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Edited Transcript of SUPN earnings conference call or presentation 1-Mar-17 2:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Supernus Pharmaceuticals Inc Earnings Call

ROCKVILLE Mar 1, 2017 (Thomson StreetEvents) -- Edited Transcript of Supernus Pharmaceuticals Inc earnings conference call or presentation Wednesday, March 1, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Peter Vozzo

Westwicke Partners - IR for Supernus Pharmaceuticals

* Jack Khattar

Supernus Pharmaceuticals Inc - CEO

* Gregory Patrick

Supernus Pharmaceuticals Inc - CFO

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Conference Call Participants

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* John Boris

SunTrust Robinson Humphrey - Analyst

* Esther Hong

Stifel Nicolaus - Analyst

* David Amsellem

Piper Jaffray & Co. - Analyst

* David Steinberg

Jefferies LLC - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Supernus Pharmaceuticals fourth quarter and full year 2016 financial results conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to turn the conference over to Peter Vozzo of Westwicke Partners, Investor Relations for Supernus Pharmaceuticals. You may begin.

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Peter Vozzo, Westwicke Partners - IR for Supernus Pharmaceuticals [2]

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Thank you, Shannell. Good morning, everyone, and thank you for joining us today for Supernus Pharmaceutical's fourth quarter and full year 2016 financial results conference call. The update discussed today is for the 3 and 12 months ended December 31, 2016.

Yesterday after the close of the market, the Company issued a press result announcing these results. On the call with me today are Supernus' Chief Executive Officer, Jack Khattar, and Chief Financial Officer, Greg Patrick.

Today's call is being made available via the Investor Relations section of the Company's website at IR. Supernus.com. Following remarks by Management, we'll open the call to questions. We expect the duration of the call to be approximately 45 minutes.

During the course of this call, Management may make certain forward-looking statements regarding future events and the Company's future performance. These forward-looking statements reflect Supernus' current perspective on existing trends and information, and can be identified by such words as expect, plan, will, may, anticipate, believe, should, intend and other words of similar meaning.

Any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those noted in the Risk Factors section of the 2015 annual report and Form 10-KA filed on January 20, 2017. Actual results may differ materially from those projected in these forward-looking statements.

For the benefit of those of you who may be listening to the replay, this call is being held and recorded on March 1, 2017 at approximately 9:00 AM Eastern time. Since then, the Company may have made additional announcements related to the topics discussed.

Please reference the Company's most recent press releases and current filings with the SEC. Supernus declines any obligation to update these forward-looking statements, except as required by applicable Securities Laws. I'll now turn the call over to Jack.

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Jack Khattar, Supernus Pharmaceuticals Inc - CEO [3]

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Thank you, Peter. Good morning, everyone, and thanks for taking the time to join us as we discuss our 2016 fourth quarter and full year results.

2016 was another year of strong commercial performance, as net product sales increased by 46% and operating income grew by 160% over full year 2015 and exceeded our original full-year guidance issued at the beginning of 2016. In addition, total net product sales for the fourth quarter of 2016 were $61 million, representing solid growth of 43% over same period last year.

Underlying this strong growth is the solid prescription demand for our products. Total prescriptions for Trokendi XR and Oxtellar XR as reported by IMS showed growth of 34% in 2016 over full year 2015, and 22% in the fourth quarter of 2016 over the same period in 2015. Regarding the label expansion for Trokendi XR to include prophylaxis of migraine headache in adults, we plan to launch the migraine indication soon after receiving full FDA approval which we expect in the second quarter of this year.

Regarding Oxtellar XR, we are excited about our plan to initiate later this year an exploratory trial investigating Oxtellar XR in patients with bipolar disorder. This would be another step towards realizing the full potential of Oxtellar XR in the treatment of patients with psychiatric and neurologic disorders.

The bipolar market represents a $4 billion opportunity, with 53 million annual prescriptions as reported by IMS in 2016. Approximately one-third of these prescriptions are written for antiepileptic drugs, including oxcarbazepine. This represents a significant growth opportunity for Oxtellar XR beyond the current epilepsy market that we estimate at approximately 34 million annual prescriptions.

Turning now our pipeline and starting with SPN-810. Enrollment continues in both phase III trials which is currently in development for impulsive aggression in patients aged 6 to 12 years old who have ADHD. The actions that we took in the second half of 2016 to help facilitate identifying, contacting and prescreening appropriate patients for these trials, as well as the steps we took to better educate patient caregivers has increased patient enrollment.

In addition, we received FDA approval for revisions to the phase III protocol which we inspect will improve patient retention during the screening period, and in turn further increase patient enrollment. Revisions to the protocol allow caregivers to gain more experience with an electronic diary and become more compliant so appropriate patients are not screened out inadvertently. We expect recruitment and retention to continue to improve as these steps become fully implemented.

Currently, we are approximately halfway through our patient enrollment target in the first phase III study for SPN-810. We remain encouraged by the fact that to date enrollment into the open label extension by those who completed the trials remains high, currently exceeding 80%. We expect enrollment into the phase III trials to continue through 2017.

Regarding SPN-812, currently in development as a model [month] stimulant ADHD treatment, we plan to have an end of phase II meeting with the FDA in the second quarter of this year. After which we plan to initiate a phase III test. We expect the phase III trial to start in the second half of 2017. We will provide additional details on the design of the phase III trial in the coming months.

Regarding our intellectual property, we continued in 2016 to vigorously defend our novel products and build upon our strong intellectual property position. As evidenced by the favorable court rulings on Oxtellar XR, and the issuance of four new US patents for Trokendi XR and Oxtellar XR over the past 12 months. Regarding IP litigation for Trokendi XR, a trial date has been set by the US District Court for March 20, 2017. While preparing for the trial, we continue to have settlement discussions with Teva and Zydus.

Finally, our Partner Shire announced that SHP-465 for the treatment of ADHD is expected to be launched in the second half of 2017 after it receives FDA approval which is expected on or around June 20, 2017. Based on the agreement between Supernus and Shire, Shire pay to Supernus a single-digit percentage royalty on net sales of the product. I will now turn the call over to Greg who will provide more details on our fourth-quarter and full-year operating performance.

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Gregory Patrick, Supernus Pharmaceuticals Inc - CFO [4]

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Thanks, Jack, and good morning, everyone. As I review our financial results, I would like to remind our listeners to refer to the fourth quarter and full year 2016 earnings press release issued yesterday after the market closed.

Net product sales for Trokendi XR for the fourth quarter of 2016 were $46.7 million, a 40.3% increase compared to the prior-year period. For Oxtellar XR, net product sales in the fourth quarter of 2016 were $14.4 million, a 54.7% increase as compared to the prior-year period.

Net product sales for Trokendi XR for full year 2016 were $158.4 million or 43.6% higher than in 2015. Net product sales for Oxtellar XR for full year 2016 were $51.7 million or 55.7% higher than in 2015.

Total revenue for full year 2016 was $250 million compared to $147.5 million in 2015. Total revenue for full year 2016 included product revenue of $210.1 million, non-cash royalty revenue of $4.7 million and license revenue of $0.2 million. As compared to $3 million and $0.9 million respectively for 2015.

Gross net deductions for the fourth quarter for Trokendi XR, approximately 33%, were in line with the gross net deductions for the third quarter. The gross net deductions for Oxtellar XR were approximately 46% in the fourth quarter.

Research and development expenses in the fourth quarter of 2016 were $13.3 million as compared to $9.4 million in the same quarter last year. Research and development expenses for full year 2016 were $42.8 million as compared to $29.1 million for full year 2015. The increases in both periods were primarily due to increased costs associated with the phase III trials for SPN-810 which were initiated during the third quarter of 2015, increased costs associated with the phase IIB trial for SPN-812 which was initiated during the fourth quarter of 2015 and the open label extension studies associated with both product candidates.

Selling general and administrative expenses in the fourth quarter of 2016 were $29.1 million as compared to $23.6 million in the same quarter last year. Selling general and administrative expenses were $106 million for full year 2016 as compared to $89.1 million in 2015. Increases in both periods were primarily due to preparation for the launch of the migraine headache indication for Trokendi XR, including marketing program development and sample production.

For the fourth quarter, operating income totaled $16.3 million, a 106.8% increase over $7.9 million in the same period last year. Operating income for full year 2016 was $54.2 million, a 160.1% increase over $20.8 million for full year 2015. This improvement in operating income for both periods is primarily due to increased net product sales.

I am pleased to note that the Company significantly exceed the original 2016 guidance provided for operating income, as well as exceeding its updated and most recent operating income guidance for 2016. Net income for fourth quarter 2016 was $14.3 million or $0.26% per diluted share, as compared to net income of $6.9 million or $0.14 per diluted share in the fourth quarter of 2015. Net income for full year 2016 was $91.2 million or $1.76 per diluted share, as compared to net income of $13.9 million or $0.28 per diluted share for full year 2015.

Net income in both periods includes non-cash interest expense related to the royalty liability originating from the royalty monetization transaction the Company entered into in 2014. Full-year 2016 net income was favorably and compacted by a one-time non-cash income tax benefit of $40.9 million, due to the elimination of the valuation allowance against deferred tax assets. I would like to briefly comment on the rationale for releasing the valuation allowance.

During the third quarter of 2016, the Company determined that the valuation allowance was no longer required or supportable because the accumulated net operating losses generated in prior years would more likely than not be utilized in the future. The Company made this determination primarily because net income on a three-year cumulative basis is now a positive number. As such, the valuation allowance was reduced to zero and the associated tax benefit was recorded through the statement of operations in the third quarter of 2016. The deferred tax asset will allow the Company to reduce cash federal income tax payments in future periods.

Approximately 52 million weighted average diluted common shares were outstanding in the fourth quarter of 2016, and approximately 51.7 million shares for full year 2016 as compared to 49.6 million and 51.2 million diluted shares in each of the respective periods of the prior year. As of December 31, 2016, we had $165.5 million in cash, cash equivalents, marketable securities and long-term marketable securities as compared to $117.2 million at December 31, 2016.

Cash generated from operations for full year 2016 was $66.8 million as compared to $34.5 million in the prior year. As of January 20, 2017, approximately $3.6 million of our six-year $90 million convertible note offering remained outstanding.

We expect to file a Form 12B25 which grants the Company a 15-calendar day extension to file its Form 10-K for the year ending December 31, 2016. Because the Company has now become a large accelerated filer, the filing deadline for its report on Form 10-K has been shortened from 75 days to 60 days.

This delay is due to the need to complete all steps and tasks necessary to finalize the Company's annual financial statements, and other disclosures required to be in the filing. Including, for the first time, the requirements as a consequence of the becoming subject to section 404B of The Sarbanes-Oxley Act of 2002.

Now turning to financial guidance for 2017. We expect full-year 2017 net product sales to be in the range of $265 million to $275 million. R&D expenses to be approximately $55 million, and operating income in the range of $75 million to $80 million.

Full-year 2017 operating income includes approximately $5 million of non-cash royalty revenue. I would now turn the call 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)

John Boris, SunTrust.

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John Boris, SunTrust Robinson Humphrey - Analyst [2]

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Thanks for taking the question, and congrats on the results in the summary. The first question just has to do with the migraine launch, Jack.

Just looking to I guess identify from a formulary standpoint how that process will work. Will it just -- what is the formulary acceptance rate at tier 1, tier 2 for securing reimbursement on the migraine indication?

The second question has to do with the bipolar study on Oxtellar XR. Just size, magnitude, is that a phase II study and then what additionally would you have to do? Because it's pretty well published in the literature that oxcarb works in bipolar. Is the FDA going to require you to do two well-controlled trials here to secure approval on the asset?

And then the third and final question, seems when we look at the number of meetings that you've had recently on the legal front on the IP front on Trokendi XR, you've had a couple of in-person conferences on settlement and multiple conference calls. Just any update you can provide on either settlement or litigation would be useful. Thanks.

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Jack Khattar, Supernus Pharmaceuticals Inc - CEO [3]

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Yes, sure. Let me start first with your question on the migraine launch. As far as managed care coverage reimbursement, we don't expect any significant or major changes in the coverage for the product. As you all know, currently and since we launched Trokendi XR we've enjoyed fairly good and wide coverage by these plans.

Although currently there are very -- a small number of states are plans that exclude reimbursement if that prescription is related to a migraine diagnosis. So once we get the expansion in the label and the migraine indication, we expect that from a formulary point of view those exceptions or these states are these specific plans that currently exclude reimbursement for migraine will add it back to the formulary. However, that doesn't happen overnight.

So typically it will probably take 6 to 9 months or so for these plans to incorporate migraine in the reimbursement scheme. But that portion is not really big, maybe it's 5%, 6% of the business. Is hard really to estimate, but it is not a huge number. So overall, the coverage should continue to be strong as we've always had it, if not a little bit stronger perhaps once we get it.

Moving on to the bipolar study. This is an investigator initiated trial. A fairly sizable study, probably going to be somewhere in the 150 to 200 patients in the bipolar area. And there are specific objectives that we are looking for behind the study really to identify what is potentially the best patient population within bipolar if Oxtellar XR could actually deliver some meaningful differentiation be it side effects, be it any specific efficacy signals that we might get.

So this is an early stage you can call it phase I or early phase 2 from a nomenclature point of view. But in the end, to your second part of the question, we will need to contact phase III studies. We believe two phase III studies for a program like this.

You are absolutely right, the use of oxcarbazepine in bipolar has been established. However, there hasn't been well-controlled studies conducted in this field, and that's why if we were and we will be the first people to develop it through the regulatory pathway, most likely we will be asked to do two well-controlled phase III studies in bipolar.

However, given our confidence that this point, with the longevity of this asset we believe that's an area which is definitely warrants us to look at very seriously. Because potentially if this is developed and approved for bipolar, Oxtellar XR could be double of even triple the potential that people think it will be currently in the marketplace as just an epilepsy drug. So this is a huge growth opportunity for us that we are taking very seriously.

And then finally regarding the third question on IP. Yes, it is public information clearly that we have had several meetings with the generic companies regarding settlement, as well as many follow-up calls. So I can basically tell you that is very intense serious discussions.

But of course, we can never guarantee the outcome of any discussions or which way it will go. So we are very well prepared and continue to prepare for the trial on March 20, while in parallel the discussions continue and settlements could happen any time or may never happen. But discussions are better than no discussions, and more intense discussions are better than the very slow discussions as well.

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John Boris, SunTrust Robinson Humphrey - Analyst [4]

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Jack, just a quick follow up. On the two patents that were issued recently, will they be included in the trial or not?

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Jack Khattar, Supernus Pharmaceuticals Inc - CEO [5]

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No, they will not be included in the trial but they are in the Orange book.

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John Boris, SunTrust Robinson Humphrey - Analyst [6]

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Great, thanks.

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Jack Khattar, Supernus Pharmaceuticals Inc - CEO [7]

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Sure.

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Operator [8]

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Annabel Samimy, Stifel.

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Esther Hong, Stifel Nicolaus - Analyst [9]

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Hello, this is Esther Hong on for Annabel Samimy. Just two quick questions. So are there any updates on commercialization efforts for the launch of Trokendi XR for migraine?

And then second, on SPN-810, can you provide more color on the FDA pro revisions? Will the revisions to the protocol add more time to the pre-screening period? And when can we expect enrollment to be completed? Thanks

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Jack Khattar, Supernus Pharmaceuticals Inc - CEO [10]

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Yes, sure. Regarding the first question on the commercial efforts for migraine, we are ready to launch the migraine. All the plans are in place. We are starting to actually execute as you might expect if you're launching in the second quarter and most likely early second quarter of this year.

We are well on our way towards that launch for preparations and readiness (inaudible) prepared. The spa revisions or protocol revisions for SPN-810, because we have us the special protocol assessment, clearly any amendments to the protocol have to be submitted to the FDA. We got the agreement from the FDA and approval on these amendments, we put them in place already in the field now so the sites are already implementing these amendments to the protocol.

We are starting to see very early signs of improvement there. The core or the focus of these amendments are really designed around the issue of compliance with the device, electronic diary, that we have and that is part of the study. Initially when we started these phase III programs, the caregivers, a lot of them were having issues in being compliant in using the diary, the electronic diary.

And of course as you would expect, we wanted to make sure that caregivers prove to us that they can be at least 80% of the time compliant in the use of the diary before they enter the study. So at least during the study, they can give us high-quality input data after they have proven that they can use that diary.

So initially, we had a lot of dropouts. People who were not compliant with the diary, who were not really getting how it works. For a lot of us, it might be a simple app that we use but not everybody is familiar with these devices or applications, and therefore they need training.

So what we did with the protocol amendment is we gave the caregivers another chance. So if they prove, for example, in the first two, three weeks that they're not able or they need maybe another week or two for extra training so they can use the device and they can prove to us that they can use it, we wanted to make sure we don't use these patients.

Because initially, we were losing patients not because the patient doesn't qualify to enter the study, because the caregiver is not able to be compliant with the device. So this should really help us significantly in allowing a lot of the patients that actually qualify for the study to enter the study, at the same time give us and continue to give us the confidence that we need to have in the compliance rate with the use of the diary.

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Esther Hong, Stifel Nicolaus - Analyst [11]

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Okay. And then any potential update on when enrollment is expected to complete?

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Jack Khattar, Supernus Pharmaceuticals Inc - CEO [12]

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Well at this time, as I said, we are almost halfway through for the first SPN-8 -- the first study. So waiting for the results of the impact of this amendment which we just put in the field recently. So until we have really a full clear idea if that has a great impact, then we will update everybody next time on our earnings call.

But it this point, we expect the enrollment to be through 2017, so data clearly in 2018. We are hoping to come back to you guys with more specifics as we get a better feel as to how this amendment and the impact of that amendment is on record.

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Esther Hong, Stifel Nicolaus - Analyst [13]

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Thank you.

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Jack Khattar, Supernus Pharmaceuticals Inc - CEO [14]

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Sure.

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Operator [15]

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(Operator Instructions)

David Amsellem, Piper Jaffray.

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David Amsellem, Piper Jaffray & Co. - Analyst [16]

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Thanks, so just a couple. Wanted to follow up on Oxtellar in bipolar. Can you walk us through what's the extent of current off-label usage of Oxtellar in bipolar? And then also the predecessor molecule how much of volumes are in the bipolar setting? So that's number one.

And then secondly, just wanted to get your thoughts on capital deployment. I know this is something you talked about in the past, but you've said in the past that you may look at acquiring a psychiatric product to build a salesforce around ahead of the ADHD product launches. Is that something that you are still looking at, is that a priority? Thanks.

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Jack Khattar, Supernus Pharmaceuticals Inc - CEO [17]

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Yes, regarding the Oxtellar bipolar. Currently as far as the market is concerned, we estimate there is about 2 million prescriptions on oxcarbazepine that are in the psychiatry space, and we believe most of them are in bipolar.

In addition to that if you look at other antiepileptic drugs, as I mentioned, about 34% of the bipolar annual prescriptions are actually from antiepileptic drugs. And most of those prescriptions are coming from molecules like lamotrigine, which is also a sodium channel blocker as oxcarbazepine is. Lamotrigine is actually about 16% of these prescriptions. So there is a huge amount of usage in bipolar that is actually coming from antiepileptic drugs such as oxcarbazepine, lamotrigine and so forth.

As far as Oxtellar XR, currently, we have very, very minimal usage in the bipolar, and the reason for that is because we don't call on psychiatrists. All our calls are in the neurology space. So clearly we don't call on psychiatrists because it is not in our label, and therefore if there is any usage it's just by people hearing about the availability of the product, and it's very, very small probably low single-digit in that space.

So we certainly look at this opportunity as a major growth opportunity for us. Because currently there is barely any usage of course of Oxtellar XR in bipolar, and secondly because oxcarbazepine as I answered previously to the previous question, oxcarbazepine is known to work, at least a lot of physicians are currently using it. If it didn't work, clearly they would be using it.

So at this point, it has been a matter for us to figure out the exact patient population. What is it going to require from an investment point of view as far as the two phase III studies, and push forward with that. Because the return on this investment could be huge for us.

And finally, regarding your question on capital deployment as far as corporate development. Nothing really changed there as far as our degree and the intensity of the efforts. So we continue to look for areas in neurology and psychiatry, in both areas, and neurology clearly to augment our capabilities that we have today, the strong footprint that we have with our salesforce in the neurology space (technical difficulty) Oxtellar XR and Trokendi XR.

And clearly in the psychiatry space, as we mentioned earlier, if we can bring in an asset that is before 812 or 810 and can get us into psychiatry before that, we are interested in that as well. So we continue to look for either products or products in late-stage testing that could have meaningful differentiation in the marketplace where we can make a big difference with these kind of products and get us into the psychiatry space early and/or expand our footprint in neurology.

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Operator [18]

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David Steinberg, Jefferies.

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David Steinberg, Jefferies LLC - Analyst [19]

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Thanks very much. I apologize if the question has been asked as I got on late. But I was curious as to how you were thinking now that the products have been launched for about four years and the peak sales potential of Oxtellar and Trokendi, you could execute it very, very well.

And sales this year, it's going to be north of $260 million. Correct me if I'm wrong, but when you launched the products I think you'd indicated you though peak sales could be in the $400 million to $500 million range. Assuming either you settle or you win your patent case and you have many more years of exclusivity and including the migraine prophylaxis indication, what are your latest thoughts on peak sales combined of those two products?

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Jack Khattar, Supernus Pharmaceuticals Inc - CEO [20]

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Regarding the peak sales, when we always used to mention and continue to mention that we believe both products peak sales are around the $500 million or more, that always included the migraine. Now, it remains to be seen if we can exceed our own internal expectations as far as the migraine is concerned, we are taking the launch of the migraine very seriously.

We are launching this as a new product. We're going to continue to invest behind Trokendi XR, and we are investing heavily this year behind the launch in migraine. So should we prove to ourselves that we can even exceed our initial expectations in migraine, clearly that $500 million peak target for both products combined would move north of that.

In addition to that, as we just talked today about the bipolar opportunity in Oxtellar XR, that could even bring us closer to the $800 million mark with both products combined if we even are successful in the bipolar space. Which we believe we should be able, but we still have to of course do the studies, have positive studies, do the filing and get the approval and launch to that.

But the use of that molecule is well proven in that space. So combined all of these growth initiatives and growth opportunities behind both products conceivably could approach the $750 million or $800 million. It's not a wild guess at this point that could be achievable in the future.

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David Steinberg, Jefferies LLC - Analyst [21]

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Thanks.

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Operator [22]

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Thank you, and I am showing no further questions at this time. I would now like to turn the call back over to Mr. Jack Khattar for closing remarks.

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Jack Khattar, Supernus Pharmaceuticals Inc - CEO [23]

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Thank you. 2016 was another outstanding year for Supernus, with record financial results and significant accomplishments. We have established a solid foundation for sustainable growth, and expect 2017 to be yet another outstanding year with strong net product sales and operating income growth.

In addition, we are very excited about the key milestones that we are looking forward to, including the launch of migraine for Trokendi XR, starting the new growth initiatives on Oxtellar XR, starting phase III testing on SPN-812 and making significant progress towards completing the phase III studies on SPN-810.

As I also mentioned earlier, we also continue to look for strategic corporate development opportunities that could further accelerate our growth in neurology and psychiatry. Thank you, everyone, for joining us this morning, and we look forward to updating you through the year.

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Operator [24]

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Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.