth?

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Kenneth J. Hillan, Achaogen, Inc. - President, Director and President of R&D [4]

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Thank you, Blake. I've had the opportunity to spend 7 incredibly rewarding years at Achaogen. It has been an honor to be part of such an amazingly dedicated and inspiring team of people, to have contributed to building our leadership position in the antibiotics field and to have seen Achaogen emerge as an established and trusted partner in the global effort to address the public health threats of antimicrobial resistance.

I'm especially proud of our success in bringing ZEMDRI to patients and of the data that supports its very unique and important position in the gram-negative antibiotics marketplace. I have enormous admiration for Blake and Janet's leadership and I'm confident through the work and dedication of our commercial and medical teams that ZEMDRI is well positioned for a successful launch as a new medicine that impacts the life of patients with bacterial infections with limited or no alternative treatment options. As other biopharma companies have stepped away from antibiotics, we have remained committed to the space because the growth in resistance of -- to antibiotics is driving a very real urgent medical need. I remain optimistic that pharma interest will return as companies like Achaogen demonstrate that newly launched antibiotics that address real unmet need can generate attractive commercial returns.

Nevertheless, to ensure that existing companies remain and new companies continue to enter this space, much more needs to be accomplished on the policy front, in particular, to progress the introduction of economic pull incentives. While we've cut back on our earlier stage investments, we remain committed to fighting antibiotic resistance at Achaogen, albeit with a scaled-back effort. We remain excited about the potential of both C-Scape and the new aminoglycoside program and are fortunate to have Dr. Ryan Cirz leading our ongoing discovery and translational research efforts. While I'm saddened that many of us, including myself, will be moving on from Achaogen, I will have the opportunity to remain strategically involved with the company through my continuing Board role. We believe that the antibody discovery platform and some of the early stage antibody programs have potential to create significant future value. As we will no longer continue these efforts at Achaogen, we're in the process of assessing alternative options to progress the capabilities and programs that have been created.

Before I turn the call over to Janet, I'd like to update you on one last item regarding our next steps for the Complete Response Letter, which we received for the plazomicin BSI indication. I can share that we intend to meet with the FDA later this quarter and will be positioned to update investors on the status at the next quarterly call.

To wrap up, I believe that the recent changes position us to remain highly focused on and to be optimistic about ZEMDRI's launch, and here to provide you with much more detail on launch progress is Janet.

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Janet Dorling, Achaogen, Inc. - Chief Commercial Officer [5]

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Thanks, Kenneth. It's been an exciting couple of weeks. We announced that ZEMDRI was available for purchase on July 20 through our specialty distributors, ASD Healthcare, Cardinal Health, McKesson and FFF. We then deployed our commercial field force on July 23, which includes our hospital account managers, hospital system account directors, regional sales directors and market access professionals.

Our Field teams are well trained on and well-armed with the ZEMDRI story. This team is already reaching prescribing physicians and formulary decision makers at our target independent hospitals, larger hospital systems and in the outpatient setting. During the last 2 weeks, we have been focused on our previously communicated launch priorities: one, reaching our target accounts; two, ensuring the product is distributed and stocked in appropriate hospitals; three, educating healthcare professionals on the ZEMDRI data; and four, building infrastructure for ZEMDRI use. I'm happy to share with you some insights on the launch and our progress to date. On our first priority of reaching our target accounts, we have seen over 360 accounts in our first 10 days in the field, hitting 75% of our high-priority target accounts in that time frame, including traditionally hard to access accounts and physicians. 15% of our calls have taken place in the outpatient setting, primarily in physician-owned infusion centers and many of our calls have included the potential for transition of care to the outpatient setting. In our first 2 weeks calling on customers and educating them about the ZEMDRI data, our team is already delivering great results. We've had orders placed in the first 7 days of launch in both the inpatient and outpatient settings. And we have had our first hospital formulary review with a positive outcome, and several other hospitals have scheduled upcoming formulary reviews.

On priority two of ensuring the product is distributed and stocked in appropriate hospitals, all of our specially distributors have placed and received their initial orders. We have confirmed customer orders in both the inpatient and outpatient setting and we have over 130 physician-owned infusion centers, which we will refer to as POICs, which include individual POICs and infusion center management companies already interested in outpatient use of ZEMDRI for their cUTI patients.

On priority three of educating healthcare professionals on the ZEMDRI data, based on our label, we have a very strong story to tell. The totality of the data is compelling and our key messages are resonating with our customers.

These include clinical messages covering ZEMDRI's microbiological activity against pathogens that include CRE and ESBL-producing Enterobacteriaceae, our message around the strength of the EPIC data and ZEMDRI's demonstrated reduction in the risk of clinical relapse or disease recurrence at the late follow-up, or LFU, which for physicians, means the potential to impact long-term readmission rates. This message is especially compelling, as the EPIC trial compared ZEMDRI to a gold standard in meropenem in a patient population which was susceptible to both drugs. And also, our clinical message communicating our safety data in EPIC has been critical, as we showed a rate of 3.6% versus 1.3% for decreased renal function in ZEMDRI versus meropenem treated patients.

Our MOA and dosing messages have also resonated, including that as an aminoglycoside, ZEMDRI allows physicians the chance to break away from repeated ß-lactam therapy and turn to a different class of antibiotics for recurrent complicated urinary tract infection.

And finally, our dosing message covering our short, once-daily dosing schedule that is absolutely seen as convenient in both inpatient and outpatient sites of care. Physicians and hospitals are motivated to move patients out of the hospital for both cost and cross-colonization reasons and many believe that ZEMDRI may help make that transition of care possible. And our fourth priority of building infrastructure, our partnership with microbiology departments is being established out of the gate with Achaogen providing the ability to do susceptibility testing at launch. Specifically, we have had 2 AST devices cleared by FDA since PDUFA. First, the Plazomicin HardyDisk, approved July 10, with estimated commercial available Q -- availability Q3 2018. And second, Liofilchem MTS, which is the -- an MIC test strip for plazomicin approved July 31, also with estimated commercial availability Q3 2018. We had -- we have had very strong uptake and response for ordering of research use only or RUO testing materials, with over 20 unique hospitals already having ordered and received AST materials. Additionally, we are finding accounts are very comfortable with therapeutic drug management of aminoglycoside. I'm also pleased to reiterate that our NTAP application for ZEMDRI was approved just last Thursday. The NTAP program is only available to new technologies that meet the definition of newness, they exceed cost criterion thresholds and demonstrate substantial clinical improvement over existing therapies. The NTAP payment will provide hospitals with a payment in addition to the standard-of-care, Diagnostic Related Group, or DRG reimbursement, of up to 50% of the cost of ZEMDRI for a period of 2 to 3 years, effective October 1, 2018. This will be a new and important component of our value proposition for hospitals who use ZEMDRI in the inpatient setting. We applied for NTAP to ensure we were doing everything we could to support hospitals as they on board ZEMDRI, knowing that the DRG system isn't optimized for new higher priced antibiotics.

With this approval, we will be able to partner with hospitals more effectively to reach our goal of ensuring all appropriate patients can be treated with ZEMDRI. In closing, based on customer reaction to ZEMDRI's product profile, we are confident that our sales team will continue to be successful in communicating the compelling value of ZEMDRI to infectious disease specialists, critical care physicians, infectious disease pharmacists and other [ACPs] involved in treating cUTI patients. We hired a team that has been through dozens of successful antibiotic launches, and due to the combination of excellent pre-launch planning and their experience, our launch is going very well. I'm extremely pleased with our progress and optimistic that there is much more to come.

Looking forward, on our third quarter conference call, we will provide ZEMDRI sales and we'll plan to discuss additional launch metrics such as the number (inaudible) targeted accounts, formulary progress and high-level account ordering and reordering metrics.

I'll now turn the call over to Zeryn.

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Zeryn Sarpangal, Achaogen, Inc. - Chief of Staff [6]

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Thank you, Janet. It's a pleasure to be on the call today. I'm taking on new responsibilities as CFO at an exciting time at the company. I want to thank Toby for his many contributions to Achaogen and for continuing to work closely with me and the team as we transition through September. This is a new opportunity for me at a company that I know very well. I've been at Achaogen for over 8 years in various roles, having led the finance group early in my tenure and most recently having led our HR and corporate affairs team. Before that, I spent my earlier career in management consulting and investment banking.

I look forward to meeting many of you in person over the coming months. Today, I will focus my remarks on key aspects of our financials and the financial impact of the restructuring we announced on July 26. We have been clear that the goal of the restructuring is conservation of capital and based on our current operating assumptions, Achaogen is funded through Q1 of 2019. Turning to near-term expense run rate, we expect near-term quarterly operating expenses to be flat and consistent with what we have reported over the last 3 quarters, excluding one-time items and noncash expenditures like stock-based compensation. We'll be getting to these run rates beginning in Q4 2018, as our quarterly expenses get normalized. Regarding one-time items, there is 2 key things: one, in the second quarter, we've recognized an expense of $7.5 million as a one-time milestone expense to Ionis, based on the FDA approval of ZEMDRI. This is part of our 2006 agreement with Ionis and we do not anticipate any other payments to Ionis in 2018. And two, in the second half of this year, we estimate a charge related to the restructuring of approximately $6 million, the bulk of which will occur in the third quarter. In addition, I'll point out a customary change in our financial reporting that comes with becoming a commercial company. Prior to ZEMDRI being approved, prelaunch product supply was considered an R&D expense. So, with the ZEMDRI approval, per GAAP, those expenditures are now being capitalized and will ultimately be expensed as cost of goods sold. As a result, we expect the COGS on our income statement to fluctuate somewhat. On an non-GAAP basis, we expect COGS as a percentage of net revenue to be in the teens in 2019, evolving to high single digits by 2020, as additional manufacturing capacity comes online.

Operationally, the restructuring will enable us to reduce our overall capital needs without impacting the ZEMDRI launch.

Looking to 2019, we anticipate that most of the net operating expenses will be attributed to ZEMDRI. Our investments in C-Scape and the new aminoglycoside program are partially funded by the BARDA and CARB-X partnership. As a result, our pipeline investments are highly capital efficient, and until we initiate a potential Phase III C-Scape trial, a small component of our overall cash burn.

Let me end by saying, that we are focused on building a company that is driven by our passion and dedication to patients. And with the operational changes we have made, we believe that we are positioned to achieve our near-term goal of successfully launching ZEMDRI in the U.S., (inaudible) the MAA in the EU in 2018 and advancing our pipeline with C-Scape and the novel aminoglycoside program.

I'll now turn the call back over to Blake for closing remarks.

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Blake Wise, Achaogen, Inc. - CEO & Director [7]

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Thanks very much, Zeryn. In closing, we're impressed and quite pleased with the momentum that is building in the launch of ZEMDRI and excited about ZEMDRI's potential impact on patients.

We have seen great enthusiasm from the medical community and believe we are positioned for success. We will now gladly take your questions, and of note, Toby Schilke will join us for the Q&A as well. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll go to Stephen Willey from Stifel.

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Stephen Douglas Willey, Stifel, Nicolaus & Company, Incorporated, Research Division - Director [2]

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Just real quickly on NTAP, I know that there really hasn't been a lot of prior art in the space from a therapeutic perspective, I guess, specifically, within the antibiotic space. I guess, the one case study that we have there didn't really show much of an inflection point and that may be kind of a product specific issue as supposed to an NTAP specific issue. But just kind of curious on how you envision this, serving as a tailwind, once effective October 1 and just the logistics about it? And whether or not you actually think that this will be kind of a genuine tailwind for reimbursement purposes?

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Blake Wise, Achaogen, Inc. - CEO & Director [3]

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Thanks, Steve, It's Blake. So I think that maybe first to talk about the precedent in this space, so I think you're referring to DIFICID, which received an NTAP approval maybe 3 years or so into their launch, and I think, maybe first and foremost, timing matters. So we've talked about a lot the launch of new products into the acute care space and the hospital and the infrastructure that needs to get built around those launches and the time it takes for uptake for some of those products and I think the same thing happens when you have a product that's been established and practice patterns are well established, formulary reviews have already taken place. And so I think the fact that it was somewhat fortuitous timing that we had our PDUFA date so proximal to the NTAP time line and then ultimately our launch now happens near the time that we get this NTAP approval, I think that's important for the purposes of upcoming formulary reviews that are going to take place in the first 6 months of a launch and even sooner, we will be in a position that we'll be able to communicate the NTAP as a component that could influence that discussion within hospitals and so, that timing piece I think is one important component. And maybe overall, I think the NTAP is important because we know that the DRG system is challenged by more expensive antibiotic therapies that often sit outside the DRG reimbursement. And when you have the opportunity to get some additional reimbursement back to hospitals and the inpatient setting, and I do believe that's meaningful. And I think, we are excited about the fact that we get to go out and do something for patient access, hospital access under NTAP. And do believe it will make a difference for patient access to ZEMDRI.

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Stephen Douglas Willey, Stifel, Nicolaus & Company, Incorporated, Research Division - Director [4]

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And then you may have mentioned this before at some point, but just maybe a general characterization of the break out between the Medicare and the Medicaid business you expect to see within the hospital?

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Janet Dorling, Achaogen, Inc. - Chief Commercial Officer [5]

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Yes. So this is Janet. We -- of our -- in our hospital setting, about 2/3 of our patients are Medicare and then less than 1/3 will be Medicaid.

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Stephen Douglas Willey, Stifel, Nicolaus & Company, Incorporated, Research Division - Director [6]

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Great. And then just lastly for me, just wondering if you can maybe comment around where your potential ex U.S. partnering discussions may be at this point? And any color you can provide around the process and, I guess, where you might be engaged would be helpful.

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Blake Wise, Achaogen, Inc. - CEO & Director [7]

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Sure. So our priority, as we've said, related to Europe is the submission of the MAA in the second half of this year, and so, that's first and foremost our priority and I think that -- in general gives us strategic flexibility on when we bring on a partner for Europe. And I'd say that in general, at this point, we don't plan on giving more specific guidance but I think we're in a strong position (inaudible) around partnering in Europe as we focus on the submission of MAA this year.

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Operator [8]

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And next we'll go to Chris Shibutani from Cowen.

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Pamela Ann Barendt, Cowen and Company, LLC, Research Division - Associate [9]

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This is Pam Barendt on for Chris. So looking at the ZEMDRI -- the wholesale acquisition cost, can you just take us through the factors that led to your decision on price? And how you think that affects the competitive landscape?

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Blake Wise, Achaogen, Inc. - CEO & Director [10]

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So I'll get started and then Janet may add. So, as you know, we priced at $315 per vial. And the reference price that we've been sort of talking about or others in this space had priced at about $1000 per day. So our expectation is that the average patient will get 3 vials, so effectively for patient who is getting 3 vials per day, the price per day is $945. And so I think our thinking going into that was informed significantly by a lot of market research with hospitals, with pharmacists that really understand their thinking in this space and we ultimately priced at a level that I think is near where the competition lies. Obviously, it's a slight discount and I think the feedback that we have gotten early on from customers is that we feel like we really did price ZEMDRI optimally. But the decision to go there was really informed by market research and a lot of discussions with the hospital community.

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Pamela Ann Barendt, Cowen and Company, LLC, Research Division - Associate [11]

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That's very helpful. And if I could just ask one follow-up. If you could talk in general about the pros and cons of working with your competitors for the policy issues that you just outlined on the call, that would be really helpful.

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Blake Wise, Achaogen, Inc. - CEO & Director [12]

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Let me just make sure, I -- when you say policy issues, you mean the potential for pull incentives or other things to encourage additional development in this space?

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Pamela Ann Barendt, Cowen and Company, LLC, Research Division - Associate [13]

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Yes.

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Blake Wise, Achaogen, Inc. - CEO & Director [14]

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Yes. So we are part of a group in D.C. called the Antimicrobial (inaudible) many other, both small biotechs and large pharmaceutical companies with interest in this space. And work very closely with all of our colleagues across the antibiotic space to try to further policy and the legislation potential. And I think as everyone is aware, we saw a pretty meaningful and exciting legislation, piece of legislation get dropped around REVAMP a couple of months ago, which was bi-partisan and allowed for the potential for transferable exclusively upon the approval of a qualifying antibiotic. As we understand it now, that legislation had the potential to come part of PAHPA reauthorization, which about 2 weeks ago had a markup that did not include the REVAMP legislation. However, the fact that it's now been introduced and has bipartisan support, I think, is a very important signal towards the interest across both sides of the aisle around doing something to incent development in this space. And we will continue to work really closely with everyone in the industry on this. I want to know, Kenneth if you have anything to add? No. So I think it's important an area where we want to see companies both large and small committed to developing new antibiotics. And so, we like that there's a lot of attention being paid to it and now we want to see some policies on the Hill.

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Operator [15]

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And next we'll go to Ami Fadia with Leerink Partners.

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Ami Fadia, Leerink Partners LLC, Research Division - Director of Specialty Pharmaceuticals & Generics and Senior Analyst of Specialty Pharmaceuticals [16]

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A couple I have. So firstly, just with respect to the NTAP bridging that you've received. How compelling is that, just from the point of view of the current economics of the DRG reimbursement and how much hospitals are netting out with respect to treating these patients and with the NTAP -- does it really make it meaningfully compelling for them to be able to use ZEMDRI? If you can give us a little bit more color on that. Secondly, if you could confirm just based on your comments whether the OpEx spend per quarter will be somewhere in the range of $46 million a quarter? And then timing on C-Scape, Phase III start, that would be helpful.

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Blake Wise, Achaogen, Inc. - CEO & Director [17]

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Okay, so I'll start with NTAP, and maybe to -- just give some context. Our maximum payment under the NTAP approval is about $2,700. And just to give it some frame, that's $2,700 that the hospital could be reimbursed if they are exceeding the DRG, which they otherwise wouldn't. So I think if the question is whether this is financially meaningful to a hospital, to be able to offset some of the cost, I think the answer is certainly, yes, because it's reimbursement they otherwise wouldn't be receiving. That said, I think the clinical profile of ZEMDRI and the patients that we can help with the product are, first and foremost, what is driving interest in the product upon launch and that we're hearing in the field today. I think that's going to drive physicians' interest in the potential to help patients. The NTAP is going to be important I think for formulary decision-making and to give an additional reason why access to therapy could be improved through that process. But the clinical profile really is the important thing that's going to be physicians' minds as they make treatment decisions. For the second question, I'll turn to Zeryn on the quarterly numbers.

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Zeryn Sarpangal, Achaogen, Inc. - Chief of Staff [18]

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Yes, Ami. So the way to think about our OpEx is, it will be based on the last 3 quarters, excluding one-time charges and noncash expenditures like stock-based expenses. So this quarter, that translated into about $45.5 million OpEx and the prior 2 quarters was around $40 million to $42 million.

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Kenneth J. Hillan, Achaogen, Inc. - President, Director and President of R&D [19]

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And then, Ami, it's Kenneth, just to -- you asked about C-Scape. We provided guidance that we intend to initiate and complete a clinical pharmacology study, a phase I study in 2019. At this time, we're not giving further guidance around the start of the Phase III study.

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Operator [20]

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And we'll go next to Alan Carr from Needham & Company.

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Laurence Alan Carr, Needham & Company, LLC, Research Division - Senior Analyst [21]

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You mentioned that you've reached around 75% of your target accounts. I wondered if you could talk a bit more about those discussions and sense of -- and dig in a little bit more about how they plan to use the drug based on these discussions. And then also hoping you can talk a little bit more about C-Scape, some of the issues involved in this, what you'll be looking at. And did I -- I guess could you confirm those time lines for that PK trial that you're planning?

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Janet Dorling, Achaogen, Inc. - Chief Commercial Officer [22]

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Hi, Alan, this is Janet. I just wanted to first address your question about what's happening in those conversations. I think we're spending a lot of time on some of the topics I mentioned in my remarks during the call. Definitely communicating our key messages around the data. The data is really resonating with those physicians, so we're talking about safety and efficacy data, the optimal dosing regimen and also, a lot about the MOA of being an aminoglycoside versus a ß-lactam. I think we're talking about these complicated urinary tract infection patients that are recurring and coming back to the hospital over and over again, sometimes they've been on multiple carbapenems or failed a carbapenem and it is definitely a situation where that patient type is resonated with our target physicians. They see those patients, they hate to see them back again and again, they hate to see them hospitalized, so they are very encouraged about -- by having an option like ZEMDRI, not only that has the data that it has, but also that has the opportunity to transition those patients when appropriate to the outpatient setting.

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Kenneth J. Hillan, Achaogen, Inc. - President, Director and President of R&D [23]

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And Alan, it's Kenneth, just -- you asked about C-Scape, just -- we haven't provided any additional guidance beyond the fact that we'll start that phase I clinical pharmacology study in 2019, really with the outcome of that study, we will be able to give a greater update on when we would plan to initiate the Phase III study. I think as we've said, we do believe through the work that we're doing, there's potential opportunities for our own patent protection based on novel approaches to dosing, formulation and treatment. So certainly those are some of the key things that we're working on.

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Laurence Alan Carr, Needham & Company, LLC, Research Division - Senior Analyst [24]

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So start and finish your clinical pharmacology work next year? Is that right?

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Kenneth J. Hillan, Achaogen, Inc. - President, Director and President of R&D [25]

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That's right, exactly, confirmed.

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Operator [26]

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And we'll go next to Kevin Kedra from Gabelli.

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Kevin Kedra, G. Research, LLC - Research Analyst [27]

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First I wanted to ask about publication time lines for the Phase III studies, any sense of when we could be seeing those published in a medical journal. Secondly, I want to just ask about the comment about the cost of goods sold in 2019, will be higher than expected, wondering, if that's a function of just purchase commitment? I would think a lot of that inventory had already been expensed as R&D. And then, finally, wanted to ask your thoughts on -- there was a recent deal in this space for a fosfomycin product that could be coming to market in UTI, just how you see that as competitively positioned against ZEMDRI? And if you see that as a kind bearing any reflection of the valuations that we're seeing for antibiotic assets?

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Kenneth J. Hillan, Achaogen, Inc. - President, Director and President of R&D [28]

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Thanks, Kevin. I can take the -- it's Kenneth, I'll take the first question and then I'll pass the question -- I'm sorry, to Zeryn. So on the manuscripts, we continue to make very good progress there. We're not in a position to give any further update at this time but we certainly look forward to seeing the Phase III manuscripts published for both EPIC and for CARE. What I can tell you is that we've already had 5 manuscripts published in Q2, with some really important data on plazomicin including data on the microbiology profile, as well as what we call a Y-site compatibility publication, which really helps hospitals when they're administering multiple drugs there together. So we'll certainly update you when we have further news on the Phase III manuscripts but as I said, continue to make good progress there.

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Zeryn Sarpangal, Achaogen, Inc. - Chief of Staff [29]

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And Kevin, regarding your question on the COGS. To clarify, the guidance that we gave was on a non-GAAP basis, so the COGS as a percentage of net revenue in 2019 and (inaudible) is really on non-GAAP. From a GAAP standpoint, as you noted, we have expensed the majority of our inventory already and so we'll start capitalizing that going forward and you will start seeing that explicitly on our income statement as we start to work through that.

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Blake Wise, Achaogen, Inc. - CEO & Director [30]

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And then Kevin, I'll take your third question on the recent deal that you referenced and IV fosfomycin as a competitor in UTI. So, yes, obviously, we've seen some activity recently. And as a leader in the antibiotic space, we remain close to the evolution that's happening in this space and obviously, pay close attention to that evolution. I think as it relates to complicated UTI and ZEMDRI versus IV fosfomycin, I would say, the EPIC data versus meropenem now that we're out and talking to customers and it reiterates what Janet has talked about, has really been quite exciting to see because this notion of meropenem being a gold standard and where people have a history of these UTIs and they have prior antibiotic exposure, maybe prior healthcare system exposure, ESBLs are on the rise, a lot of these things that played out that we saw in terms of strength of data in the EPIC study are really resonating in the community. And I think that's where we're focused is where ZEMDRI can help these patients. And so there will always be other products that are out there, that are currently approved or in the future could be approved in the same indication. I think where we're focused really is on understanding which patient type most resonates around ZEMDRI and making sure that those patients have the potential to access and we've been really pleased with what we've been hearing so far. So I'll be interested to see how things continue to evolve in this space, but I'd say we're not paying a tremendous amount of attention to that today, because we're focused on our launch.

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Operator [31]

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And we'll go next to Ed Arce from H.C. Wainwright & Company.

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Antonio Eduardo Arce, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [32]

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So I have a few questions. First is, you mentioned, a formulary approval has already taken place. I was just wondering, if you could characterize that, is that more of an outlier? Or do you expect any further near-term approvals? Secondly, your meeting, you mention later this quarter with the FDA around the CRL. What kind of scenarios do you anticipate? And would you be in a position to discuss, if need be, an additional trial for that? Thirdly, when do you expect to see RX data on ZEMDRI? And then lastly, I think you mentioned that the pipeline going forward, which is predominantly funded externally, C-Scape and the aminoglycoside, does that necessarily mean the other earlier programs are slated for out-licensing?

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Janet Dorling, Achaogen, Inc. - Chief Commercial Officer [33]

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Ed, this is Janet. I'll start with your question around formulary approval. So I'll say 2 things. First of all, as far as being an outlier in general in antibiotic launches, yes, I think it is an outlier. It is unusual to have a product reviewed and approved so soon, and I think it's a testimony to the strength of the data of ZEMDRI as well as our excellent hospital account managers out in the field to have achieved a milestone like that so quickly. I'll also add to say we've been very pleasantly surprised at the number of hospitals that are scheduling formulary reviews over the next quarter. And so I don't think having initial positive formulary approvals will be an outlier for ZEMDRI. I expect to be reporting additional information on formulary at our next earnings call.

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Blake Wise, Achaogen, Inc. - CEO & Director [34]

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And maybe Janet, the RX data, you want to hit that now as well?

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Janet Dorling, Achaogen, Inc. - Chief Commercial Officer [35]

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Yes, we expect that [IQV] data should be coming online as soon as this week, if not, definitely by next week. So should be coming soon.

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Kenneth J. Hillan, Achaogen, Inc. - President, Director and President of R&D [36]

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Yes, thanks, Ed, it's Kenneth, thanks for the kind words. Just in terms of the CRL, we'll be talking, as I said, to the FDA -- or meeting with the FDA this current quarter and really one of the primary things from our perspective in terms of our objectives is to determine if there's a feasible path to an approved indication for BSI. You mentioned about additional studies, certainly I think it's unlikely we would take -- undertake another study that was similar to CARE, but we're very open to discussing with the FDA what would it take to get that BSI indication, so that will be the purpose of -- primary purpose of the meeting with them. And as I said, we will plan to update on the next quarterly call. And then, maybe just to reiterate what I said earlier in terms of the early stage pipeline, we do believe, both with the people as well as the discovery platform and some of the early stage programs that there is really the potential to create significant future value. We're looking at the various different opportunities, we've also had inbounds in terms of interest about what we're planning to do with that platform and also the pipeline. And so we'll continue to assess that and then we will also plan to update once (inaudible).

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Antonio Eduardo Arce, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [37]

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Okay. And then just one last one if I could squeeze it in. Just wanted to confirm, you mentioned the cash runway is through the first quarter of '19?

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Zeryn Sarpangal, Achaogen, Inc. - Chief of Staff [38]

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Yes, that's correct through Q1 2019.

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Operator [39]

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And next we'll go to Difei Yang from Mizuho Securities.

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Alexandre N. Bouilloux, Mizuho Securities USA LLC, Research Division - Research Analyst [40]

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This is Alex on for Difei. I just have a quick one. I guess when you look at the -- some of the other assets in the antibacterial product space, what are some of those products you'd say could potentially be synergistic or complementary to ZEMDRI?

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Blake Wise, Achaogen, Inc. - CEO & Director [41]

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So, Alex, thanks for the question. I think I'd maybe just answer it generally and say, since we're a leader in this space, we're close to and familiar with all of the assets and I don't want to comment on anyone else's particular products, but just to say that it's an interesting time for this space because there are number of companies who have upcoming regulatory actions, potential for commercialization. We're out there commercializing in our first few weeks, so it's a very exciting time for antibiotic development and the ability to make a difference in patients' lives across a lot of different infection types and so that's an exciting time, but I'm not going to comment specifically on other products or companies.

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Operator [42]

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(Operator Instructions) We'll go next to Adnan Butt from Guggenheim Securities.

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Adnan Shaukat Butt, Guggenheim Securities, LLC, Research Division - Senior Analyst [43]

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Once on the NTAP, could you tell us if the NTAP is rewarded on a specific basis, so was it something different than the data that led to it? And is it for the hospital setting? Or is it specifically for the hospital inpatient setting?

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Blake Wise, Achaogen, Inc. - CEO & Director [44]

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Thanks, Adnan. So it is specific to hospital inpatient. So outpatient therapy happens through a different mechanism, that does not fall under the hospital DRG, so it's specific inpatient and for Medicare patients. And the criteria to be approved for NTAP, you have to prove newness in terms of your technology. You have to meet a specific cost threshold and you have to show clinical -- substantial clinical improvement over current standard of care. So is a quite rigorous process both for the general application, but then the review that CMS goes through and you go through a public comment period. And so, I would say it is indicative of an important new technology that's introduced into the hospital when you see things approved for NTAP. And if you look at the overall general rate, less than 50% of therapies or even technologies including devices that have applied for NTAP ultimately get approved. So I think it is a high bar and a meaningful designation for hospitals once you get an NTAP-approved.

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Adnan Shaukat Butt, Guggenheim Securities, LLC, Research Division - Senior Analyst [45]

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Blake, I'm wondering, if CARE would have played a role in it? The CARE study.

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Blake Wise, Achaogen, Inc. - CEO & Director [46]

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Yes, you can -- yes, the whole review is public, and what CMS said is that when FDA made the decision on the approval within complicated UTI that they no longer considered the data supporting the BSI indication as a part of the support for the clinical improvement component, so the approval was based on the EPIC study in complicated urinary tract infections. That said, an important note is that we have an ICD 10 code for fiscal year 2019 and the mechanism by which NTAP reimbursement happens is through that ICD 10 designation when hospitals complete their coding and their paperwork. And that ICD 10 code is for ZEMDRI generally, so it's given on a product basis rather than an indication basis. And so as hospitals use ZEMDRI and use our ICD 10 code, that will then define their additional reimbursement under NTAP.

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Adnan Shaukat Butt, Guggenheim Securities, LLC, Research Division - Senior Analyst [47]

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Would you know if (inaudible) was awarded the same or it wasn't?

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Blake Wise, Achaogen, Inc. - CEO & Director [48]

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It was not.

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Operator [49]

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All right. We have no further questions at this time. I would like to turn the call back to Blake Wise, President and Chief Operating Officer for any closing remarks.

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Blake Wise, Achaogen, Inc. - CEO & Director [50]

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Thanks, Christy. So as always, we appreciate your continued support. And we look forward to updating you in the coming quarters on the impact ZEMDRI is making in the infectious disease community. Thank you for joining our call.

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Operator [51]

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And that concludes our call for today. Thank you for your participation. You may now disconnect.