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Edited Transcript of NRI.TO earnings conference call or presentation 31-Oct-19 12:30pm GMT

Q3 2019 Nuvo Pharmaceuticals Inc Earnings Call

MISSISSAUGA Nov 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Nuvo Pharmaceuticals Inc earnings conference call or presentation Thursday, October 31, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jesse F. Ledger

Nuvo Pharmaceuticals Inc. - President & CEO

* Katina K. Loucaides

Nuvo Pharmaceuticals Inc. - VP, Corporate Secretary & General Counsel

* Mary-Jane E. Burkett

Nuvo Pharmaceuticals Inc. - VP & CFO

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Conference Call Participants

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* David C. Martin

Bloom Burton & Co., Research Division - MD & Head of Equity Research

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Nuvo Pharmaceuticals Q3 2019 Results Conference Call. (Operator Instructions) This call is being recorded on Thursday, October 31, 2019.

I would now like to turn the conference over to Jesse Ledger. Please go ahead.

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Jesse F. Ledger, Nuvo Pharmaceuticals Inc. - President & CEO [2]

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Thank you. Good morning. Thank you for joining our call today. On the call with me this morning from Nuvo Pharmaceuticals is Mary-Jane Burkett, Nuvo's Vice President and Chief Financial Officer; and Tina Loucaides, Nuvo's Vice President, Secretary and General Counsel.

This morning's call makes reference to a presentation on our website that should be viewed concurrently. If you've not downloaded this presentation, I would invite you to do so now by visiting www.nuvopharmaceuticals.com and scrolling down to the bottom of the page. You can then click on the link.

Before we begin, I will remind you that certain matters discussed in today's conference call or answers that may be given to questions asked could constitute forward-looking statements that are subject to risks or uncertainties relating to Nuvo's future financial and business performance. Actual results could differ materially from those anticipated in these forward-looking statements. The risk factors that may affect results are detailed in Nuvo's periodic and annual disclosure documents as well as the news release that we issued this morning, and you can access these documents in the SEDAR database under www.sedar.com.

Except as required by law, Nuvo is under no obligation to update any forward-looking statements discussed today, and investors are cautioned not to place undue reliance on these statements.

The agenda for today's discussion is as follows: I will provide a business overview of the quarter; Mary-Jane will discuss the financial results for the third quarter, which were announced earlier today; I will then provide a key products and business update followed by growth drivers for the Nuvo business during the remainder of 2019.

Our business continues to benefit from the integration of the Aralez Canada operations and products into Nuvo. We've now received the benefit of these additional business segments and revenue streams for 3 quarters, and the impact on our financial results has been transformative.

Furthermore, in the third quarter, the company realized a reduction in operating expenses from the identification of synergies and organizational changes that were implemented in June 2019. Despite the fact that the United States Court of Appeals for the Federal Circuit denied our en banc petition and determined that 2 of our patents related to Vimovo were invalid. A generic version of Vimovo did not launch in the United States during the 3 months ended September 30, 2019. As a result, the company has accrued $1.7 million of license revenue related to its U.S. Vimovo royalty stream for the third quarter. I will go into further detail about the Vimovo situation later in the presentation.

Our pipeline continues to progress as well. In September, our Indian partner, Sayre Therapeutics, received approval from the Drug Controller General of India to market Pennsaid 2% in India. Preparations are underway for an anticipated commercial launch in the first quarter of 2020.

I will now turn the call over to Mary-Jane, who will take you through our financial results for the quarter and year-to-date.

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Mary-Jane E. Burkett, Nuvo Pharmaceuticals Inc. - VP & CFO [3]

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Thanks, Jesse. Today's presentation includes references to certain financial measures that do not have standardized meaning under IFRS. These measures include adjusted total revenues and adjusted EBITDA. Nuvo believes that shareholders, investment analysts and other readers find such measures helpful in understanding Nuvo's financial performance. For a discussion of how Nuvo defines these non-IFRS financial measures as well as a reconciliation of these measures, please refer to Slides 20 and 21 of this presentation as well as Nuvo's management discussion and analysis filed on SEDAR.

Adjusted total revenue increased to $18.9 million and $55.1 million for the 3 and 9 months ended September 30, 2019, compared to $5.1 million and $15.7 million for the 3 and 9 months ended September 30, 2018. As a result of the Aralez transaction, the company now recognizes 3 business segments: The commercial business; the production and service business; and the licensing and royalty business. The $13.7 million increase in the adjusted total revenue in the current quarter was primarily attributable to an addition of the revenue related to the Aralez transaction, which provided an incremental $9.6 million of total revenue contributed from the commercial business segment and $4 million attributable to earned Vimovo royalties.

Adjusted EBITDA increased to $7.8 million and $18.7 million for the 3 and 9 months ended September 30, 2019, compared to negative $1.3 million and positive $1.4 million for the comparative 3 and 9-month periods. The increase in adjusted EBITDA for the current quarter was primarily attributable to an increase in gross profit as a result of the Aralez transaction as well as a reduction in general and administrative expenses of $0.9 million, partially offset by an increase in incremental sales and marketing expenses of $2 million.

Gross profit on total revenue was $11.3 million or 60% and $30 million or 60% for the 3 and 9 months ended September 30, 2019, compared to gross profit of $2.9 million or 57% and $9 million or 58% in the comparative 3 and 9-month periods. The increase in gross profit for the current quarter was primarily attributable to an increase in gross margin on product sales and an increase in license revenue as a result of the Aralez transaction.

The company grew its cash on hand by $3.8 million during Q3 2019 to $18.5 million at the end of the quarter. As a result, the company will make a USD 2.5 million payment towards its bridge loans in November 2019. The company's USD 6 million bridge loan carries a coupon rate of 12.5%. The company's USD 60 million amortization loans and USD 52.5 million convertible loan each carry coupon interest rates of 3.5%. The company carries its loans at amortized costs, which results in a lower value reflected in its statement of financial position compared to the principal value of the loans. The company's amortization and convertible loans mature and outstanding warrants expire on December 31, 2024.

I will now turn the call back to Jesse.

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Jesse F. Ledger, Nuvo Pharmaceuticals Inc. - President & CEO [4]

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Thanks, Mary-Jane. Our key growth assets, Blexten and Cambia, have continued to perform as expected throughout Q3. Blexten's third quarter performance reflects some of the seasonality we see historically in the oral antihistamine market. The summer months are generally slower months for allergy prescriptions while prescriptions in late August and September typically increase, marking the return of ragweed season in Central and Eastern Canada. The third quarter is historically the second most active quarter of the year for antihistamine prescriptions.

Blexten demonstrated continued year-over-year growth of total prescriptions or TRx and TRx market share during the quarter. Blexten Q3 2019 TRx increased 57% over Q3 2018, and year-to-date 2019, TRx increased 64% over the comparable period in 2018. Blexten Q3 2019 TRx market share has increased to 13.9% compared to 10.5% for Q3 2018.

Blexten continues to erode the market share of our #1 competitor, cetirizine, also known as REACTINE. Our sales force is doing an excellent job of expanding the prescriber base for Blexten, and we expect ongoing growth and market share gains in the prescription antihistamine market moving forward.

Turning to our second key growth product. Cambia is an innovative prescription treatment for acute migraine. Cambia, which is the only prescription NSAID approved in Canada to treat acute migraine, acts fast and begins to work in as little as 15 minutes.

Cambia Q3 2019 TRx increased 31% over Q3 2018. And for year-to-date 2019, TRx increased 30% over the comparable period in 2018. Cambia Q3 2019 TRx market share has increased to 4.4% compared to 3.5% for Q3 -- for the Q3 2018 period. We anticipate continued prescription growth through the end of the year consistent with historical trends, culminating in December with the traditional peak migraine holiday period.

Our most advanced pipeline asset, Suvexx, is moving through its Health Canada review, and we expect a review decision in Q1 2020. Suvexx represents an important addition to our growing migraine portfolio. We believe the migraine treatment market represents a growing therapeutic area with tremendous unmet medical need.

Headache disorders like migraine are one of the most prevalent and disabling neurological disorders globally. More than 10% of the population is affected by migraine with 2% to 4% of the population experiencing migraine on 15 or more days every month. These are astonishing facts with enormous financial implications on our society. To make things even worse, migraine is frequently underdiagnosed, undertreated and mismanaged. Many patients self-diagnose and self-treat, and the result is ineffective management of this debilitating disorder.

More than 50% of headache patients experience severe impairment or require bed rest during a severe attack. We all know people, whether they are family members or coworkers, who experience the effects of migraine, and we've witnessed the impairment that comes with a migraine attack. More can be done to create enhanced awareness of migraine and to help health care providers properly diagnose and treat migraineurs.

Suvexx, which is our patent-protected fixed-dose combination of sumatriptan and naproxen will mark the second unique and clinically relevant prescription product that we have commercialized in the migraine space. This unique combination drug provides patients with a dual mechanism of action to treat migraine. In fact, Suvexx has been studied in 11 Phase III clinical trials, specifically focused on treatment of acute migraine. These studies were originally co-funded and conducted by the multinational pharmaceutical company, GlaxoSmithKline or GSK. And as a result, Suvexx is now one of the most studied acute migraine treatments globally.

As mentioned, we anticipate a Health Canada review decision on Suvexx during the first quarter of 2020. If approved, our Canadian commercial team will launch Suvexx into the approximately $130 million prescription acute migraine treatment market later in 2020.

With respect to our U.S. Vimovo business, I would like to provide a brief update on the current situation. As you may recall, on May 15, 2019, we made an announcement regarding the U.S. federal court decision, which invalidated 2 of our patents protecting the U.S. Vimovo royalty stream. Since that time, Nuvo management working closely with our U.S. partner has considered every possible legal strategy. In June, Nuvo Ireland along with our U.S. partner requested that the U.S. Court of Appeals for the Federal Circuit reconsider their May decision relating to the invalidity of the 2 patents on Vimovo. On July 30, the U.S. Court of Appeals denied our request to reconsider the May 2019 decision. This decision by the U.S. Court of Appeals now permits the U.S. Food and Drug Administration to approve a generic version of Vimovo. However, Nuvo Ireland still owns other valid patents. So any generic company that launches a generic version of Vimovo prior to the expiration of these other patents would be launching into what is referred to as an at-risk launch. This means that if Nuvo Ireland's other patents are found to be valid and infringed through litigation, we can sue for damages.

Once a generic competitor enters the market, we will no longer be entitled to the minimum annual royalty payment from our U.S. partner, which amounts to USD 7.5 million a year, but we will continue to receive a 10% royalty on net sales, which is subject to a step-down provision once the generic competition achieves a certain market share percentage.

As of the end of business yesterday, Dr. Reddy's Labs or DRL has not yet received final FDA approval for their generic version of Vimovo. It's our understanding of the regulations based on advice from our legal counsel that DRL was required to obtain final U.S. Food and Drug Administration approval for their generic Vimovo application and to commercially launch their generic Vimovo in the U.S. by October 20, 2019, in order to preserve their 180-day exclusivity. This is the benefit they receive for being the first to file a generic version of Vimovo with the FDA. Unfortunately, the FDA has not and will not provide official confirmation on whether or not DRL has forfeited their exclusivity.

While this is a positive development, DRL could still launch their generic Vimovo once they receive final FDA approval, which could occur at any time. Again, this launch would be at risk as Nuvo Ireland does own additional valid and enforceable patents that protect Vimovo. However, we continue to anticipate a generic launch of Vimovo during the fourth quarter of 2019.

The other generic Vimovo applicants have entered into settlement agreements with Nuvo Ireland and our U.S. partner, which currently restricts them from entering the U.S. market until after DRL launches. While the possible loss of 180-day exclusivity for DRL would seem to minimize the benefit of launching their generic Vimovo in an at-risk scenario, we do not have insight as to what decisions, if any, DRL will undertake with regards to the timing of a generic launch in the U.S. In the meantime, we will continue to consider all legal and commercial options to enforce the additional patents protecting the Vimovo U.S. market exclusivity and will continue to provide our shareholders with updates.

We remain focused on investment in our 3 growth drivers: first, Blexten, Cambia and Suvexx and our Canadian commercial business; second, market expansion for our global products and related manufacturing business. This is primarily Pennsaid 2% and results; and third, the identification and execution of new business development opportunities to leverage our enhanced commercial platform.

Our pipeline is yielding the results we are looking for with Pennsaid 2% receiving approval in India and our European and Swiss Pennsaid 2% marketing authorization applications advancing through the registration process with review decisions expected early in 2020. We have a robust pipeline of business development opportunities that are under evaluation, and we'll continue to pursue these opportunities for long-term value creation.

Overall, we are pleased with our financial results and the achievement of various pipeline development milestones year-to-date.

Thank you for your continued support. That ends our formal remarks. I will now turn this back to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from David Martin from Bloom Burton.

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David C. Martin, Bloom Burton & Co., Research Division - MD & Head of Equity Research [2]

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I've got a few questions. The first one, what are the next steps as far as the litigation related to the '996 and '920 Vimovo patents? And you also said related to Vimovo that FDA hasn't confirmed a forfeiture event as far as the 180-day exclusivity for DRL. Is that typical? Or is that unusual? And would suggest maybe they haven't lost 100-day -- 180-day exclusivity.

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Jesse F. Ledger, Nuvo Pharmaceuticals Inc. - President & CEO [3]

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Okay. Thanks for the questions, Dave. Keep in mind, this is -- it's a pretty fluid situation, and I'll address the one question on the FDA and then I'll hand this over to Tina who can do a much better job of addressing this. But yes, typically, the FDA does not provide any acknowledgment or communication about what's going on with other submissions, obviously, until they're approved. But Tina, do you want to take Dave's other questions about where we go next with the other litigation?

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Katina K. Loucaides, Nuvo Pharmaceuticals Inc. - VP, Corporate Secretary & General Counsel [4]

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Yes, yes, sure. Thanks, Dave, for your question. So the '996 and the '920 patents are currently in ongoing litigation. So there is a scheduling that's been set by the court that has been agreed on by both parties, so DRL and us and Horizon. And based on the schedule, most likely, a trial will end up occurring sometime towards the middle or the end of 2021 if the litigation proceeds to its final conclusion. There is also some -- sorry, go ahead.

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David C. Martin, Bloom Burton & Co., Research Division - MD & Head of Equity Research [5]

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2021 or 2020?

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Katina K. Loucaides, Nuvo Pharmaceuticals Inc. - VP, Corporate Secretary & General Counsel [6]

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2021 would be on the current time line. And then there's also an ongoing motion for summary judgment that was filed by DRL and that's proceeding. And in terms of that timing, again, it's up to the district court's time line, but a decision on that could be made sometime towards maybe November, December this year or even spill into the next year. There is really no set time line that the court has to follow.

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David C. Martin, Bloom Burton & Co., Research Division - MD & Head of Equity Research [7]

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Okay. Also related to Vimovo, you only had $66,000 as an amount billed to customers for existing contract assets. And that's your U.S. Vimovo royalty. That's typically being $2.5 million per quarter. Why did it reduce this quarter? And then on your income statement, your license revenue about doubled. Have you shifted it from that contract asset into license revenue or royalty revenue?

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Mary-Jane E. Burkett, Nuvo Pharmaceuticals Inc. - VP & CFO [8]

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Dave, so yes, simply, it's a result of the IFRS accounting. So up until June 30, 2019, the Vimovo royalty stream, given it was a guaranteed minimum, was treated as a contract asset, that we didn't see until after we saw the add-back of the amounts billed to customers or contract assets in our adjusted total revenue. Now that we don't have that contract asset on our books because it's an uncertain royalty stream, you'll see that revenue recognized as license revenue going forward.

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David C. Martin, Bloom Burton & Co., Research Division - MD & Head of Equity Research [9]

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Okay, okay. I've got a couple more questions, but I'll get back in the queue if there's someone else asking.

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Jesse F. Ledger, Nuvo Pharmaceuticals Inc. - President & CEO [10]

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I think you probably keep going, Dave.

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Operator [11]

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(Operator Instructions) Your next question comes from David Martin from Bloom Burton.

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David C. Martin, Bloom Burton & Co., Research Division - MD & Head of Equity Research [12]

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Okay. So according to Symphony, Pennsaid 2% scripts in the U.S. were down about 15% year-over-year, looking at 3Q '19 versus 3Q '18. Does that reflect the sales trends seen by Horizon?

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Jesse F. Ledger, Nuvo Pharmaceuticals Inc. - President & CEO [13]

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Well, so I think it's -- I think, generally, what we said all along is that when you're looking at Symphony data or IMS data, it never necessarily properly reflects the actual level of Pennsaid bottles that are being prescribed and dispensed. It tends to underreport, and that's a function of the way that Horizon sells their product and how they get prescriptions fulfilled and how they deal with adjudicating insurance claims. So overall, that business is in a sort of a stable sort of decline mode. They continue to maintain that business with the same level of promotional support that they've had over the last couple of years. So the number of sales reps hasn't changed. They continue to sample physicians and they continue to support that business. It's -- again, it's an important part of their business in terms of cash flow generation, especially as they start looking at launching some of their other products. But certainly, we're not looking at that part of the business in the U.S., Pennsaid 2% in the U.S. as a growth portion of our business.

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David C. Martin, Bloom Burton & Co., Research Division - MD & Head of Equity Research [14]

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Should we be modeling it down 15% or is it -- actual sales, is it more like 10% down when you say stable decline?

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Jesse F. Ledger, Nuvo Pharmaceuticals Inc. - President & CEO [15]

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Well, it's -- it -- David, it's kind of difficult for us to be able to pinpoint that because the IMS data and the Symphony data, again, isn't necessarily picking up what's really happening. We don't have visibility or the right to obtain much visibility from Horizon in terms of what they're doing from a commercial standpoint other than sort of what I've indicated. And so, we continue to look at this as a declining business and that's how we would look at it moving forward.

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David C. Martin, Bloom Burton & Co., Research Division - MD & Head of Equity Research [16]

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Okay, okay. Next question, what kind of revenues are you expecting from your Indian partner next year?

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Jesse F. Ledger, Nuvo Pharmaceuticals Inc. - President & CEO [17]

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Yes, it will be incremental. This is -- it's an interesting launch strategy that they've identified. They're really targeting, let's call it, wealthier or middle class citizens in India, not necessarily looking at a broad penetration into the billion-plus market that exists there in terms of the number of people that live in India. And so they're looking at a high price point for the product. They're not going to be competing with local competitors in terms of Voltaren and some of the other products that are selling at very low prices. And so we anticipate that there will be additional batches of Pennsaid 2% that will be produced at our manufacturing facility. And that's sort of the expectation for next year. It's -- despite the large size of the market there, we're taking a cautious approach because of the pricing.

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David C. Martin, Bloom Burton & Co., Research Division - MD & Head of Equity Research [18]

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Okay. And then my last question related to Pennsaid 2% in Europe, your press release indicates that you're beyond the initial screening stage. And I'm just wondering, you've tried to take Pennsaid 2% to Europe before, but they wanted ankle sprain data, and you had OA data that was positive. I'm wondering if because you got beyond this point, you've now passed the point where they would reject it on the same basis they did previously?

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Jesse F. Ledger, Nuvo Pharmaceuticals Inc. - President & CEO [19]

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Well, you can never have any certainty when you're going through a regulatory review process. Certainly, we're well beyond sort of the halfway point on this. We've received some questions from the regulators. We have answered those questions, and we're continuing down that path. And so I can -- you can never -- like I said, you can never say with any certainty whether you're going to get something approved or not, but simply the fact that they were willing to accept the registration dossier on the basis of the data that we had presented compared to where we were, say, 2, 3 years ago when we were looking at doing the ankle sprain studies and looking at bolstering the dossier with additional clinical trials. There certainly was a willingness and an openness and the desire on the part of the European regulators to take a look at this dossier. And I think the biggest hurdle that we had coming out of the original development of original Pennsaid was not necessarily the clinical data, but it was really the tox data related to DMSO, which, as you know, is the dimethyl sulfoxide, which is -- it's an inactive ingredient for the purposes of the formulation, but it makes up about half of the drug in the formulation. And there were some concerns in Europe about the toxicity of DMSO. And that threw the dozens and dozens and dozens of studies that have been conducted by the company over the past decade. We've demonstrated that this is an extremely safe compound to be used in this formulation and it's a key part of the IP as well. So that was the main hurdle. We addressed that, and so now it's a function of going through the rest of the review. So like I said, we're making very good progress. We're -- the regulators are hitting all the time lines that they've communicated to us, and we continue to anticipate a review decision in the first quarter of 2020.

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David C. Martin, Bloom Burton & Co., Research Division - MD & Head of Equity Research [20]

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So last time you tried to get it through in Europe, did you get stopped-up before this initial screening stage or did you get beyond it and then rejected after the initial screening?

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Jesse F. Ledger, Nuvo Pharmaceuticals Inc. - President & CEO [21]

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We didn't even file last time. We had sought scientific advice from some of the regulators and based on the feedback hadn't moved forward. And then we pivoted. Bernie Chiasson, our Chief Scientific Officer, and his team has done a phenomenal job of repackaging and repurposing the data that we have and putting that into a format that was acceptable to the regulators. And that's a big reason why we were able to get to where we are today.

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Operator [22]

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(Operator Instructions) There are no further questions at this time. Please proceed.

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Jesse F. Ledger, Nuvo Pharmaceuticals Inc. - President & CEO [23]

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Okay. Thanks, everyone, for listening in today. I appreciate your support as always, and don't eat too much candy today. Happy Halloween. Take care.

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Operator [24]

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Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.