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Edited Transcript of VLRX earnings conference call or presentation 12-Nov-19 9:30pm GMT

Q3 2019 Valeritas Holdings Inc Earnings Call

BRIDGEWATER Dec 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Valeritas Holdings Inc earnings conference call or presentation Tuesday, November 12, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Erick J. Lucera

Valeritas Holdings, Inc. - CFO & Secretary

* John E. Timberlake

Valeritas Holdings, Inc. - President, CEO & Director

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Conference Call Participants

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* Steven Michael Lichtman

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Gregory Peter Chodaczek

Gilmartin Group LLC - MD

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Presentation

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Operator [1]

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Welcome to Valeritas Third Quarter Financial Results Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded today, November 12, 2019.

I would now like to turn the conference call over to Gregory Chodaczek, Investor Relations. Please go ahead.

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Gregory Peter Chodaczek, Gilmartin Group LLC - MD [2]

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Thank you, operator. This is Greg Chodaczek with the Gilmartin Group. Thanks for participating in today's call. Joining me from Valeritas is President and Chief Executive Officer, John Timberlake; and Chief Financial Officer, Erick Lucera.

Earlier today, Valeritas released financial results for the quarter ended September 30, 2019. If you've not received this news release or if you'd like to be added to the company's distribution list, please send an e-mail to ir@valeritas.com.

Before we begin, I'd like to remind you that management will make statements during this call that are forward-looking statements within the meaning of the federal securities laws, such as our financial guidance. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated. For a listed description of those risks and uncertainties, please see the Risk Factors section of the company's most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q with the Securities and Exchange Commission.

Valeritas disclaims any intention or obligation to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise, and claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

This conference call contains time-sensitive information and is accurate only as of the live broadcast, November 12, 2019.

I will now turn the call over to John Timberlake. John?

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John E. Timberlake, Valeritas Holdings, Inc. - President, CEO & Director [3]

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Thank you, Greg. Good afternoon, everyone, and thank you for joining us. I am delighted to announce that during the third quarter ended September 30, Valeritas experienced robust revenue growth, coupled with an acceleration in our V-Go prescription volumes in the United States.

For the quarter, we posted revenue of $8.5 million, a 22% increase over the third quarter of 2018 and a 13% sequential growth over the second quarter of this year. What I find exciting is that our U.S. revenue grew 30% in the third quarter versus the same quarter in 2018, as all of our $8.5 million this year and this third quarter was generated in the United States versus a $6.5 million in revenue generated in U.S. in the same quarter of 2018. Our total prescriptions in the United States across targets and non-targets combined grew more than 25% in the third quarter versus the same quarter in 2018. In our targeted accounts, total and new prescriptions grew year-over-year by an impressive 41% and 48%, respectively, demonstrating our continued acceleration with those accounts where we focus our resources. On a sequential basis, total and new prescription growth in our target accounts were 13% and 9%, respectively.

As a reminder, target accounts represent those V-Go prescribers to whom our field-based sales team calls on and support and where we focus the vast majority of our resources. Conversely, we characterize accounts or prescribers which our field does not call on or support as non-target accounts. Those non-targets represent prescribers in geographies where we have no sales reps, so-called white space, or in markets where a representative is somewhere in the area but a prescriber who is -- a prescriber that we currently do not call on or support by our field force.

During this quarter, total prescriptions for those non-targeted accounts decreased by 4% as compared to the third quarter in 2018. However, on a sequential basis, total prescriptions from these non-target accounts actually grew by 1%, demonstrating that our business in those areas has stabilized.

When you look at the sales territories which were already in place before our late first quarter of this year expansion, which I will call existing territories, total and new prescriptions increased year-over-year by 34% and 37%, respectively, for the quarter, and increased -- and they also increased 9% and 6% sequentially, respectively. The strong growth in our existing markets demonstrates the value of our fully integrated V-Go Cares program and its ability to help accelerate growth in our more tenured and larger volume territories.

As a reminder, our V-Go Cares program integrates our patient and provider support for V-Go under one umbrella that ensures our comprehensive support for V-Go in a coordinated and efficient manner. Our V-Go Cares program allows our field representatives more time to focus on promoting V-Go within their targets.

The V-Go Cares program includes our greatly expanded field-based contracted V-Go-certified trainers, who train new patients and who provide follow-up support. It includes our virtual CDE patient coaches through our partnership with Cecelia Health, who help educate patients prior to starting V-Go and they also focus on helping them stay on V-Go post the -- starting of V-Go. And it also includes our integrated reimbursement support team and our integrated CRM system, which allows us to connect all of these components together as well as allows us to market and communicate directly to those patients.

Now prior to the V-Go Cares being fully implemented, our greatest challenge for continued growth with our highest-volume territories was primarily field rep bandwidth. And now, post the full integration of the V-Go Cares program in the late first quarter of this year, these larger and mature markets have actually accelerated their growth in the second quarter and third quarter of this year.

So now let's look at the impact of our 2019 expansion, where we increased our sales force by approximately 50% by adding around 25 new field-based sales representatives in the middle of the first quarter this year. These new representatives started in the field not by selling or asking for prescriptions but instead by executing our experience program, which we refer to as our Early Access Program, or EAP, which leveraged our learning from similar programs we did in 2018.

Now this EAP program was designed to get a few key prescribers in each territory hands-on clinical experience with V-Go with no risk or cost to the patient, thereby allowing that prescriber to see the great benefits of V-Go firsthand with their own patients. The EAP ran until May of this year, therefore, the new representatives really did not begin selling or generating prescriptions until about mid-May of this year. The result of this approach was that the new territories had marginal impact in revenues in our second quarter and they began contributing to the total company growth in the third quarter.

And with that said, we saw that the total in new prescriptions in these new territories rose sequentially from the second quarter by 23% and 17%, respectively. Now as a group, the new territory has generated approximately 18% of the total prescriptions by -- generated across all of our target accounts during the third quarter. Now these robust early prescription trends demonstrate that our V-Go Early Access Program was effective and is paying dividends already.

Now we have seen that this most recent group of new representatives has become even more productive in a shorter period of time than the representatives we hired in 2017 or 2016 due to our continued adaptation of our sales approach and the support from our fully integrated V-Go Cares program.

I want to share a very concrete example of how our current sales model, coupled with our V-Go Cares program, is really allowing our new reps to become more productive even faster.

One of our original representatives -- sales representatives who started in the market prior to 2016 who was selling under our old model but for personal reasons had -- wanted to move to a new state and moved into a new territory where we had never had a V-Go rep before. Now this same representative, now with our new approach and with our V-Go Cares umbrellas, was able to generate the same monthly level of field prescriptions in his fifth month, which under the old model and without the V-Go Cares, took him 12 months to produce. Getting this as well as looking at the overall accelerated growth across our existing territories, the fast start with a whole group of new sales force expansion reps gives me great confidence in our continued acceleration in the fourth quarter and beyond.

In terms of our reimbursement coverage, we began the third quarter with some major wins for patients by getting V-Go placed on the commercial preferred formulary for Humana, Cigna and CVS. Throughout this quarter, we have witnessed an increasing number of prescriptions being adjudicated and filled through these plans, and I believe these preferred positions will help fuel future growth in the fourth quarter and throughout 2020.

During third quarter, we continued to announce the results of clinical studies that confirm both the clinical and economic benefits that V-Go provides to patients. In October, positive data from the retrospective study using the health care or integrated research database comparing patients using V-Go to patients using multiple daily injection therapy was published in the Journal of Managed Care & Specialty Pharmacy. The study demonstrated that V-Go users experienced lower insulin dose requirements and lower diabetes-related medication costs while lowering their average blood glucose levels as measured by A1C.

Now during the last 6 months of therapy in the study, the V-Go users had a decrease in insulin's total daily dose of 29 units per day, whereas the multiple daily injection group actually had an increase in total daily use of insulin by 6 units per day. Also during that 6-month period, the total diabetes medication costs were approximately $1,300 less for the V-Go patients versus the multiple daily injection patients. And as I noted, the V-Go patients provided this cost savings while actually lowering their blood glucose slightly more than the MDI group.

Now as a backdrop, to date, V-Go is currently cleared by the FDA to deliver only the more expensive U-100 rapid-acting insulins such as Humalog and Novolog. And essentially, all the data that the company has presented to date, which, again, has consistently demonstrated patients who use the V-Go versus injected insulin, use significantly less total insulin per day while significantly lowering their blood sugars. All those data was really based on using these rapid-acting insulins.

In August of this year, we announced that a randomized multicenter-controlled study with patients with type 2 diabetes comparing the delivery of the less-expensive U-100 regular human insulin by V-Go versus delivering U-100 rapid-acting insulin V-Go, met the primary A1C or blood sugar level study endpoints. The planned interim analysis was reviewed by an independent Data Safety and Monitoring Committee who unanimously recommended stopping further screening and randomization after determining that non-inferiority between the 2 insulin therapies had already been met as the study demonstrated that the patients with type 2 diabetes who used V-Go achieved similar A1C or glucose control whether they're using a less-expensive regular human insulin versus a rapid-acting more-expensive insulin.

Now we believe this data is profound as the use of regular human insulin could save U.S. patients with type 2 diabetes in health care systems thousands of dollars per year and could lead to better patient compliance, resulting in potentially improved blood glucose because they're actually using the product in delivering insulin.

Now late June, we filed a special 510(k) device modification with the FDA that included using regular human insulin with the V-Go. Subsequently to our submission, the FDA has converted our file to a regular 510(k) filing, and the company is on schedule to provide the agency with the additional requested information by the end of this year.

Turning to our R&D pipeline. The company has made significant progress in the preparation to bring our V-Go SIM, which is our simple infant management Bluetooth-connected accessory device to market. As a reminder, the V-Go SIM is a snap-on accessory that detects and records basal and bolus insulin usage and wirelessly sends this information to the SIM smartphone app. Our belief, based on market research and feedback from V-Go patients, type 2 patients with insulin who are not yet using the V-Go and from health care providers is that the availability of the V-Go SIM device will aid in the compliance and persistent use of V-Go. It will allow for prescribers to adjust the dosing periodically and it could enable the patient to get even better clinical results by using all the insulin that's available in the V-Go every day.

It's important to note that the V-Go SIM does not control the V-Go, and once the V-Go SIM is on the market, the V-Go can still run and operate as it does today with or without the V-Go accessory.

So regarding timings. Based on review from multiple external regulatory experts, the company's position was that the V-Go SIM was a 510(k) exempt accessory device which meant we had to do all the necessary testing and documentation for a 510(k), but that we would not have to actually submit all that work prior to entering the market with the product. Subsequently, we've had some very constructive discussions with the FDA. It was determined that the company would, in fact, need to submit a 510(k) related specifically to and only for the V-Go SIM accessory. Now because the company was already conducting all the necessary testing and preparing all the necessary work for a 510(k) material under our previous exempt assumption, this change does not require the company to complete any additional testing beyond what was already planned. But it will require that the 510(k) be filed in the first quarter of 2020 and for it to first to be cleared by the FDA prior to us bringing the product to market. But because we were in a position to introduce the SIM as early as January, I am confident that the company is in a great position to launch V-Go SIM immediately upon clearance from the FDA.

Now on a new and exciting initiative from Valeritas. During the third quarter, we had numerous announcements regarding our proprietary h-Patch wearable drug delivery technology and its use in delivering a variety of therapeutics beyond insulin. As a reminder, the underlying technology behind the V-Go is the h-Patch. V-Go is the branded name to deliver insulin using that h-Patch technology.

Now over the recent quarters, we came to realize that there were -- there may be substantial opportunity to leverage and monetize our h-Patch technology beyond V-Go to facilitate the simple and effective subcutaneous delivery of injected medicines for other drug companies into their patients across a broad range of therapeutic areas, especially those therapeutics that either have a very low bioavailability in humans using the current mode of administration and/or significant side effects with its current mode of administration and/or even significant potential patient quality of life challenges.

Our plan is to explore partnering opportunities with companies who could benefit from utilizing the h-Patch to deliver their therapeutics, thereby allowing us to advance our technology, to generate non-dilutive capital in the shorter term and potentially generate significant cash flows in the future.

During the last 4 months the company has proactively identified multiple drugs that could be delivered in the current V-Go/Patch configurations, and we have conducted relatively inexpensive pharmacokinetic, or PK, studies to demonstrate the h-Patch ability to efficiently and effectively deliver drugs.

To date, we have completed these PK studies, we have publicly communicated successful delivery, and we have presented our data at major U.S. and international scientific congresses within and using the following different drugs: cannabinoid, or CBD; apomorphine; and GLP-1 analogues. Each of these 3 therapeutics present unique and fertile opportunity for Valeritas to further leverage and monetize our h-Patch wearable drug delivery technology.

Now you can learn more about the study results and which diseases we believe h-Patch could really make a meaningful clinical and patient outcome difference by reviewing our press releases which are easily accessible on our company website.

I want to reiterate that these opportunities will be derived through partnering with companies who could benefit from utilizing our h-Patch to deliver their therapeutics, whereby Valeritas would provide the devices and the drug companies would conduct and pay for the clinical studies. The net result would be a net positive cash flow to Valeritas.

Now I'd like to turn the call over to our Chief Financial Officer, Erick Lucera.

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Erick J. Lucera, Valeritas Holdings, Inc. - CFO & Secretary [4]

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Thank you, John, and hello, everyone. My comments today will focus on revenue, margin improvement and expenses. Our full financials are available in our 10-Q, which will be filed later today with the Securities and Exchange Commission.

For the third quarter of 2019, revenue increased to 22% to $8.5 million as total V-Go prescriptions grew 25% versus the third quarter of 2018 nationally. And in our target accounts, prescriptions grew 41%. Gross profit in the third quarter was $4.2 million versus $3.2 million in the third quarter of 2018. Gross margin for the quarter was 49.6%, up from the 45.9% in the prior year driven primarily by higher sales volume, evidencing the benefits of scale in our business model.

Total operating expenses for the third quarter were $16.3 million, up $2.6 million versus the same period in 2018, driven primarily by nearly a 50% increase in the number of sales reps which went from 50 to approximately 75, the integration of over 80 field-based V-Go-certified trainers and live remote patient coaches into our V-Go Cares program, and promotional spending to targeted health care providers.

Our operating loss for the quarter was $12.1 million compared to the operating loss for the third quarter of 2018 of $10.6 million driven by the increase in OpEx, as previously described. At the end of September, the company announced that we had reduced our long-term debt obligation by nearly 60%, which among other advantages, will save the company approximately $8 million in cash interest expense. Specifically, the company worked with its creditors to reduce its debt obligation by $25 million by exchanging that amount into series B preferred stock, which can be converted into common stock on a 1-for-1 ratio. This reduction in long-term debt will result in greater financial flexibility and significant cash expense savings.

Turning to guidance. Based on the prescription trend we experienced through October, we remain confident and our revenue growth rates will continue to accelerate throughout the year and return to 30% year-over-year for the total company in the fourth quarter due to our V-Go Cares program as well as anticipated increased contributions from our new sales reps.

As a reminder, our U.S. growth has already returned to 30% during this -- the third quarter. Based on our third quarter results and prescriptions through October, we expect to record a record revenue in the fourth quarter between $9.1 million and $9.4 million, all within the United States, and we do not expect to record any OUS revenue, representing year-over-year growth of 32% to 36%. This will result in an expected annual revenue to be between $31.5 million and $31.8 million, representing annual growth of roughly 20%.

We anticipate gross margin to continue to trend higher for the remainder of the year and expect to exit the fourth quarter of 2019 with a gross margin between 52% and 54%.

At this point, I would like to turn the call back to John for closing comments.

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John E. Timberlake, Valeritas Holdings, Inc. - President, CEO & Director [5]

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Thank you, Erick.

Now I think we all know there are millions of patients with type 2 diabetes on insulin therapy in the United States and that the vast majority of them are not meeting their A1C or their blood sugar goals. Every day, patients struggle with the adherence to multiple daily injections as over 75% do not inject insulin away from their home. Valeritas continues to demonstrate that when patients with type 2 diabetes switch from taking insulin injections to delivering their insulin with the V-Go, they significantly lower their blood sugars and they do so with significantly less total daily insulin.

I am very excited to see how our existing reps have now accelerated their growth and believe that our fully integrated V-Go Cares program is a significant driver in that growth. I am also very pleased to see the fast uptake of our new reps as this class has gained traction and has generated better results in their first 5 to 6 months than any of our previous classes of sales representatives when we started.

These factors, combined with our strong reimbursement, gives me confidence that we will continue to accelerate our growth in the fourth quarter and beyond.

And with that, operator, could you please open up the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Steven Lichtman of Oppenheimer.

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Steven Michael Lichtman, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [2]

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So you talked about a number of things that are accelerating U.S. performance and you're anticipating that again here in the fourth quarter. Beyond the new sales reps and cares, I'm wondering if you could touch base a little bit more on the managed care wins from earlier in the year and what you're seeing in terms of impact from them at this point or what you're anticipating, looking ahead from some of those formulary wins.

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John E. Timberlake, Valeritas Holdings, Inc. - President, CEO & Director [3]

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Sure. Thank you, Steve, for the question. Yes, as I mentioned, we started off the quarter with some really nice formulary placement wins, which does a couple of things. It really puts the patient copay back at the level equal to the lowest possible branded level plans that I mentioned. And again, keeping in mind that these patients are typically multiple -- or treating multiple diseases. So they have copays for their blood sugar, for their -- not for diabetes but for cholesterol, it could be for either high blood pressure. So it's a really important driver.

What we've seen, Steve, is every month through the quarter we've seen an increase in the number of prescriptions, as I mentioned, that get adjudicated and are filled through those plans, where in the past, they would have been -- the patient would have had a prescription and decided not -- to go to the pharmacy and not pay the higher-tier copay, for example.

So we think that helped support our growth that we're seeing. And when you couple that with what we're doing with the V-Go Cares program, that's why we've seen 40% growth in our target accounts this quarter, and we expect to see that continue to accelerate in the fourth quarter with the additional having 3 more months of experience with our new sales reps.

So I think it really just puts us having -- I think we have a very strong footing in the managed care. The vast majority of all of our contracts with managed care, both in the Part D and the commercial, are in the preferred situation. So we're taking or reducing that copay burden to the patient. We're getting a higher success rate post their prescription being written.

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Steven Michael Lichtman, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [4]

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Okay, got it. Moving on to some of the additional potential indications, following the PK work, can you talk generally about sort of where you are in terms of discussions, receptivity from therapeutic companies? Any sense of when we -- any sense you could give us as to when we could hear from you guys on next steps there?

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John E. Timberlake, Valeritas Holdings, Inc. - President, CEO & Director [5]

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Yes. Your latter part of your question will be the one where I can't predict because those discussions, as you know, never can predict the time period, but the receptivity did great. For the 3 drugs we have publicly disclosed, we have presented, as I mentioned, been accepted and even by the 2 major, not only U.S. but international congresses, where we have presented the data. I think we have extreme and high interest and the ability -- as I mentioned, we picked these drugs on purpose, some because they -- some -- one drug that requires multiple injections has serious side effects because the dosing creates a high onboarding and then it felt, with the short half-life, falls off, which we can address. Other, like the CBD orally administered, has some very, very low viability.

So what we have seen is we have had conversations with companies, somehow reached out to us. Others, we reach out to them. But these are preliminary, very early stage, Steve. And I think we've done what we wanted to do. We could highlight our technology by showing up at congresses and kind of -- and boost, or we can actually show some data and show the PK value of what we can really overcome.

So I think we've been very pleased in the first 3 months of this, creating the interest, creating initial dialogue and discussions with companies. I can't predict how long it takes before we get somebody across the finish line.

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Steven Michael Lichtman, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [6]

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Got it. And then just lastly, John, relative to international, obviously, you mentioned this year, this will be driven by the U.S. Can you update us, though, where you are in terms of international? I think you had sort of 15 countries you've been working with potentially. What can we expect generally in 2020 on that front?

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John E. Timberlake, Valeritas Holdings, Inc. - President, CEO & Director [7]

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Yes. So I think, as you mentioned, we have agreements covering 14 or 15 geographies. To date, we have 3 countries who are promoting the product and selling the product, Australia and New Zealand and Italy. Australia and New Zealand have mainly a cash-paying approach, which was very common for the -- when they introduced other diabetes products like Libre and Dexcom.

Italy, we've been very pleased. As I mentioned last time, it has very strong reimbursement. And they are really seeing some nice pick-up in their patients. I think they have started several hundreds of patients. They are seeing very high persistency when patients start with a Libre, for example, because they promote both those products in that country. So we're learning -- taking the lessons and learnings from that because doctors see immediate feedback, which supports that patient use. But I think we're going to see Italy really continue to grow and expect them to be in a position to place orders for next year.

The other countries are continuing to work through reimbursements, and that's the biggest challenge for the other geographies. Reimbursement, as we hear about today in our news in the United States, where costs and reimbursement is always an issue, it's even more so in other countries. And it's a process that I can't predict. It's not an easy process. It's really a country-by-country, and sometimes, a province-by-province discussion.

So again, I don't expect significant, very large revenue coming from OUS in next year. We will get -- again, Italy, I think, will continue to grow. I would expect that we'll get some other reimbursed countries. But when they do that, it's not immediate. You could still take 3 months before they can start promoting. So our focus has really been making sure we support those customers or those partners, but we're really taking off and we're showing some nice growth here in the United States.

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Operator [8]

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Our next question comes from the line of [Peter Edelman of Edelman Family of Funds.]

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Unidentified Analyst, [9]

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John, you spoke about the V-Go Cares program and what you believe is having it -- that it's having a real impact on the sales ramp. Could you give a somewhat more granular description of exactly what that V-Go Cares program entails?

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John E. Timberlake, Valeritas Holdings, Inc. - President, CEO & Director [10]

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Yes, sure. So we do call this our umbrella because, really, what we're trying to do is support the patient throughout what we call the whole patient journey. And that means from the time a patient might first be made aware of V-Go, whether it's -- they find out about V-Go themselves through our marketing or they come across it in the web or they see some news or they're introduced V-Go by their prescriber.

So that very first time that V-Go comes into their mind, we now have a contact point. And it's everywhere from making sure that patient understands what the V-Go is because with devices some patients have misconceptions. So we can utilize our resources under the umbrella to help educate the patient. Here's what the V-Go is. We can provide you a physical demo so you know this is not a complicated electronic product. We can talk through your questions. And the point of that is to make sure that they are really aware of the advantages it could provide to them and it increases that percentage of them showing up for their training session and a much higher percentage of them actually being ready to receive the V-Go if a doctor brings it up in a visit.

So it's the upfront work that we do to make sure the patient understands it. It's the support from training the patient with our field-based contract trainers. It's follow-up after the patient is trained to help them through a reimbursement to make sure they know, okay, it's covered under XYZ pharmacy, your copay is $20. Here, really we can help you make sure your pharmacy has the product before you show up. It is following up with the patient afterwards to make sure if they have any questions because patients retain less than 50% of what they're presented on a doctor visit. So whether it's an immediate follow-up, subsequent follow-up to make sure they can understand how to use the product, get the first refill, answer their questions.

So really, we're helping the patient through that whole journey. We're also helping the physician office by reducing the burden from them. If they identify the patient and start the prescription, we can really help them throughout the whole process.

So I think it's really a kind of A-to-Z process of helping a patient from the very beginning point of time until, hopefully, they become a very happy, compliant, adherent patient, and now, they're on their own. Hope that answered your question.

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Unidentified Analyst, [11]

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Yes, thank you. That's very clear, I think.

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Operator [12]

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And there are no further questions in the queue. At this time, I will turn the call back over to John Timberlake for final remarks.

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John E. Timberlake, Valeritas Holdings, Inc. - President, CEO & Director [13]

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All right. Well, great. Well, thank you, everybody, for joining us.

As you can tell, I think we are very excited for what we have done and what we've been able to grow and really excited about what Q4 and 2020 will bring.

So look forward to keeping everybody updated on our progress. Thank you.

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Operator [14]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.