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Edited Transcript of VLRX earnings conference call or presentation 9-May-19 8:30pm GMT

Q1 2019 Valeritas Holdings Inc Earnings Call

BRIDGEWATER Jun 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Valeritas Holdings Inc earnings conference call or presentation Thursday, May 9, 2019 at 8:30:00pm 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

* Greg Chodaczek

Gilmartin Group - IR

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Conference Call Participants

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* Steven Michael Lichtman

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

* Joseph Marino

- Analyst

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Presentation

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Operator [1]

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Welcome to Valeritas' First Quarter Financial Results Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded today, May 9, 2019. I would now like to turn the conference call over to Greg Chodaczek, Investor Relations. Please go ahead.

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Greg Chodaczek, Gilmartin Group - IR [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 March 31, 2019. If you have 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 financial guidance. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated. For a list and 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 contains time-sensitive information and is accurate only as of the live broadcast, May 9, 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. Our first quarter results represent a solid start to 2019 as our revenue grew slightly ahead of our guidance, and we achieved or exceeded all the metrics in which we provided guidance.

For the quarter, we posted revenue of $6.4 million, an increase of 5.3% over fiscal quarter of 2018. While this growth is lower than what we had been experiencing over the past 5 quarters, we do expect growth to reaccelerate in the rest of 2019. Now driving our confidence is the impact of our now fully integrated V-Go Cares program, our managed care formulary wins this quarter and the future effect of our newly hired sales reps who will be shifting their focus in May from training and executing Early Access programs to generating prescriptions.

As I mentioned, we had strong volume growth in the first quarter with our year-over-year growth in total and new prescriptions of 16% and 10%, respectively. Importantly, total and new prescriptions in our target accounts grew year-over-year by 30% and 28%, respectively. And I'm very happy with our prescription growth in these targeted accounts in the first quarter and with our current prescription trends. It is evident that our decision to focus on our targeted prescriber accounts with a high level of sale service is generating prescription growth. As we have focused our resources on these target accounts, the total and new prescriptions in our nontarget accounts showed a year-over-year decline of 8% and 14%, respectively.

Our overall first quarter prescription growth was negatively affected by the impact of health care deductibles in both Part D and commercial plans, resetting at the beginning of the calendar year. With most annual health care plan deductibles and flexible spending accounts resetting on January 1, some plan members request more than a month's supply of product in December and V-Go is no exception.

In December of 2018, we experienced a 5% increase in prescription size as compared to the average prescription size during the year. Translated, this means that we saw more patients getting 2 or 3 months' supply of V-Go with their December prescription. This increase in the number of months' supply filled in December as well as the resetting of the majority of our patient and target patient pharmacy deductibles in January led to a decrease in prescriptions being refilled early in the first quarter. It is very important to note though that our weekly prescription trend normalized in the latter half of February and grew throughout March.

During the quarter, we fully implemented our V-Go Cares program, which integrates our patient and provider interactions under one umbrella. Also in the quarter, we completed the establishment of contracted field-based patient trainers in most of our territories and we finished the training and integration of our live coaching services with Cecelia Health. Now we expect the combination of these 2 services will begin to substantially increase the number of patient needs transitioning to initiation of V-Go, allowing our sales reps more time to sell and initiate therapy.

For example, our contract training team trained 33% more patients in the month of March as compared to January and February. Also, in March, we experienced a 40% increase in patient leads into our V-Go Cares program as compared to the first 2 months of 2019.

Now turning to managed care reimbursement. During the first quarter, we were successful in moving V-Go to the preferred formulary position in a major Part D plan and a major commercial PBM. Now within this Part D plan alone, we noticed a change in the amount patients are paying for V-Go from nearly over half of them paying over $100 per month in 2018 to now during the first quarter of 2019 where approximately 85% of these patients paid between $0 and $50 per month for V-Go. So our managed care team will continue to leverage the lowering glucose and cost savings data to drive positive changes in Medicare and commercial formularies.

Now as we communicated during our last earnings call, our newly hired sales representatives were not focused on generating prescriptions this first quarter but were tasked to identify critical accounts in their new territories in which they could provide V-Go Early Access program services. We learned from our initiation program that we conducted in the second half of 2018 that we can turn prescribers into V-Go adopters faster if they had direct clinical experience with at least 5 of their own patients in a relatively short time period. And we are confident this approach will allow our newly hired sales reps to become productive quickly and expect to see the impact of this approach in the second half of this year.

Now moving to our clinical programs. Our tireless clinical team published one manuscript, presented data from 2 other studies and helped advance an important -- another important prospective study during the first 4 months of this year. The first study was a study with 148 patients presented at the 12th International Conference of the Advanced Technologies & Treatments for Diabetes meeting in Berlin, Germany on February 21. Now this study demonstrated that patients with Type 2 diabetes who switched from insulin pen devices to the V-Go experienced statistically significant reductions in both their A1C, or their glucose levels, and in total daily dosages of insulin. After 7 months of V-Go use, the A1C level has decreased by 1.1 from a baseline of 9.1, and the average total daily dose of insulin dropped by 29% from a baseline dose of 82 units per day.

In early April, there was a peer-reviewed manuscript published in the Journal of Health Economics and Outcomes Research. This prospective, randomized, pragmatic clinical study titled V-GoAL evaluated 415 insulin-treated patients with Type 2 diabetes across 52 sites and demonstrated a significantly greater reduction in A1C and insulin dose with V-Go as compared to standard treatment optimization in patients who prescribe insulin injections.

Importantly, the study assessed the cost of therapy to treat these patients and demonstrated that the cost to reduce an A1C by 1 point, 1 percentage, with V-Go group was less than half the cost it was to do the so -- to do the same with the standard insulin injection therapy group.

And in April, positive data from the VERDICT study were announced at the American Association of Clinical Endocrinologists 28th Annual Meeting. This study demonstrated that patients with Type 2 diabetes using V-Go had an average reduction of A1C levels of 1.5 with a decrease in insulin total daily dose of 14%. Regardless of the baseline insulin regimen, switching to V-Go improved the A1C or glucose and resulted in a reduction of total daily dose of insulin. Now when looking at patients previously prescribed basal bolus via multiple daily injections, they were able to reduce their daily dose of insulin by 30% with V-Go.

So there is a very consistent theme demonstrated by these recent as well as all of our clinical presentations and published manuscripts. Patients with Type 2 diabetes who switched to V-Go to deliver insulin instead of using insulin pens or syringes experienced a decrease in A1C or glucose and in their insulin usage. It is important to note that all this data is based on patients using what's called rapid-acting analogue insulins, or RAIs, delivered using the V-Go. Now given the importance of health care burden to both patients and health plans and regarding the cost of treating diabetes, Valeritas is supporting an ongoing investigator-initiated study to evaluate lower-cost alternatives when insulin therapy is warranted. This prospective study aims to determine if patients can switch from using V-Go with a rapid-acting analogue insulin to V-Go using regular human insulin, or RHI, and maintain similar glycemic controls as measured by the A1C.

RHI, or regular human insulin, is a much less expensive insulin alternative. The study will also evaluate the risk of hypoglycemia between both insulin options when delivered by V-Go. We believe the results of the study will provide valuable insight and could be significant if the data demonstrates similar A1C levels with less costly regular human insulin as compared to the analogue insulin. Investigators expect the study could be completed by the end of this year.

Now turning to our efforts outside of the United States. Valeritas now has V-Go distribution agreements in place covering 15 countries and territories. As we have communicated in the past at the last earnings call, each of these distribution partners must gain pricing and reimbursement in their respective countries and territories. As of today, V-Go is being promoted in Australia and New Zealand without government reimbursement more on a cash paying basis. And in Italy, our partner is making great progress in gaining reimbursement. At this time, we do not expect to ship any additional product to our distributors outside the United States until late 2019.

Now regarding our R&D pipeline. We continue to advance our V-Go SIM, S-I-M, Simple Insulin Management, which is a Bluetooth-connected accessory. We are working to introduce SIM through a selected pilot launch in each of our U.S. [seller's] regions across the country in the fourth quarter of this year and expect a full national launch in the first quarter of 2020. Now we've done market research and the feedback from this research with doctors and patients is very encouraging, and it indicates that the V-Go SIM will lead to a higher physician adoption of V-Go as well as patient retention.

As a reminder, the V-Go SIM is a snap-on accessory, which tracks the basal rate and bolus insulin usage of V-Go and wirelessly communicates this to a SIM smartphone app. In addition, patients and providers who utilize the Glooko system will be able to get Glooko data as well as the other Glooko information as part of our partnership with Glooko. It's important to note, the V-Go SIM will be considered an optional accessory, and the V-Go itself will continue to operate as it does today with or without the V-Go SIM.

I will now turn the call over to Erick Lucera, our Chief Financial Officer, and then I will return for some closing comments. Erick?

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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 SEC. For the first quarter of 2019, revenue increased 5.3% to $6.4 million as total V-Go prescriptions grew in our target accounts 30% year-over-year.

Gross profit in the first quarter was $3 million versus $2.9 million in the first quarter of 2018. Gross margin for the quarter was 47.6%, virtually the same as in the prior year, driven by slightly lower sales volume in the first quarter, as described by John.

Total operating expenses for the first quarter were $16.9 million, up $3.4 million versus the same period in 2018, driven primarily by an increase in the number of sales reps, the completion of the fully integrated V-Go Cares program, and promotional spending to targeted health care providers. Our direct field-based sales force increased by 25 sales reps or 50% in the first quarter of 2019.

Our operating loss for the quarter was $13.9 million compared to the operating loss for the first quarter of 2018 of $10.6 million, driven by the increase in OpEx as just described.

Turning to guidance. Based on our first quarter results, the leading indicators from our V-Go Cares program, prescriptions through April and the initial signs of our Early Access program with our newly hired sales reps, we are increasing the lower end of our annual revenue guidance from $30 million to $31 million and providing full year guidance in the range of $31 million to $34 million, representing an annual growth of 23.1% at the midpoint of that range.

Based on the prescription trend we experienced through the first 4 months of 2019, we remain very confident and our revenue growth rates will accelerate throughout the year and return to a 30% year-over-year growth in the second half of 2019 due to the integration of our V-Go Cares program and increased production from our newly hired sales reps.

We anticipate gross margin to trend upward throughout 2019 as our revenue growth rate accelerates in the second half of the year. We expect to exit the fourth quarter of 2019 with gross margins between 52% and 54%. Regarding our second quarter of 2019, we expect revenue will be between $7.4 million and $7.6 million. We expect gross margin to be between 49% and 50% and operating expense to be in line with our first quarter of approximately $17 million. We also expect cash and cash equivalents to be approximately $25 million on June 30, 2019, with total liabilities consistent with May 9.

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. I am very pleased with the start of the year as we have met or exceeded all of our internal goals for the quarter. More importantly, our underlying business remains strong with a 30% year-over-year growth in our targeted accounts and as our current V-Go prescription trends point to accelerating growth throughout 2019. These positive prescription trends coupled with our continued focus on generating clinical data and the advancing of our R&D pipeline gives us great confidence that we will achieve our financial guidance.

With that, operator, could you please open the call for questions?

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Questions and Answers

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Operator [1]

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(Operator Instructions) You have a question from the line of Steven Lichtman.

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

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So I guess first, John and Erick, just relative to the new sales reps, just wondering where they sort of are in the cadence from the promotional program to forward selling? Are they now pivoted to selling, or are they still in the -- sort of the final stages of the promotional program? And overall, how would you sort of describe the experience of the promotional program for the new reps?

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

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Yes, Steve. Good question. So the new reps are actually pivoting into the generating prescription mode this month. So the early program, the Early Access program ended essentially last week. And they have now pivoted into the new approach. I am overall, to your second part of your questions, very pleased with the execution of the team through the time period up until last week in Early Access. We got an average what we wanted to and the doctors into the program gaining on average 5 patients to clinical experience the product. Now those patients, and most patients are still on our product, so they haven't come back with any of their A1C results. Some patients early on that they were starting to -- immediately had seen some results. But overall, that's kind of the reason -- one of the reasons that we increased the lower end of our guidance and our range because I think we saw some really good execution in that program and are really expecting that to pay dividends in the second half of the year.

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

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Okay. Great. And then, John, I was wondering if you could also just expand on sort of the early impact of V-Go Cares and how you were seeing the sort of expressions of interest really translating into some more actionable items with the CDEs. Just any sort of early learnings would be helpful.

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

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Yes. Appreciate that. Yes. So I think what we really saw, as I mentioned, a really nice spike in kind of what we call leads into our V-Go Cares program in the month of March, which coincided with our national sales meeting at the end of February where we really integrated and rolled out, communicated and worked on how we can integrate that with the sales force. So with that increase, again, it's early in the process where we haven't seen them go through the whole funnel or the whole process. But seeing such a large increase in March of patients who are being routed into the system. And again, they're routed into our system by either our direct-to-patient advertising when they go to our website or ask for our demo kits or they are directly put into the system by the physician offices through our process where they identify patients who they want to have -- educate them to V-Go even before the doctor sees them.

So it's early in that process, Steve, but we're very encouraged by what we saw initially. And what we'll be doing over time is monitoring those patients and the leads that get transitioned or transferred, and then ultimately executed on to prescriptions. And then part of the program is also to help those patients stay on the product through retention through communication, post the initial prescription.

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

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Got it. Okay. Great. And then just lastly, obviously, 2019 is primarily -- very much primarily about the focused accounts in the U.S. Just wondering, in your full year guidance, what is sort of the assumption for the non-focused accounts year-over-year? Is it down, flat? And then in terms of OUS revenue, is it less than $1 million? What's sort of been the thinking in the overall 2019 guide?

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

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Sure. So on the non-targeted accounts, in the last year, they represented about 42%, 43% of our volume over a year ago and are now less than about 1/3 of our volume. And so overall, we still see a slight decline happening this year just because we are not putting our resources, or the majority of resources, to them. So we do see a little decline throughout the year from them. Some of those who were not called on or not targeted last year, some of them will become targets this year starting now in May because the new reps may pick some of them up. But in general, they'll be going down.

The question about the international sales, as kind of was mentioned, we don't expect any shipments until the last part of the year. But we really have 3 countries that are currently promoting the product, or 2 promoting it, 1, Italy, being very close. They're getting good reimbursement feedback and learnings and the other countries are still working to reimburse that. So back to your question, it is definitely less than $1 million that we'd expect -- that we have included in our estimate.

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Operator [8]

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(Operator Instructions) Your next question comes from the line of [Joseph Marino].

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Joseph Marino, - Analyst [9]

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So yes, I wanted to ask you guys about what's going on with China. The China situation, are we going to clear that any time soon? Do you know or updates on that?

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

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Sure. So the update status of that is we, as communicated the last part of last year, we initiated the registration process in China. It's this process that does take, on average, up to -- it's about a 2-year process before you get approval. So we are working with the CRO in China, working with the Canadian-equivalent of the FDA on the required study to be done in China because it does require a clinical study in China. So that process is going -- is ongoing. Again we do not expect approval of that product this year in China.

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Joseph Marino, - Analyst [11]

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Okay. Understand. And what's going on with this lawsuit with Roche? Is there any update with that?

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John E. Timberlake, Valeritas Holdings, Inc. - President, CEO & Director [12]

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Yes. So the only update, we did update in our guidance -- or not in our guidance but in our 10 -- in our filing that you'll see tonight so you probably haven't seen it yet, to be clear, is this is well described within our 10-K that you probably have already read. And if not you'll see it in the 10-Q. Again, we believe we do not infringe upon their patent. They have claimed that we do infringe upon the patent, and it's currently being reviewed by the Patent Board. And as part of that process, most recently, which is noted in here, Roche did file back a preliminary response to our filing with the Patent Board where they essentially disclaim or abandon all the claims but 2. So really, we're feeling comfortable on our position that, again, that we do not infringe on their patent. But at this stage, we just have to let it play out its course.

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Joseph Marino, - Analyst [13]

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Yes. I feel comfortable with that as well. All right. And then one last question, I'm going to ask that -- probably the million-dollar question, everybody wants to know about this reverse split. Is this going to happen or what's going to be with that?

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John E. Timberlake, Valeritas Holdings, Inc. - President, CEO & Director [14]

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Yes. So we are scheduled to have our Annual Shareholder Meeting next week. That is obviously one of the items on the -- for the shareholders who are voting on it. So that will be determined. We've asked the shareholders for authority to do a reverse split and the Board will make its final determination upon -- post the shareholder meeting.

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Joseph Marino, - Analyst [15]

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Understood. With all the insiders buying a lot of shares lately, how do you guys feel about a reverse split? Do you want it? Are you for or are you against it?

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John E. Timberlake, Valeritas Holdings, Inc. - President, CEO & Director [16]

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We are for it. The management is for the reverse split. Our primary objective, obviously, is to maintain our qualification for NASDAQ so it's critical I think for all shareholders. So that is the primary driving force to do that.

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Joseph Marino, - Analyst [17]

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To be compliant? Exactly, okay.

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John E. Timberlake, Valeritas Holdings, Inc. - President, CEO & Director [18]

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Yes.

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Operator [19]

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(Operator Instructions) And there are no further questions at this time.

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John E. Timberlake, Valeritas Holdings, Inc. - President, CEO & Director [20]

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Okay. Well, thank you, operator. Well, this will conclude our call for today for our first quarter earnings. And we really appreciate everybody calling in and look forward to keeping everybody informed as we continue to make progress this year. So thank you all. Have a good evening.

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Operator [21]

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That does conclude today's conference. Thank you for participating. You may now disconnect.