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Edited Transcript of NRI.TO earnings conference call or presentation 23-Mar-18 12:30pm GMT

Thomson Reuters StreetEvents

Q4 2017 Nuvo Pharmaceuticals Inc Earnings Call

MISSISSAUGA Mar 26, 2018 (Thomson StreetEvents) -- Edited Transcript of Nuvo Pharmaceuticals Inc earnings conference call or presentation Friday, March 23, 2018 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. - CEO & President

* Nicole Rusaw-George

Nuvo Pharmaceuticals Inc. - Interim 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

* Robert Gibson

PI Financial Corp., Research Division - MD, Head of Research & Consumer Products Analyst

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Presentation

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Operator [1]

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Good morning. My name is Sharon, and I will be your conference operator today. At this time, I would like to welcome everyone to the Nuvo Pharmaceuticals Inc. Fourth Quarter and Year-End Results Conference Call. (Operator Instructions) Thank you. Jesse Ledger, President and CEO, you may begin your conference.

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

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Thank you. Good morning, everyone. Thank you for joining our call today. On the call with me this morning from the Nuvo Pharmaceuticals' team are John London, Nuvo's Executive Chairman; Nicole Rusaw, Nuvo's Interim Chief Financial Officer; and Tina Loucaides, Nuvo's Vice President, Secretary and General Counsel. 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.

Earlier this morning, we announced our fourth quarter and year-end results. Nicole will walk you through the financial results in a moment. But first, I would like to provide a review of our developments in 2017.

As many of you know, Nuvo's U.S. Pennsaid 2% revenue is generated by commercial bottle and physician sample sales from our Varennes, Québec manufacturing facility to our U.S. distribution partner, Horizon Pharma. Nuvo records revenue when product shifts to Horizon. However, Horizon's orders are significantly influenced by Pennsaid 2% U.S. prescription trends. U.S. prescriptions for Pennsaid 2% stabilized through the year, despite the changes Horizon made to its primary care business commercial strategy. Total prescriptions for 2017 were 434,000 compared to 457,000 in 2016. Horizon's U.S. Pennsaid 2% business faced increased managed-care challenges, which led to portfolio-wide changes in their inventory management, a modest reduction in the number of sales representatives and an approximately 50% decrease in their physician sample purchases, a change that will impact our sample production in 2018 and possibly beyond. In 2017, these factors, together with the planned shutdown of our Varennes manufacturing facility to install new serialization equipment driven by the implementation of new FDA regulations, resulted in Horizon drawing down its existing commercial bottle and product sample inventories at the expense of new production orders to Nuvo. Despite its commercial strategy changes, Horizon continues to actively support the Pennsaid 2% business with an approximately 250 representative national sales force. Pennsaid 2% remains the #2 revenue-generating product in Horizon's overall portfolio and the #1 product in its primary care portfolio. The bottom line is that Pennsaid 2% remains a very important product for Horizon and a very important source of revenue for Horizon and for Nuvo.

In 2017, we announced 2 new international Pennsaid 2% partners, Sayre Therapeutics in India and Gebro Pharma in Switzerland. In December, Sayre submitted their Pennsaid 2% registration dossier in India and anticipate an approximate 12-month window with the Drug Controller General of India, the Indian regulatory agency. Gebro anticipates meeting with Swissmedic, the Swiss regulatory agency, towards the end of Q2 or early Q3 2018 for scientific advice regarding an application for Swiss regulatory approval. We are very pleased with the progress Sayre and Gebro making, and we'll update shareholders as our partners proceed through their respective regulatory processes. Furthermore, we continue to believe that the global Pennsaid 2% opportunity is very attractive and anticipate completing additional licensing deals in 2018. In May, we announced the successful outcome of Horizon's patent litigation against the generic company, Actavis Laboratories, which involve the challenge one of Horizon's U.S. Pennsaid 2% patents. The judge's decision upheld the validity of the patent, and subject to appeal secured this revenue stream for Nuvo until the patent expiration in 2027. It is important to note that there are 18 additional issued patents in the FDA Orange Book that protect the U.S. Pennsaid 2% franchise that were not the subject of this litigation, the longest of which extends patent protection to 2030. This was a major victory for Horizon and Nuvo and is evidence of the exceptional Pennsaid 2% patents that were developed by the Nuvo team. Identical and/or similar patents have been issued throughout key ex U.S. jurisdictions, a notable product attribute that supports our Pennsaid 2% out-licensing efforts worldwide.

In August, we secured a $6 million operating loan facility with the Royal Bank of Canada. The facility can be accessed by Canadian dollar-denominated loans and U.S. dollar-denominated loans that will bear interest at a low single-digit premium to RBC's prime rate or RBC's U.S. base rate. While we have not yet drawn any amounts under the facility, it gives us the flexibility to deploy our existing cash toward product and business acquisitions that meet our criteria. On November 28, 2017, Nuvo's common shares commenced trading on the OTCQX market in the United States. This listing provides Nuvo shareholders in the U.S. with simplified access to trade Nuvo shares with no material increase in our public company costs.

Towards the end of the year, we incorporated Nuvo Pharmaceuticals Ireland Limited. Historically, Nuvo has had an EU affiliate in the U.K., which held our European marketing authorizations for Pennsaid. However, the decision by the U.K. to exit the EU common market or Brexit required us to make changes to our European business structure to remain in compliance with EU regulations. This wholly-owned subsidiary of Nuvo Pharmaceuticals Inc. was established to be the future operational hub for Nuvo's ex Canadian business and to hold our EU marketing authorizations within an EU member state.

In November, we received Toronto Stock Exchange approval to proceed with a normal-course issuer bid that allows us to use our existing cash to buyback Nuvo common shares. We believe that Nuvo shares are currently undervalued. The normal-course issuer bid gives us the opportunity to strategically acquire shares for cancellation at an advantageous price with a view to increasing the value of the remaining shares outstanding.

As the year came to a close, we were excited to announce we had completed the acquisition of the Resultz ex U.S. royalty stream along with all intellectual property and product rights from Piedmont Pharmaceuticals LLC. Resultz is a best-in-class non-pesticide treatment for head lice infestation in humans with over 1 million treatments sold annually outside of the United States. The product's 5-minute treatment claim and 100% efficacy when used as directed differentiates it in a global head lice market. This transaction marked a significant new product acquisition for Nuvo and demonstrates our commitment to grow and diversify our product portfolio and revenue streams. Resultz was an ideal acquisition for Nuvo, as it met all our product acquisition criteria namely: Resultz is currently generating revenue via a U.S. $1.5 million annual royalty stream from the net sales of Resultz in select international markets by our new partner Reckitt Benckiser and other licensees; Resultz is approved throughout the European Union and, therefore, ready for commercialization once we have suitable commercial partners in place from markets not currently partnered; Resultz is protected by 40 patents globally into 2023; and most importantly, Resultz is a product that we can produce at our manufacturing facility. On closing of this transaction, we paid USD 7 million upfront from cash on hand. Nuvo will also pay to Piedmont, the original developer of Resultz, a low single-digit royalty on net sales in new territories as well as certain sales-based milestones. We will incur some onetime closing and transition expenses throughout 2018, but these should taper off in the second half of the year. We quickly followed the ex U.S. acquisition with the acquisition of U.S. rights to Resultz in January 2018. On closing of the U.S. acquisition, we paid USD 1.5 million to Piedmont, and we'll pay a single-digit royalty on net sales through 2034. Resultz is cleared by the FDA for marketing in May 2017, but is yet to be partnered to be commercially launched in the U.S. After these 2 transactions, Nuvo now owns the global product and intellectual property rights to Resultz. To date, Resultz has been commercialized in 11 countries, where it has been a very successful product, achieving market share of anywhere between 15% to 35%. We believe that with its category leading 5-minute treatment and 100% efficacy when used as directed, we are well positioned to partner Resultz in many new markets. Our number one priority is to enter the U.S. market, which has an annual retail value of approximately $250 million as well as entering key markets in the European Union, such as Germany and Italy. The combined annual retail value of the unpartnered EU and U.S. head lice markets are approximately USD 400 million. Most importantly, the U.S. market is dominated by ineffective and dangerous pesticide-based treatments, which presents a fairly timely and potentially lucrative opportunity for our highly effective and safe product.

Nicole will now walk you through our fourth quarter and year-end financial results.

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Nicole Rusaw-George, Nuvo Pharmaceuticals Inc. - Interim CFO [3]

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Thank you, Jesse. Despite the challenges we faced in 2017, Nuvo maintained a profitable business throughout the year on a trailing 12-month basis, and we continue to operate debt-free with significant cash on our balance sheet. Total revenue consisting of product sales, royalties and contract revenue for the 3 months ended December 31, 2017 was $4.5 million compared to $5.6 million for the 3 months ended December 31, 2016. The decrease in total revenue was primarily related to a decrease in Pennsaid 2% product sales. Total revenue for the year ended December 31, 2017 was $17.5 million compared to $27 million for the comparative year. Total operating expenses for the 3 months ended December 31, 2017 increased to $4.6 million compared to $4 million for the 3 months ended December 31, 2016. Increase in operating expenses was primarily attributable to an increase in general and administrative expenses, partially offset by a decrease in cost of goods sold and research and development expenses. Total operating expenses for the year ended December 31, 2017 decreased to $15.6 million from $19.3 million in the comparative year. Cost of goods sold, or COGS, for the 3 months ended December 31, 2017 was $2.3 million compared to $2.5 million for the 3 months ended December 31, 2016. The decrease in COGS was primarily related to a decrease in Pennsaid 2% product sales. The decrease in product sales reduced the gross margin on product sales to $1.9 million or 46% for the 3 months ended December 31, 2017 compared to $2.7 million or 51% for the 3 months ended December 31, 2016. For the year ended December 31, 2017, COGS was $8.1 million compared to $11.4 million in the comparative year. Gross margin on product sales was $8.2 million or 50% for the year ended December 31, 2017 compared to a gross margin of $13.5 million or 54% for the year ended December 31, 2016. Research and development, or R&D, expenses decreased to $36,000 for the 3 months ended December 31, 2017 compared to $0.6 million for the 3 months ended December 31, 2016. The decrease in the quarter related to costs associated with the 2016 Pennsaid 2% trial for the treatment of acute ankle sprains, which were recognized in the comparative period. The 2016 Pennsaid 2% trial was completed in May of 2017 and the majority of the costs were previously recognized. R&D expenses were $0.6 million for the year ended December 31, 2017 compared to $1.4 million for the comparative year.

General and administrative, or G&A, increased to $2.4 million for the 3 months ended December 31, 2017 compared to $0.9 million for the 3 months ended December 31, 2016. The increase in the current quarter of $1.5 million was primarily related to increased costs associated with employee headcount expansion, which resulted from the strengthening of the executive and senior management team aimed to facilitate the company's growth strategy as well as a $0.6 million increase in stock-based compensation expense. G&A expenses were $7.1 million for the year ended December 31, 2017 compared to $6.7 million for the year ended December 31, 2016.

As a reminder, our adjusted EBITDA is defined as net income from continuing operations before net interest income plus income tax expense, depreciation, amortization and stock-based compensation. We believe that adjusted EBITDA is a useful measure from which to determine our ability to generate cash available for working capital, capital expenditures and income taxes. Adjusted EBITDA decreased to $36,000 for the 3 months ended December 31, 2017 compared to $1.3 million for the 3 months ended December 31, 2016. In the current quarter, a decrease in adjusted EBITDA, primarily related to a decrease in gross margin. Adjusted EBITDA decreased to $2.2 million for the year ended December 31, 2017 compared to $8.9 million for the comparative year.

Net loss from continuing operations was $0.2 million for the 3 months ended December 31, 2017 compared to net income from continuing operations of $1.7 million for the 3 months ended December 31, 2016. The decrease in net income from continuing operations was primarily related to a decrease in gross margin and an increase in G&A expenses. Net income from continuing operations was $1.6 million for the year ended December 31, 2017 compared to $7.4 million for the year ended December 31, 2016. Cash and short-term investments were $10.4 million at the year-end compared to $17.7 million as of September 30, 2017, and $17.6 million as of December 31, 2016. The decrease was primarily related to the USD 7 million, CAD 8.8 million that was paid to Piedmont to acquire the ex U.S. product and intellectual property right to Resultz.

I will now turn the call turn the call over to Jesse, who will discuss our strategic focus in 2018.

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

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Thanks, Nicole. In addition to finding a license partner for Resultz in the United States, another key priority for Nuvo in 2018 is our continued progress towards an EU regulatory submission for Pennsaid 2%. We had previously indicated that Nuvo would be presenting an new meta-analysis of existing Pennsaid data to select EU regulatory authorities at meetings to be held towards the end of Q1 2018. These meetings have been arranged, and we anticipate providing a further update on our EU registration strategy during Q2 2018. Our strategy is to present clinical data relating to the safe and effective use of Pennsaid 2% for osteoarthritis, an indication that is aligned with our approved labeling in the United States for Pennsaid 2% and the approved labeling for Pennsaid in the EU and Canada. The global market for topical diclofenac, the active ingredient in Pennsaid 2%, is sizable with sales of approximately $1 billion annually outside of the United States. This is a market we want to access, and we are working diligently to make this reality. Business development will remain a key focus for Nuvo in 2018. We have high expectations for our Resultz and Pennsaid 2% partnering activities in 2018 and anticipate announcing new collaborations throughout the year. We will also continue to seek new product and business acquisition opportunities. Finding product acquisition opportunities is relatively straightforward, but finding the right products at the right price is much more challenging. We approach business development with not only financial discipline, but also with consideration for commercial, scientific and legal synergies and future growth opportunities. As a company that will be relying on business development for pipeline and portfolio growth, we are committed to making the right deals for the right products and businesses at the right price.

That ends our formal remarks. And 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 Bob Gibson from PI financial.

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Robert Gibson, PI Financial Corp., Research Division - MD, Head of Research & Consumer Products Analyst [2]

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Could we just -- I know it's early days, but you should be starting to get some royalty income in this current quarter, does it seem to match your expectations?

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

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Well, the way that the royalty -- you're right, we will be getting royalty income in Q1. But typically, the royalty reports come in at the end of the quarter. So what we do know is that the 2017 royalty met the -- our expectations in terms of what that royalty income would look like. And obviously, once we get to Q1, we'll be providing much more detail on our Q1 royalty. But certainly, 2017 hit the levels that we were expecting.

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Robert Gibson, PI Financial Corp., Research Division - MD, Head of Research & Consumer Products Analyst [4]

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Okay. Great. And can you give me a little color on what's happening with getting some equipment into your facilities to produce Resultz?

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Jesse F. Ledger, Nuvo Pharmaceuticals Inc. - CEO & President [5]

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Well, one of the nice things about Resultz is that we don't need to bring in substantial amounts of new equipment. We can use the existing production line, bottle filling, compounding lines and whatnot to manufacture Resultz. Now obviously, we'll need a bit of tooling and some spare parts and things like that to handle different bottle sizes and whatnot. But one of the really nice things about this acquisition is that it did not require us to go out and acquire new filling equipment.

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Robert Gibson, PI Financial Corp., Research Division - MD, Head of Research & Consumer Products Analyst [6]

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So not a lot of CapEx for this?

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Jesse F. Ledger, Nuvo Pharmaceuticals Inc. - CEO & President [7]

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No, exactly. Most of it is the timing for completing the tech transfer of Resultz. A lot of the work is really just method validation, scale up, sourcing raw materials, things like that and then waiting for stability data. So there's a lot of just sort of procedural things that we have to do, and that's why it takes roughly -- it will take roughly 1 year for us to complete the tech transfer.

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Robert Gibson, PI Financial Corp., Research Division - MD, Head of Research & Consumer Products Analyst [8]

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Excellent. And just wondering, are you going to segment the 2 products in your data for revenue, et cetera?

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Jesse F. Ledger, Nuvo Pharmaceuticals Inc. - CEO & President [9]

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Just -- you know what, we haven't -- it's a good question. I think we haven't really thought of that -- not that we haven't thought of it, but we haven't -- we're still working through that at this point in terms of how well we'll manage the disclosure of the revenue moving forward.

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Robert Gibson, PI Financial Corp., Research Division - MD, Head of Research & Consumer Products Analyst [10]

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And given that we all think that the potential for further acquisitions is so robust out there, how aggressively do you think you're going to go after buying back your own stock?

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Jesse F. Ledger, Nuvo Pharmaceuticals Inc. - CEO & President [11]

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Well, I think, what we wanted to do is, obviously, we want to utilize our cash for product acquisitions for the most part. But when possible and when feasible, we'll go out and purchase our stock. So we've been in blackout -- trading blackout for much of the past quarter and haven't been in a position really since we put the normal-course issuer bid in place to actually utilize it, and so that's one thing that has sort of held us back there. But I think we'll be selective, we'll support the stock when we have opportunities, but we really want to earmark most of that cash for product acquisitions. And when we look at our business development pipeline, I think, at this time -- this year versus this time last year, we've got significantly more opportunities in the hopper that we're looking at. So there are active discussions. We're in various stages of discussion, and we most certainly want to keep that cash available for those purposes.

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Operator [12]

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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 [13]

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I've got a couple of questions. So Pennsaid 2% in the U.S., the scripts look pretty stable through 2017. But obviously, you had a lot of issues impacting the revenues, Horizon restructuring primary care, the serialization and new sample manufacturing equipment. I'm wondering is this all done now, and should we get back to a new stable normal? Or is there still, for instance, drawing down of non-serialized inventory that will impact Horizon's orders?

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Jesse F. Ledger, Nuvo Pharmaceuticals Inc. - CEO & President [14]

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So ultimately, we have limited visibility into Horizon's sort of inventory management strategy, and on a day-to-day basis how much inventory they are actually carrying. But what I can tell you is that we have started shipping them only serialized commercial bottles and that started in Q4. So we're not shipping any non-serialized product anymore. So one would believe that if we're shipping serialized inventory, at this point that means they're filling up their safety stock and putting serialized product into the channel. So I think that's certainly helpful. And obviously, the serialization has no impact on the samples. Samples aren't required to be serialized because they're not into commercial commerce. So I think like everything that we're ship -- we're producing and shipping now is serialized commercial bottles.

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David C. Martin, Bloom Burton & Co., Research Division - MD & Head of Equity Research [15]

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Okay. So I would assume when you're running normally, there are fairly regular orders. And then last year, probably there were long periods where you went without orders. Are you back to that sequence of fairly regular orders without big gaps?

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Jesse F. Ledger, Nuvo Pharmaceuticals Inc. - CEO & President [16]

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Yes. I think -- I don't think we'll ever sort of have a regular or normal sort of order pattern because it changes all the time based on market factors and whatnot and strategic considerations on Horizon's end. But we're certainly not looking at our business moving forward and seeing major gaps like we had last year, where, for example, in Q2 and a good portion of Q3, where we weren't production anything. We're not seeing anything like that.

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David C. Martin, Bloom Burton & Co., Research Division - MD & Head of Equity Research [17]

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Okay. Second question is, when we look at scripts on Symphony, it looks like Q1 this year is down about 10% versus last year. Does that match what Horizon is telling you about their expectations, either for the first quarter or for the entire 2018 year? And if Symphony is telling you something different from -- sorry, if Horizon is telling something different from what Symphony is showing, is there a reason for that?

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Jesse F. Ledger, Nuvo Pharmaceuticals Inc. - CEO & President [18]

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Well, it's the -- we're not seeing -- I guess, basically, when we look at the forecast and the discussions that we've had with Horizon, we're not getting an indicator that the business is declining. And so Horizon has indicated that they've been and they continue to make subtle changes to their commercial strategy, in terms of how they distribute product and how they -- how product is dispensed certainly through their HorizonCares program and through commercial payers. And so one of the things that happens -- that they're telling us is that very often when new pharmacies come online, they don't necessarily get picked up by Symphony or IMS Health right off the bat. And so that -- it's not always the most -- I'm not going to say reliable, it's a reliable indicator of what's happening, but it's not always as up-to-date because there is a bit of a lag there. So we're certainly not hearing anything or seeing anything that reflects a dip in the business. Obviously, we're monitoring what's happening with prescriptions and monitoring what's happening with our production, but we're not hearing any alarm bells or anything like that, that's for sure.

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Operator [19]

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(Operator Instructions) And we do not have any questions over the phone line at this time. I will turn the call over to the presenters.

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Jesse F. Ledger, Nuvo Pharmaceuticals Inc. - CEO & President [20]

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Okay. Thank you very much, everyone, for joining us on the call today. As always, if you have any additional questions, feel free to reach out to us directly through the Investor Relations section on our website. Well, that's it for now. Thank you very much.

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Operator [21]

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This concludes today's conference call. You may now disconnect.