NuPathe's Management Presents at Stifel 2013 Healthcare Conference (Transcript)

Executives

Armando Anido - CEO and Director

Keith Goldan - CFO

Gerald McLaughlin - Chief Commercial Officer

Analysts

Annabel Samimy – Stifel, Nicolaus & Co., Inc

NuPathe Inc. (PATH) Stifel 2013 Healthcare Conference September 11, 2013 4:25 PM ET

Annabel Samimy – Stifel, Nicolaus & Co., Inc

Good afternoon everybody and welcome to the NuPathe presentation. My name is Annabel Samimy; I’m the specialty pharmaceutical analyst here at Stifel. NuPathe has developed its pending commercialization of its branded patch for migraine, ZECUITY and also involving some other drug for central nervous disorders, although I think those are probably on hold for now. The lead product is ZECUITY for acute migraine has gained FDA approval. [Last January] has two IND stage (indiscernible) products. And with us today is Mr. Armando Anido who is the -- Anido sorry, the CEO of Nupathe. We have Keith Goldan here and Jerry McLaughlin to answer questions during the Q&A portion. So I’ll step aside and let you (indiscernible)?

Keith Goldan

Thanks a lot Annabel and good afternoon everyone. Hopefully I will be able to figure out how to turn this and change slides. Hopefully over the next 10 or 15 minutes I will give you a general overview of who NuPathe is and what we’re all about and why we believe that we have a very significant opportunity in front of us with product called ZECUITY.

I’m going to be giving you some forward-looking statements as all of the presentations do. Please go on to our website under Investor Relations and checkout our risk factors and hopefully after that you’re still interested in investing in us. We are a specialty CNS pharmaceutical company. We have the first and only FDA approved migraine patch in the United States. Migraine hits about 31 million adult migraine sufferers in the United States. And there is a significant component of migraine known as migraine related nausea that is one of the major symptoms of migraine that affects tremendously.

We are in the process of preparing to launch ZECUITY in the fourth quarter of this year and we’re also in the process of having conversations with various commercial partners to help us in broaden our reach. We do have two earlier stage CNS compounds. I’m not going to spend very much time on today. But at the end of the day, it does help to establish a pipeline to build out a long-term CNS specialty company.

Let’s talk about ZECUITY, the first and only FDA approved migraine patch. We believe its game changing and innovative and disruptive technology. It uses sumatriptan, the number one prescribed migraine medicine in the world as the main molecule that gets delivered. We had excellent patent protection. Today we have five orange book listed patents that provide protection out through 2029. And yesterday we announced that we actually have a 61 that was allowed that will hopefully be issued shortly and then be in the orange book quickly thereafter.

Migraine headache pain and migraine related nausea is really the focus of what ZECUITY can help to attack. We’ve excellent clinical data that shows rapid relief for both headache pain and nausea and a very low rate of what are known as Triptan sensations are really a -- almost have feeling of a heart attack that happens in some of the patients that take Triptan. MRN affects about half of the patients that suffer from migraine attacks on the majority of their attack. So there is a very significant product opportunity, patient opportunity and we do know that MRN has a very significant impact on healthcare utilization. And we will talk a little bit further about that.

Today there are 6,000 physicians that write about 33 million Triptan units. We think that if the specialists, the headache specialists, general neurologist really can help drive and establish ZECUITY quite well. And as I mentioned in the fourth quarter is when we’re going to be launching the product.

And it was a very easy to use, single use disposable patch. It gets supplied as you start getting the first signs of your migraine. Press the button; it works for a period of four hours. Once the product has completed, it turns itself off and you can turn it off – and you can take it off at that particular point and dispose it. To comply, it’s either in the upper arm or to the fact, so it does provide opportunities for the patient to have different slides for application. But one of the main futures is that it bypasses the GI track. So when a patient is very nauseous during their attack, the last thing they want to do is take a pill or a tablet or a spray -- nasal spray up their nose.

And as we talked about it does rapidly deliver sumatriptan and we’ll talk about some of the data. Epidemiologically 31 million adult migraine suffers in the United States. We know about half of them, 16 million of them are actually being treated and are diagnosed here in the United States and there are 8 million of them who have migraine related nausea on the majority of their attacks and that’s really the core ZECUITY market opportunity, those 8 million patients.

We know MRN causes problems for the patient. We know that even before they take a medicine that they’re less likely to respond to an oral Triptan just because they have nausea with their disease. We also know they’re causing society money, six times the number of emergency room visits, eight times the hospitalization cost versus those that don’t have nausea with their attacks. And one of the other great things about this is the guidelines are already established, we’re not trending new water at this particular point. Guidelines basically say, it recommends a non-oral treatment for those patients who suffer from migraine related nausea. I’m going to helpfully tell you why we believe ZECUITY is the best of the non-orals.

Current options that are available today don’t really meet the needs of the migraine related nausea patient. Obviously with the tablets or the melts that you have to put in the mouth when you’re nauseous, the last thing that you want to do is put anything in your mouth. We know that many patients will delay therapy which is not good form or they’ll avoid it entirely and just go into a dark room and not do anything, because they feel too nausea or they feel they’re going to throw it right back up.

In addition migraine patients also suffer from gastroparesis which is slowing down of GUT motility. And so if you actually have to take something that gets absorbed from the stomach and its not moving at the appropriate rate that it normally does. It may not actually get into the blood stream and the timeframe that you need in order to work effectively. So that’s the reason the orals and melts aren’t very effective.

Nasal spray, great idea. Spray up the nose hopefully relive the migraine attack. Unfortunately with the nasal sprays, most of it goes down the back of the throat and it tastes like rotten eggs. So at the end of the day nasal spray has never really done quite well in helping to treat that migraine related nausea patient well.

And injections fastest of all of the options that are available to patients works in 10 to 15 minutes. Unfortunately these Triptan sensations appear in 4 out of 10 patients or more. And it’s a feeling like they’re having a heart attack. It’s tightening in the chest, throat, a feeling of panic comes over them and once the patient tries one injection, likely that there are not going to try it again because of that feeling of a heart attack happening.

The result of all this is the patient switch from product to product to product looking for the solution for. We know 80% of patients will try at least two Triptan’s and we know that half of them will try three or more including a non-oral in that. So we believe there is an opportunity for us to really be able to penetrate this market quite well. We think that ZECUITY provides a solution for that because its ability to rapidly deliver sumatriptan, be able to bypass regarded at the end of the day have a very low rate of triptan sensation.

It’s a part of 5(b)(2) program that we went through, but at the end of the day we did a lot of clinical work. We had over 800 patients in our study. Its 10,000 patch applications. Our pivotal Phase 3 study comparing it to placebo was published in Headache back in October, a year-ago. And we did two additional 12 months long-term repeat use studies and one of them was already published and the other one is hopefully soon to publish, 660 patients.

The data and this is a side-by-side comparison of Imitrex, left side is the pivotal Phase 3 data for ZECUITY. You can see superior efficacy over placebo, 53% achieving headache pain relief in two hours, 84% are nausea free at that two-hour time point. And compared to the gold standard in this therapy, Imitrex 50 and 100 milligram tablets and you can see efficacy against pain relief very comparable. ZECUITY does just fine relative to Imitrex tablets. But where it wins out? And where physicians will tell you over and over again that they see it being unsurpassed is relative to nausea freedom. You can see the 84 is far above the 60% rate that Imitrex gives you and we showed statistical significance in Imitrex only in one out of four major studies today.

(Indiscernible) profiles, what you'd expect from a patch? Predominantly application site reactions that you’re going to see and here is the comparison to placebo and you can see some tingling, some pain, some itching and warmth that is very short lift. Transient and at the end of the day within a 24 hour period is for the most part gone. The key piece on terms of side-effects is the atypical sensation. You can see with ZECUITY lower than 2%, atypical sensation versus we know the injection at four out of 10 patients and the tablets are up to 15% as well.

We got a very (indiscernible) same thing clear marketing strategy that were gone; they’re take as we move forward with ZECUITY later on this year. All focus would be on 6,000 headache specialists have prescribed 33 million triptan units on an annual basis. In addition there are 44,000 additionals who prescribed 50 million triptan units. We're in the process of working with some potential partners that will help to broaden our reach to get into that incremental 34,000 or so. And so we believe, combined we’re going to get to an off a lot of them. But I’m going to hopefully show you over the next few slides how even with 6,000 you’re going to be able to get to a fairly substantial market opportunity.

The great thing is our product label has the messages we need in order to remain in and actually they’ve really compete well and be very successful with this product. It got the clinical data relief of headache pain and migraine r relate to nausea as well as a low rate off sensations.

Our strategy on pricing is to price it at parity or premium. And to be quite honest, we’re thinking that it’s probably going to be more of a premium to the current non-oral branded. We also have planning on supporting patient trial with a zero dollar Copay program for the first 12 months. So that in essence a physician will be able to give to the patient, a prescription with a sample patch in order to help them try it on and make sure they know how to use it and they wont have to make a dollar payment out of their own pocket in order to try. We are going to do that not just for the first script for any script within the first 12 months period.

And the final piece of our strategy is really around racing the market focused on migraine related nausea because the current agents haven’t really been able to address MRN and the tolerable fashion; you haven’t really talked a whole lot about it. Even though it affects more than half of the patients or about half of the patients on a regular basis. So we are going to invest and making sure that physicians and patients both require a good alternative for patients that suffer from MRN. We’ve done an extensive amount of market research in order to prepare for the launch. Of course the 800 physicians close to our little bit more than 800 patient and payrolls that represent over a 140 million lives in the United States. So our basis for believing that this product can be very successful is based on the research it’s been conducted. From a pricing standpoint, the research would indicate that. Insurance covers if 90% -- greater than 90% commercial private pay. So very little Medicare D as well as Medicaid in this whole category.

(Indiscernible) see the value in ZECUITY. They know that a poorly controlled migraine suffer actually costs them money. And they acknowledge the GI issues are a significant problem for them and finding the right product for these patients is important. We anticipate that we will not be in Tier 1. We’re not going to compete with generic oral tablets that are currently available. We’re going to be in Tier 3 and Tier 3 with a single step that is going to be just fine with us because at the end of the day what it offers us is an ability to price this product very appropriately in order to get the most value for the product. And pricing we believe it's going to be anywhere between $100 and $150 more than likely up closer to the top end of that and our research would indicate that, that would work quite well.

Most of our business based on our quantitative research would indicate that we’re going to get most of the business from patients that have been on oral therapies. So 80% plus of the patients we anticipate getting are going to come out of oral. And what's going to probably happen is that patient is going to come into the doctors office, they’re going to try them on generic oral sumatriptan. Patient is going to say to them, doc I can’t take it as early as I want -- if you want me to or I want to. And at the end of the day because I am nauseous or I am throwing up I can’t tolerate it. So what's the next alternative? We want to be the next line therapy. That next line therapy should be ZECUITY and we believe that that’s what our research would indicate that we’re going to get next line therapy.

We’ve got brand positioning that we believe is very distinct, meaningful and sustainable. We’ve got game changing disruptive technology that bypasses the GI track. It has great clinical data showing efficacy in both headache pain as well as migraine related nausea and that low incidence of Triptan sensations and we get consistent delivery regardless of whether the patient has nausea or doesn’t have nausea. So regardless of what the start out with, we’ll deliver 6.5 mg of sumatriptan through the skin over a four hour period.

To give you a sense of kind of what the market opportunity may be. What we’ve done here is basically take the 8 million migraine related nausea patients that we talked about previously. We assume that they are treating their MRN and their migraine with ZECUITY two times a month. And that’s only about half the time that they have an attack. On average these patients suffer through about three to four attacks on a monthly basis. And then we put in place $100 price per patch and a $150 price per patch. And the key take away here is that if we were to really only get about 2.5% share of that 8 million patients the product becomes over $700 million product opportunity. So it requires a very low market share of these MRN patients where ZECUITY should be the first line in order to make this several $100 million in size.

So hopefully over the last 15 minutes or so I’ve given you a sense of what NuPathe is about, particularly with securities about first and only patch, game changing technology. We got a product that is approved. We will be ready to launch in the fourth quarter. Specialist driven opportunity, long run way out, protection now through 2029 and we’re pretty excited about the long-term revenue opportunity.

So maybe what I will do now is turn it over and ask if you all have any questions that I can answer or if Anido has done. I know you do.

Annabel Samimy – Stifel, Nicolaus & Co., Inc

Definitely.

Keith Goldan

(Indiscernible).

Annabel Samimy – Stifel, Nicolaus & Co., Inc

So all right. Expect a launch for Q, with or without partner?

Keith Goldan

We are in conversations with partners as we speak and at the end of the day, its we would love to have a partner to broaden our reach and be able to get to a broader group of physicians. Don’t know for sure if that will happen for sure. But today I think that its one of those that we continue in conversations. I wish that were done by now, but its not. And we will see what happens.

Annabel Samimy – Stifel, Nicolaus & Co., Inc

So are you able to prepare? Let’s just assume that it’s not with the partner, but you’re still in discussions. Are you able to prepare for your launch right now in the same way and how it change if you had a partner? Are you still doing the same thing to normally do?

Keith Goldan

Yes. We are doing everything to prepare for the launch. As if we were doing it on or around with a partner regardless. The only thing that we have yet to pull the trigger on is the hiring of the commercial sales organization today. So we’ve got managed care lined up, we’ve got sales leader ship lined up, we’ve got marketing lined up, we’ve got the back office things that are lined up. We’ve got territories cut and it's basically a matter of, if we’re doing it on our own we’ll do it one way. If we’re doing it with a partner we’ve got it set up in a different way. And at the end of the day we’re ready to go and the final button that we’ll have to push is basically -- we’ve got recruiting firms already set up in order to allow us to get the reps up and running and these are guys that -- the recruiting firm that we’re using are some of the folks that I’ve used previously and they’re able to, you press a button and within 45 to 60 days you’ve got reps on your payroll ready environment to go.

Annabel Samimy – Stifel, Nicolaus & Co., Inc.

Are there any contingent -- well there is no contingent, it’s already approved. So are there any offers out right now that you know that we will have at least this size sales force regardless of whether we have a partner or not?

Armando Anido

Yeah, I am not going to answer that question in terms of contingent or not. But I think that we're -- we’ve got our ideas on the territories. So the territories are cut. Jerry has done a great job along with his team to kind of get it all setup. And in essence we have the recruiting firm ready to go and he’s found us people in each of every one of those territories. So, there are a group of three or four of them in each of one that we’re ready to kind of interview and ready to go. And at the end of the day once we make the final call and determine are we doing it alone, are we doing it with a partner or in some variation they’re up, we’re set to go.

Annabel Samimy – Stifel, Nicolaus & Co., Inc.

Okay. And you may or may not be able to answer those, but I am going to ask it anyway. What is the rate limiting sub for that final decision on a partner or not the partner?

Armando Anido

Yeah, at the end of the day partnerships are about to the people who love the asset as much as you do. And by loving it, it includes the economic portions of it. And I think at the end of the day we are in a couple of different discussions that can terminate quickly or can proceed quickly. And so we’re at some point here hopefully have that call made.

Annabel Samimy – Stifel, Nicolaus & Co., Inc.

Okay. And try anything special; keep on going with those partners they would earn.

Armando Anido

If you think.

Annabel Samimy – Stifel, Nicolaus & Co., Inc.

Thank you. So let me move on.

Armando Anido

Okay, all right.

Annabel Samimy – Stifel, Nicolaus & Co., Inc.

And there are (indiscernible) audience have some partner questions too, because I am just batting zero here as I always do. So you’ve been now with the company a four year. You’ve been in the migraine space before. You’ve done your due diligence; is there anything about the market that you see now as you do your due diligence with this product that you didn’t see when you started, that gets you either more excited or less excited and just give us the sense of how you see the market today?

Armando Anido

Yeah. So the market today and, one; in comparison to when I was in at Glaxo back in the late 90’s, one there were no generics at that point. We were Imitrex in the various formulations and the new competitors were just coming in. Maxalt and Pfizer’s compound and Zomig and all of them were just coming in. So it's changed a lot since then. Today we’ve got a market that after a year of looking at it further I get more excited about it. And the reason I get excited about it is that particularly for ZECUITY, with ZECUITY you have a product that we don’t want to be first one. We’re not going to compete against generic orals. We don’t want to be there. We want to be the first option after they can’t tolerate it. And manage care, the more we talk to them the more we are very happy that they are in essence not thinking of us competing with the first Tier. They’re going to put us in Tier 3 and it gives me the ability to price this thing at a fairly high rate which I’m quite happy with because I think this product deserves a good value. And at the end of the day we’re able to get the next line option, put in Tier 3 and we will get significant coverage in Tier 3 and at the end of the day be able to price it appropriately in order to make good money in a shorter time period.

Annabel Samimy – Stifel, Nicolaus & Co., Inc.

Okay. Now how about the landscape for migraine and how it's changing now? Obviously we know that – that’s fun..

Armando Anido

That’s fun.

Annabel Samimy – Stifel, Nicolaus & Co., Inc.

Let me just clear, you go horizontal,

Armando Anido

Yeah, it’s still not approved by the way.

Annabel Samimy – Stifel, Nicolaus & Co., Inc.

That’s still not improved.

Armando Anido

I got a second COO and (indiscernible) and God knows what -- who knows what's going to happen.

Annabel Samimy – Stifel, Nicolaus & Co., Inc.

Right. So they still have a clinical profile and it probably go somewhat in line with your clinical profile which is if you’re going for Triptan sale (indiscernible) respond while they can be rapid acting. They can treat nausea. So how do you position yourself which at some point in time those products will be on the market. So how are you positioning yourselves together?

Armando Anido

Yeah. I think that first and foremost I don’t think I would directly compete with DHE. I think DHE for years has been flash resort medicine in whatever formulation, whether it was nasal, injectable or whether it's orally inhaled. I think that MAP may have a nice compound or Allergan I guess at this point. It may have a nice compound that in essence maybe one of the best formulations of DHE, but at the end of the day it doesn’t really address that migraine related nausea patient very well. It's orally inhaled, so you have to put it in the mouth and many of these patients aren’t very interested in actually putting anything close to their mouth when they’re feeling nauseous or about to throw up. Second piece is, is DHE is known to cause nausea in and off itself. So that’s a big issue and if you take a look at their clinical data that’s been published you will see that at 30 minutes and at one hour it was worse than placebo, and that’s an issue for them. All right, so if you’re all of a sudden making it worse before it ultimately gets better I don’t think patients are going to go down that pathway. So I believe we’re going to compete, we’re going to get our business from the oral. If they’re going to try one oral maybe two, and then they’re going to come over to something that they need that’s non-oral and it will be I believe ZECUITY is the best of the non-orals without a doubt. It addresses it in a very tolerable fashion, and then if they don’t respond well to ZECUITY or injection or nasal, they’ll then try DHE and DHE will be in it's own little spot and I think that my guess is Levadex will become the predominant formulation in the DHE’s but it's 1% of the units today. So at the end of the day 1% of the units is 1.3 million units I’ll let them have that.

Annabel Samimy – Stifel, Nicolaus & Co., Inc.

So regardless of whether Levadex is delayed or not delayed the opportunities are completely different in your view. They’re not providing any advantage or a disadvantage?

Armando Anido

Yeah, I mean I think at the end of the day they will won't compete with us directly. I think they’re going to -- my guess is they’re going to compete and get the DHE business first. They may eventually try to get over into a broader audience. But to be quite honest because they cause nausea they’re also going to have a pregnancy category acts and if you think about the ideal patient type that is in this category it is a 30 to 50 year old female, child bearing age, why would you want to give them a product unless it's last resort. Okay, if they tried the Triptan’s and it's not working, tried several of them, tried a non-oral then go ahead and go to it. But I don’t think other than some headache specialist I don’t think primary care will ever touch DHE in whatever formulation it is whether it's oral or injectable or nasal.

Annabel Samimy – Stifel, Nicolaus & Co., Inc.

Okay. Now we’ll talk about the market for a second. So you decided that eight million nausea patients, I think at some point in a couple of your conference calls you have a 1.5 million nausea vomiting, so how are you stratifying your target audience. Who do you go to first and what really is the opportunity if the 1.5 is in the eight or there’s something between, is it -- the response of that?

Armando Anido

Yeah, the eight million are those that have nausea on the majority of their attacks. They don’t have them on a 100% of their attacks. The 1.5 million that we’ve previously listed are those that vomit every single time. So those are patients that, they’re not only nauseas but they are throwing up on every single attack, that’s 1.5 million patients, okay? We think we’re broader than just that vomiting group. We think that patients that have nausea they want to bypass the gut, they don’t want to put anything in their mouth or nose. And at the end of the day we think that we can get to that broader group and we can get to that broader group through either going after just the 6000 dots that represent 33 million Triptan units or get to a slightly broader group depending on the partnership that we would have.

Annabel Samimy – Stifel, Nicolaus & Co., Inc.

Okay. And in terms of identifying patients, it's pretty easy to identify someone who’s vomiting. How much education do you need to provide to the physician for them to ask the question, do you have nausea and vomiting to really identify that patient from a physician perspective?

Armando Anido

Well, remember that nausea is one of the symptoms, one of the classic symptoms of migraine. So physicians in their mind, headache specialists, general neurologists, general practitioners have all been taught that its headache pain, it's nausea, it's phonophobia, its photophobia. All right, so it's one of the four cardinal symptoms of migraine. So what we have to do is make sure that they now know that they have an option that’s tolerable form. All right, it's tolerable for the patient. In the past the reason nobody has really talked a lot about it is, if you got a tablet you’re not going to talk about nausea. If you’ve got an injection that causes severe pain to the chest, you’re probably not going to talk much about it, and if you’ve got a nasal spray that goes down the back of your throat and tastes miserable you’re not going to talk about it. So we believe that we’re going to, it's going to be one of those things we’ll continue to drive our medical message all about MRM. And we believe that, that will continue to drive physicians to be thinking more and more about what patient fits right with ZECUITY. Patients are going to self identify. Patients, the category – the one thing that hasn’t changed though over the past 15 years since I was in it back in Glaxo days, is that patients are always looking for a better alternative. They’re always looking it. The data would say 80% of them at least tried to and 50% are trying three or more. That’s always been the case. So always looking for something that’s going to work for them and we believe that as ZECUITY is introduced that patients are going to start seeking it out. We already get phone calls in the office. When we announced that the product had been approved we get calls from people. We get website hits from people asking us, when are you going to launch? When is it coming out? When can I get it? Because we’re all looking for something to address their migraine.

Annabel Samimy – Stifel, Nicolaus & Co., Inc.

Okay. You already had started talking about your commercial preparedness, you have (indiscernible) in place of I guess the Regional Sales Managers and I guess I want to know more is about the manufacturing and what is the status of manufacturing and do you have sufficient capacity that you want for that launch?

Armando Anido

Yeah, we have -- our manufacturing is moving along quite well. We’re ready to -- basically we’re in final -- we’re in validations at this point and we’ll be ready to start shipping product in the fourth quarter. The capacity for the first 12 month period is about 1 million units. So it does provide us with a nice ability over the first 12 months to be able to produce enough to satisfy demand. And then in about 12 to 15 months afterwards we actually are going to be going to a commercial scale manufacturing facility with new equipment and that is currently being qualified and work is being done on that at this point to the point where it will increase our capacity to over 5 million units. So I believe that between our registration batch; God Love Us, if we run out of product at our registration batch I think we’ll all be happy because the product would have done unbelievably well in its first year. And then in 12 to 15 months we’ll have the second line up and running and that line is going to provide us with 5 million units in capacity.

Annabel Samimy – Stifel, Nicolaus & Co., Inc.

Okay. We’ll we’re run out of time but does anybody have any questions from audience? No, okay. Well, thank you.

Armando Anido

Okay, great. Thanks a lot, Annabel.

Question-and-Answer Session

[No formal Q&A for this event]

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Transition Therapeutics Management Discusses 2013 Results - Earnings Call Transcript

Executives

Tony F. Cruz - Chairman of the Board and Chief Executive Officer

Nicole Rusaw-George - Chief Financial Officer

Analysts

Dan Trang - Stonegate Securities Inc., Research Division

Philippa Flint - Bloom Burton & Co., Research Division

Transition Therapeutics (TTHI) 2013 Earnings Call September 11, 2013 4:30 PM ET

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Transition Therapeutics Full Year Fiscal 2013 Financial Results Conference Call.

I would like to begin by reviewing the Safe Harbor provisions. Certain statements made during this conference call about the company's future plans and intentions or other future events constitute forward-looking statements for purposes of Canadian securities legislation and the Safe Harbor provisions under the SEC's Private Securities Litigation Reform Act of 1995. These forward-looking statements are not based on historical facts but rather on management's current expectations regarding Transition's future growth, results of operations, performance, future capital and other expenditures, competitive advantages, business prospects and opportunities.

Forward-looking statements involve significant known and unknown risks, uncertainties and assumptions. These risks are described in the company's annual information form and the company's annual report on SEC Form 20-F for the fiscal year ended June 30, 2013, and other SEDAR/SEC filings. Forward-looking statements are made as of the date of this conference call, and Transition assumes no obligation to update or revise them to reflect new events or circumstances.

[Operator Instructions] As a reminder, this conference is being recorded today, Wednesday, September 11, 2013.

I would now like to turn conference call over to the host of today's call, Dr. Tony Cruz, Chairman and Chief Executive Officer of Transition. Please go ahead, sir.

Tony F. Cruz

Thank you. I am Tony Cruz, the Chairman and CEO of Transition. I'd like to welcome you to our conference call announcing Transition's fiscal 2013 year-end financial results. Nicole Rusaw, Transition's CFO, will begin by providing a summary of Transition's financial results for this past year. Then I'll provide a summary of our progress over the last year, particularly focusing on the last quarter. And finally, we will answer any questions that you may have. So I'll pass it over to Nicole now.

Nicole Rusaw-George

Thank you, Tony. I will start by providing an update on our cash position. At June 30, 2013, the company's cash, cash equivalents and short-term investments were $28.1 million compared to $19 million at June 30, 2012, resulting in an increase of $9.1 million. The company's working capital position increased $9.4 million from $16.1 million to $25.5 million at June 30, 2013. The increase in the company's cash, cash equivalents and short-term investments, as well as the increase in working capital, is primarily due to the $11 million milestone payment received from Elan upon commencement of the Bipolar Disorder trial in August 2012, as well as a $7 million milestone payment received in June from Lilly when Lilly exercised their option to assume all development and commercialization rights to type 2 diabetes drug candidate TT-401.

The increase in cash has been offset by the company's fiscal 2013 cash burn of approximately $9 million. Subsequent to year end, we announced the issuance of approximately 2.6 million units in a private placement, which resulted in gross proceeds of USD 11 million. In light of the private placement, the company currently has approximately $36 million in cash. Management projections indicate that the current cash resources should enable the company to execute its core business plan and meet its projected cash requirements well beyond the next 12 months.

I will now discuss significant variances in the results of operations from June 30, 2013, compared to June 30, 2012. During the year ended June 30, 2013, the company recorded net income of $23,000 or $0.00 income per common share compared to net loss of $12.3 million or $0.48 loss per common share for the year ended June 30, 2012. In fiscal 2013, the company recognized revenue of $17.9 million, which is comprised of the $11 million payment received from Elan and the $7 million payment received from Lilly. Revenue was 0 for the comparative period ended June 30, 2012.

R&D expenses increased $664,000 or 8% from $8.2 million for the fiscal year ended June 30, 2012, to $8.9 million for the fiscal year ended June 30, 2013. The increase in R&D expenses is primarily due to an increase in clinical development costs related to TT-401/402, which has been partially offset by a decrease in TT-301/302 clinical development costs.

G&A expenses decreased $849,000 or 19% from $4.4 million for the fiscal year ended June 30, 2012, to $3.6 million for the fiscal year ended June 30, 2013. The decrease in G&A during fiscal 2013 is due to decreases in legal consulting fees and business development expenses, as well as decreased salaries and related costs. The decrease has been partially offset by increased investor relation expenses.

During the fourth quarter of fiscal 2013, the company decided to no longer develop TT-301 and 302, the compound acquired from NeuroMedix. Accordingly, the company has recognized the impairment of intangible assets of $6.5 million for the year ended June 30, 2013. There was no impairment of intangible assets recognized during the comparative period.

That concludes the financial review for fiscal 2013. Tony?

Tony F. Cruz

Okay, thanks, Nicole. So I'll give a brief update. In the past quarter -- and I'll try to focus on the past quarter. This was highlighted by, again, the progress of development of our leading diabetes drug candidate, TT-401, that is now partnered with Eli Lilly and also the continuation in the advancement of our 2 -- our leading CNS drug, D5, which is currently in two 400-patient trials in Bipolar and also in agitation/aggression in moderate to severe Alzheimer's disease. And these studies are being performed by our licensing partner, Elan Pharmaceuticals.

I'd like to now first focus on our diabetes program, TT-401, which we have now licensed with a partnership with Eli Lilly. It's been an exciting and productive 6 months for this program and also for Transition. First, we completed our proof-of-concept trial with TT-401 in obese diabetics and obese patients and press released the top line data. TT-401, just to remind people, is a dual agonist with activity of the GLP-1 and the second target for the treatment of type 2 diabetes. This study enrolled 5 cohorts of obese diabetic subjects to evaluate 5 dosing levels. Each cohort received once weekly treatment with TT-401 or placebo for 5 weeks.

We were very pleased with the data and observed the following key findings that were important in Lilly's decision. One was that the 3 highest doses in all dose groups were considered tolerable and well tolerated. The 3 highest dose groups showed significant reduction in fasting blood glucose relative to placebo. And there was also significant body weight reduction from the baseline of the 3 highest dose groups. And a similar reduction in body weight was observed in non-diabetic obese subjects.

As I mentioned, it was -- had an acceptable safety and tolerability profile. The major common adverse event was a decrease in appetite. And so based on these findings that Lilly found to meet all their criteria for advancing the program to the next stage of development. We're part of the decision making for Lilly to take on the program back in-house.

In parallel, we also completed the Phase II enabling nonclinical studies, which also met all our expectations. And therefore, this also played a role in Lilly's decision. So taking everything combined, the proof-of-concept data and the supporting nonclinical data demonstrated that TT-401 could have broader therapeutic benefits for type 2 diabetes and provide a swift -- a pretty good path or a clear path to a larger Phase II efficacy study that will be performed by Lilly, where we will also be participating.

So Lilly reviewed the data, not only proof-of-concept data but the manufacturing and nonclinical data. And based on this review, Lilly made the decision to exercise the option to take the technology in-house and continue its development going forward. As per our agreement, Transition received a $7 million milestone. And based on our agreement going forward, Lilly will assume all costs and be responsible for future clinical development and commercialization. Transition will participate in the Phase II study by committing $14 million in funding during the 2014 calendar year. It's also based on patients being enrolled.

In return, Transition was able to increase its economics where now Transition will receive up to $240 million in milestone payments, double-digit royalties and potentially low single-digit royalties on future related molecules that may be developed by Lilly. Since this deal was finalized, Lilly has taken this technology in-house and began preparation for a Phase II study. We feel that TT-401 is a very exciting GLP-1 dual agonist with the potential to provide superior glucose control and weight loss for the treatment of type 2 diabetes.

Subsequent to the news that Lilly was exercising TT-401, Transition announced the exclusive licensing of world rights to a novel small molecule transcription regulator, TT-601, from Lilly for the treatment of osteoarthritic pain. This is a selective and potent inhibitor of a novel nuclear receptor target that modulates inflammatory pathways that may be involved in pain or that is thought to be involved in pain.

This molecule is targeted to treat patients who do not respond to NSAIDs or cannot take NSAIDs due to potential additional GI risks. We anticipate that TT-601 will enter Phase I studies in the first half of 2014. And similar to our previous deal with Lilly, following a proof-of-concept trial, Lilly will have the option to acquire the technology and continue its development. If this was to occur at that time, Transition will receive a $6 million milestone and up to $140 million in milestones and a high single-digit royalty. So obviously, as part of our strategic moving forward is to bring in those molecules, move them forward and continue to find either the partner that we -- where we got the molecule or someone else to continue with further development and pay for those costs going forward.

I would like to talk about advances in the development of the D5 program for the treatment of Alzheimer's disease and also its other applications in neuropsychiatric indications. Our partner, Elan, has, as I mentioned, two 400-patient studies ongoing with enrollment in North America and Europe. One is investigating the effects of D5 for the treatment of agitation/aggression in moderate to severe Alzheimer's patients, and the other is for the treatment of mood changes in Bipolar Disorder patients.

In addition, Elan just announced recently that it has initiated a small Phase IIa trial in Down Syndrome. This new development would suggest not only Elan's commitment to this technology but also its potential application across a number of different disease -- D5's application across a number of different disease indications.

Agitation and aggression in Alzheimer's patients is considered a major problem for caregivers and a very high cost to health care system. It is the major reason why AD patients are institutionalized. The 400-patient agitation/aggression trial is placebo-controlled safety and efficacy study with the primary endpoints being severity of aggression following a 12-week treatment with D5. Although we don't have specific dates from Elan, we do expect that this trial will be completed sometime during 2014.

Bipolar is also a significant mental illness and affects nearly 3.5 million people in the U.S. and Europe. The 400-patient trial is also a placebo-controlled efficacy trial involving treatment with D5 for up to 48 weeks or time to a first mood episode during that period of treatment. According to clinicaltrials.gov, we do expect that this trial will be completed around the end of 2014, but we do not have specific dates from Elan as well. These trials represent a major commitment by Elan, and if any of them were to be successful, which we hope they will, it would be a transforming milestone for Transition.

Finally, as you all may know, Elan will be acquired by Perrigo, or at least one expects to be -- that to occur over the next little while. From the comments by Perrigo's CEO, as well as the increasing ongoing activities on D5 by Elan, we believe that Perrigo is fully committed to continue the development of D5 that I described above.

So we have a lot of things going in the company, and we continue to build our pipeline, and we expect to actually build our pipeline further over the next 6 to 12 months. So in order to strengthen our cash position, Transition recently raised $11 million with the potential to bring that up to $21 million over the next 2 years. This financing was performed at a premium to market, and it was done mostly with our leading shareholders, Jack Schuler, Larry Feinberg and Oracle, as well as participation by some of our management and Board of Directors. As of today, Nicole indicated that there's $36 million in cash. Based on the company's projected burn rate of $8 million to $10 million per year, we are in a good cash position to fund the development of our existing programs and perhaps even bring in an additional program.

So we would like now to answer any of your questions that you may have, and thank you very much.

Question-and-Answer Session

Operator

[Operator Instructions] And Doctor, there are no questions in queue at present time. [Operator Instructions] And Doctor, there are no questions in queue at present time. I'll turn the conference back to yourself -- oh, one moment, please. I believe we are getting our first question queued up. It comes from the line of Dan Trang, Stonegate Securities.

Dan Trang - Stonegate Securities Inc., Research Division

Kind of wondering if you could provide some color in regards to any other indications you might be exploring for the -- with the partnership with Eli Lilly?

Tony F. Cruz

Is this related to TT-401 or TT-601?

Dan Trang - Stonegate Securities Inc., Research Division

Yes, TT-401.

Tony F. Cruz

TT-401, sorry?

Dan Trang - Stonegate Securities Inc., Research Division

Yes, TT-401.

Tony F. Cruz

Yes, TT-401. Well, Lilly just took the molecule in-house, and so the process has already occurred of transferring the technology over. Going forward, the next plan is to initiate or plan to initiate a Phase II trial. And Lilly is now taking over that process of organizing both manufacturing the product and initiation of the Phase II. We are going to be participating with them with our contribution of $14 million, and Lilly will be responsible for all additional costs and any additional activities apart from the Phase II that are ongoing during this time. The -- we expect at some point that Lilly will have some -- an idea of how this program is going to be moving, and we will be finding out more from Lilly as time goes on. But at this time, it's still a little bit too early to know exactly when they're going to initiate the study.

Dan Trang - Stonegate Securities Inc., Research Division

Okay. And a follow-up question regarding product pipeline. Can you provide any color in regards to anything you're working on currently, any other compounds or...

Tony F. Cruz

Well, we just brought in TT-601 from Lilly under a similar format or a similar platform where we would take this molecule from the lead molecule to proof of concept. That molecule is for osteoarthritic pain. We have the tox data that's ready, 1 month tox data that will allow us to do Phase I study. So we're basically manufacturing the compound, looking at stability formulation, and we expect to have an IND submitted sometime in February, March. And we expect that, that program could move into the clinic sometime around April, May at the latest, around that time. So our focus really is on that molecule, to take it forward as quickly as possible. As part of that development plan, we'd like to really investigate the molecule's therapeutic window, and so we are doing additional work on it's tox, longer-term tox, so that we can better understand the therapeutic window, and that's ongoing. So our focus is really in that molecule. In addition to that, the company does plan to increase its pipeline over the next 6 months and maybe 12 months. And so our -- a lot of our work right now is to look at potential leading molecules that we can get our hands on from Big Pharma to see if we can find ones that meet our criteria to move forward and then get into some sort of agreement and move those molecules forward. So that's our next goal.

Dan Trang - Stonegate Securities Inc., Research Division

Okay. And is there any type of ideal as far as mix of molecules, I mean, number-wise, I mean, that you can put out there or...

Tony F. Cruz

Well, there's certain criteria that we use. One is that it has to have the sound science. It has to have the therapeutic window. In other words, the tox profile has to look appropriate for the disease indication, at least that's available at the time of licensing it in. Thirdly, it also has to have an indication where you think that molecule has a position in the marketplace. Once you get proof-of-concept data, people would -- or whoever would partner that from us would believe that they could take it forward and be reimbursed at some point because there's a major medical need that isn't currently provided with the drug. And finally, it has to ensure that we can reach that proof-of-concept study perhaps in no more than, say, $6 million to $10 million. And so there are -- there is a series of criteria that we use to try and select these molecules because we still are under constriction in terms of how much we can spend on any of these molecules before it becomes unacceptable to us. So those are the main criteria that we use. But in terms of disease indication, it applies to a lot of disease indications. Perhaps the only one that we have not looked at when we go through these molecules that are provided to us by other companies is cancer just because there is a uniqueness there. But other than that, we pretty well look at most molecules and see if we can find a way to move them forward.

Operator

[Operator Instructions] Our next question comes from the line of Philippa Flint with Bloom Burton.

Philippa Flint - Bloom Burton & Co., Research Division

Just following up on your conversation with the previous caller. You talked about your plans for 601 and additional work you want to do to explore the therapeutic window. Are those -- is that working in partnership with Lilly? Do you have a team where you work on what's the best strategy to develop it or are you doing it by yourself?

Tony F. Cruz

Well, the work we have -- when we license these molecules, we have the final say in what we do. We can also add additional work that we want to do. In other words, we control development during the period that we have this molecule with -- but we do have to achieve what we've put down contractually at the end of the day so that Lilly can have that data to analyze at that time. But we tend to do more than is down contractually just because we feel that it's in both of our best interests to have more data to be able to derisk the molecule when you get to decision time at proof-of-concept data. So part of our derisking of this program is to really add additional data. And we think it's -- it allows 2 things. One is it allows us to feel more secure as we spend more money as we move this program forward and we get into preclinical -- into clinical studies, which are more expensive, particularly the proof-of-concept studies. So the more data we have, the more secure we feel that it's worthwhile moving into those studies. The second is when we do provide that data, if there's additional data available on tox, longer-term data, it also feels like our partner has a better decision-making ability at that time to decide what is the risk of the molecule. So it acts -- and finally, the final thing that it does is by doing these additional studies, which we do, it also allows us to very quickly move forward into Phase IIs or Phase IIbs once the proof of concept or Phase IIas are done, so there's no delay time. So it's to our advantage. It doesn't cost a lot, and so we try to add as much derisking to the program as possible as we go along, which I believe as to the process at the end to make those decisions that are necessary, either for us to spend money or for our partners to invest into this program and take it over.

Operator

And Doctor, there are no further questions at present time. I'll turn the call back to you. Please continue with your presentation or closing remarks.

Tony F. Cruz

Okay, well, thanks, everyone, for attending the conference call. And if you have any questions, please, you can contact either Nicole or myself, and we'll get back to you. Thanks very much, everyone.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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Keep A Close Eye On Health Management Associates, Community Health Systems

Health Management Associates (HMA) has agreed to be acquired by Community Health Systems (CYH), which will pay around $4 billion and take on the equal amount of debt as the consideration for the transaction. The combination is expected to be a system for healthcare, which is better positioned to compete in the rapidly changing scenario in the United States. The deal is subject to the normal conditions, but it is widely expected that there will be no trouble in getting the necessary regulatory and shareholder approvals. This is a pretty good deal for HMA shareholders who will receive cash payments of $13.78 a share as well as contingent value rights depending on the outcome of ongoing investigations that could provide an extra $1 per share to the effective price. Without the contingent value rights, Community's offer currently makes available a premium of around 3%, and the addition of the CVR enhances this premium to around 10%.

Community Health Systems has a bigger headcount and bed count than HMA, but both companies are well known in the American healthcare industry. Community Health Systems operates hospitals and clinics in 29 states within a fairly tight area surrounding its Tennessee headquarters. Health Management Associates, with clinics and hospitals in around 20 states, is also focused on operating in the Southeastern and Mid-Atlantic regions of the United States. In fact, Health Management is already present in all the states in which Community operates and both companies provide similar services, including full-service hospitals, walk-in clinics, outpatient specialists, facilities for surgery, cancer treatment, and so on.

In response to the implementation of the Affordable Care Act, hospital companies are still working out how to respond. It is generally accepted that hospital systems will need to live with lower profits and margins; many small and medium-sized companies are entering into alliances that enable them to exploit the economies of scale. This deal will certainly create synergies for the combined company, and, once it has digested Health Management, Community may be able to centralize some of its activities and close some of its smaller, less profitable facilities without affecting service and coverage. Additionally, it may choose to experiment with data-gathering systems and outsource menial medical tasks to low-cost overseas facilities.

Health Management Associates' second quarter finances

Health Management Associates reported EPS from continuing operations of $0.03 per diluted share. Adjusting for approximately $19.3 million (or $0.04 per diluted share) relating to interest rate swap accounting and mark-to-market valuations on the swap, diluted EPS from continuing operations was $0.07 per diluted share in comparison to $0.21 per diluted share in the previous year on net revenues of $1.464 billion. The results fell short of Wall Street expectations. Cash flow generated by continuing operating activities for the quarter was $108.3 million, after making cash interest and cash tax payments totaling $61.7 million. At June 30, 2013, total leverage ratio and interest coverage ratio were at 4.1%, which was well within the requirements of its debt covenants.

For the six months ended June 30, 2013, Health Management had net revenue of $2.947 billion and adjusted EBITDA of $380.1 million. Excluding the impact of approximately $37.0 million ($0.09 per diluted share) for interest rate swap accounting, as well as mark-to-market adjustments EPS from continuing operations, were $0.21 per diluted share. Consolidated EPS per diluted share from continuing operations were $0.12 for the period.

The role of Glenview Capital Management

Glenview Capital Management, which owns 14.6 percent of HMA stock, has decided to play the activist shareholder and decided to get rid of the entire board of directors of HMA after a fight that has lasted some months. Even the proposed sale to Community Health Systems has not been sufficient to ward off Glenview. Glenview says that it does not like to act in an activist fashion, and this is the first time it has openly taken on a company's board of directors. It is seeking to establish that company boards must work constructively to improve shareholder value and ensure that shareholders are treated as partners of the management. It further says that if these two objectives are not met, shareholders should actively seek change. Glenview says it expects to "ensure a smooth transition to be affected this week." After Glenview's nominees take over the board, the next step will be to review the $3.9 billion deal. The fund said that would happen in several months, in line with the timetable the companies had proposed and would not cause further delays. On August 12, Glenview Capital Management LLC announced that it has won shareholder approval for its plan to replace the entire board of directors at Health Management Associates Inc.

Recommendation

HMA is currently trading at $12.93, which means that there is an arbitrage premium provided the Community Health Systems goes through at the announced offer price of $13.98, and that the CVR premium of $1.00 is realized, making a total of $14.98 per share. If you are convinced that this is going to happen, you could buy and cash in on the arbitrage premium. However, I would recommend that, as a matter of prudence, you should watch future developments before taking action of any kind.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)

Business relationship disclosure: The article has been written by an Analyst at ResearchCows, ResearchCows is not receiving compensation for it (other than from Seeking Alpha). ResearchCows has no business relationship with any company whose stock is mentioned in this article. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the company's SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.

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Nordion Management Discusses Q3 2013 Results - Earnings Call Transcript

Executives

Ana Raman - Director of Investor Relations

Steve M. West - Chief Executive Officer, Director and Member of Technology Committee

G. Peter Dans - Chief Financial Officer and Senior Vice President

Analysts

David Krempa - Morningstar Inc., Research Division

Neil Maruoka - Canaccord Genuity, Research Division

Douglas Miehm - RBC Capital Markets, LLC, Research Division

Alan Ridgeway - Paradigm Capital, Inc., Research Division

Varun Choyah - CIBC World Markets Inc., Research Division

Nordion (NDZ) Q3 2013 Earnings Call September 5, 2013 10:00 AM ET

Operator

Good morning, ladies and gentlemen. Welcome to the Nordion Third Quarter Results Conference Call. [Operator Instructions] I would now like to turn the meeting over to Ms. Ana Raman, Investor Relations. Please go ahead, Ms. Raman.

Ana Raman

Thanks, Melanie. Good morning and welcome to Nordion's Third Quarter Fiscal 2013 Earnings Call and Webcast. On the call this morning are our Chief Executive Officer, Steve West; and our Chief Financial Officer, Peter Dans. The format for our call will be that Steve and Peter will provide their perspectives on the quarter, and then we'll open up the line for questions from analysts. Slides have been posted to accompany this webcast.

As per Slide 2, which contains our caution on forward-looking statements, please note today's comments do and our responses to questions may contain forward-looking statements within the meaning of applicable securities laws. These include statements about our financial performance, our agreements with AECL, the proceeds from the sale of our Targeted Therapies business, our strategic review, our defined benefit pension plan and the estimated future deficit and funding and our internal investigation.

We indicate forward-looking statements by using words such as expect, plan, estimate, will, intend, believe, continue and similar expressions. All forward-looking statements reflect our current views and information with respect to future events and are subject to risks, uncertainties and assumptions we have made, and we do not assume any obligation to update them except as required by law.

Many risk factors could cause our actual results, performance or achievements to be materially different from those expressed or implied by our forward-looking statements. These factors are described in Nordion's quarterly and year-end news release and annual filings, which are available on SEDAR, EDGAR and the company's website.

Turning to Slide 3. All amounts mentioned are in U.S. dollars, except when otherwise noted. And though results have been prepared under U.S. GAAP, we have included certain non-GAAP measures. These include adjusted net income and adjusted earnings per share. These non-GAAP measures exclude certain items and are intended by management to provide investors with a meaningful consistent comparison of the company's core operating earnings results. This information should be considered as a supplement to and not a substitute for the corresponding financial measures prepared in accordance with GAAP. More information regarding our non-GAAP measures as well as a reconciliation between the non-GAAP measures and corresponding GAAP financial measures is available in our third quarter news release that was issued this morning before markets opened. You can find it on our website at nordion.com.

With that, I'll turn it over to Steve.

Steve M. West

Thank you, Ana. Good morning, everyone, and thank you for joining us today. Over the past few months, Nordion has made considerable progress across a number of key areas: executing on opportunities, reducing uncertainty and clearing the path for our future. Now we continue to focus on the day-to-day execution of our business, which resulted in a solid third quarter. Recently, we entered into a key settlement with AECL and solidified our supply agreement for medical isotopes until 2016 and for waste management until 2026. And we made significant progress on our strategic review, closing the sale of our Targeted Therapies business to BTG in July.

Peter and I will discuss each of these items during this call. At this point, I will begin with a review of our third quarter results and then elaborate on our business and our strategic progress. If you would, please turn to Slide 5.

Nordion delivered solid third quarter results across the company's operations. Consolidated revenue of approximately $71.7 million increased 7% from Q3 of 2012, while consolidated segment earnings of $19.6 million were down 5% from the same period last year, but with sterilization and Medical Isotopes experiencing year-over-year gains. Lower Targeted Therapies earnings, however, more than offset the increases due to higher TheraSphere investment during the quarter and the divestiture of the business to BTG, which was on July 13.

So moving to Sterilization Technologies, which is on Slide 6. Sterilization Technologies revenue increased 14% to $36.5 million this quarter compared with the same period last year. Our Cobalt revenue was up $3.5 million or 11% to $35.4 million as a result of strong sales volumes, due to quarterly variability in the timing of cobalt-60 shipments to our customers.

Sterilization-Other revenue increased by $0.9 million, which was largely due to an increase in production irradiator refurbishments during this quarter.

We have revised our fiscal 2013 revenue expectations for our sterilization business to be up slightly versus our initial forecast of relatively flat revenue compared with fiscal 2012. Having said that, we do expect fourth quarter sterilization revenue to be substantially lower quarter-over-quarter and year-over-year, as we were able to meet our customer demands to deliver cobalt earlier in this fiscal year.

Nordion continues to strengthen its relationship with customers as well as its reputation as an expert in gamma sterilization, which we believe supports our market-leading position, both now and in the long term.

So please turn now to Slide 7 for our summary on Medical Isotopes. Medical Isotopes revenue increased 9% to $24 million compared with third quarter fiscal 2012, primarily driven by an increase in reactor isotope revenue. The gain in reactor isotopes revenue was mainly due to an increase in sales volume, which was the result of the shutdown of our -- of the primary reactor in Europe that supplies some of our customers. And this reactor resumed production in June. Cyclotron revenue increased by 4% due to the resumption of Strontium-82 sales in April. We had initially stopped the production of Strontium-82 in May of 2012.

Contract Manufacturing revenue was up 10% versus Q3 of last year due to the initiation of a TheraSphere manufacturing under our Manufacturing and Support Agreement with BTG in July.

As disclosed previously, we entered into the -- this agreement in connection with the sale of the Targeted Therapies business to BTG. TheraSphere manufacturing contributed revenues of $0.7 million in our third quarter.

Bexxar currently represents the balance of the revenue in our contract manufacturing line. GlaxoSmithKline, the owner of Bexxar, recently notified Nordion of its intent to discontinue the manufacture of this product as of February 20 in 2014. We plan to manufacture Bexxar for GSK until that date.

Based on the additional orders we received during the European reactor shutdown, we have revised our fiscal 2013 Medical Isotopes revenue outlook to reflect and expect a decline now of 7% compared with fiscal 2012 versus our initial forecast of a 20% revenue reduction, and this excludes the impact of the TheraSphere contract manufacturing.

Please turn to Slide 8. So subsequent to our third quarter, we announced a comprehensive settlement with our medical isotopes supplier, Atomic Energy of Canada Limited, to resolve the outstanding claims between the 2 parties relating to the MAPLE facility.

We view this as a positive event for 3 key reasons. First, it provides closure and clarity on the outstanding MAPLE project-related losses. Second, it has a direct positive impact for the company in terms of cash position. As a result of the settlement, we received a $15 million cash payment from AECL. We were released from paying any of AECL's arbitration-related costs, and we have achieved legal cost savings. Third, the settlement provides certainty regarding these matters, better positioning Nordion to focus on the business moving forward, including continued efforts to find credible partners and alternate sources of long-term medical isotopes supply.

With the resolution of outstanding liabilities with AECL, we believe we are better positioned to focus on the future of our Medical Isotope business. As part of the settlement agreement and as previously announced, we signed an amended and restated medical isotopes supply agreement from AECL, with the term ending October 31, 2016. Now in addition, Nordion entered into an agreement to continue waste disposal services from AECL until October 31, 2026.

Our priority has been and continues to be securing a long-term, sustainable and economically feasible supply relationship that aligns with our critical time frame. A resolution with AECL has cleared the way for Nordion to now have more meaningful discussions with credible partners, and we are actively working towards this objective.

Early in our third quarter, we announced our agreement to sell the Targeted Therapies business to BTG, and we subsequently closed that transaction in July. The transition of the business unit is progressing well. And as mentioned earlier, the Manufacturing and Support Agreement for the manufacture of TheraSphere on behalf of BTG has been initiated. Sale process and transition has been demanding on our employees, and I would like to take this opportunity to thank our employees who have been vital to the success of this transaction and the continuing transition. Thank you, everyone.

Now as previously disclosed, BTG acquired Targeted Therapies for approximately $200 million. Net cash proceeds after taxes, deal fees and costs were approximately $190 million. At the time of the completion of the sale of the Targeted Therapies business to BTG, we indicated that we would provide an update around this time on the use of the net cash proceeds from the sale.

After considering potential methods of distributing the net cash proceeds from the sale to shareholders, considering overall tax implication to shareholders and considering the progress of the strategic review, we have decided to retain the net cash proceeds on our balance sheet. The strategic review process is ongoing, and we continue to evaluate opportunities.

Overall, I am pleased with the progress Nordion made in its third quarter, as well as in recent weeks. We intend to continue to operate our sterilization and our Medical Isotopes businesses with efficiency and with focus.

I'd now like to pass the call over to Peter Dans, our CFO, who will discuss our financial results.

G. Peter Dans

Thanks, Steve, and good morning, everyone. I'll start on Slide 10. Nordion achieved revenue of $71.7 million in our third fiscal quarter, up 7% compared to revenue of $67.1 million in the same period last year.

GAAP net income was $180.4 million, up significantly compared to the previous year due to the gain on sale of the Targeted Therapies business. On an adjusted basis, we have net income of $12.6 million or $0.20 earnings per share, down from $15.5 million of adjusted net income in the third quarter of 2012 or $0.25 per share.

Significant adjusting items included the pretax gain on the sale of Targeted Therapies of approximately $189 million, the impairment of assets associated with the Targeted Therapies sale of approximately $29 million and the reversal of litigation accruals related to the AECL arbitration costs of approximately $25 million.

Gross margin percentages this past quarter remained at 55%, consistent with Q3 of fiscal 2012.

On a consolidated basis -- segment basis, earnings were down 5% to $19.6 million from $20.6 million in the third quarter of fiscal 2012. Higher revenue and segment earnings contributed from Sterilization Technologies and Medical Isotopes were more than offset by lower Targeted Therapies earnings due to increased investments in TheraSphere. We also incurred increased pension expense and higher annual incentive costs.

Now turning to Slide 11. We had approximately $282 million of cash and cash equivalents on our balance sheet as of July 31, up $200.4 million from previous quarter, primarily due to the addition of proceeds from the sale of Targeted Therapies.

Upon the close of sale of our Targeted Therapies business to BTG, we received initial proceeds of $200.7 million in cash, which included $0.7 million in net working capital adjustment. Net of taxes and transaction costs, we realized cash proceeds of about $190 million from the sale, and recorded an after-tax gain of approximately $182 million from the sale.

We utilized capital losses to offset taxes on approximately 1/4 of the gain on the sale, and used approximately $11 million of our deferred tax asset to offset federal cash taxes on the remainder of the gain on sale.

Our net deferred tax asset as of July 31 was $41.2 million, which we expect to utilize to offset future cash taxes on income from our operations. In addition, we reported an asset impairment of approximately $29 million. As of July 31, we had an asset group with a carrying value of $38.4 million, used in the production of Targeted Therapies and Medical Isotope products. We identified impairment indicators following the completion of the sale of Targeted Therapies that significantly changed previously estimated cash flows supporting this group of assets.

Please turn to Slide 12. Subsequent to our third fiscal quarter, we entered into a comprehensive settlement with AECL to resolve the outstanding claims between both parties relating to the MAPLE facilities. In Q3, we released $24.6 million in accruals related to the AECL matters and reduced our accrued liabilities by the same amount. We received AECL's CAD 15 million cash payment in August, and expect to record a gain in our fourth quarter. In our third quarter, Nordion made cash contributions of $2.5 million to meet solvency funding requirements and strengthen the financial position of our defined-benefit pension plan. As part of our capital allocation plans, we currently intend to make cash contributions until December 2013 to meet our annual funding -- pension funding requirements.

That cash contributions allow the pension plan to benefit from earning a return on cash invested through the plan.

During the third quarter, we incurred $1.2 million costs related to our internal investigation, which was significantly lower than the $4.5 million in our second quarter and the $4.1 million we spent in our first quarter of this year. The decline in costs reflects, in part, the progress made thus far on the investigation.

While we currently estimate the investigation and remediation costs to be approximately $11 million in fiscal 2013, $1 million lower than our update provided in Q2, we also recognize that there are a number of factors beyond our control, including actions of regulators and enforcement agencies, which could increase these costs.

We've made good progress in the third quarter in working through certain contingent liabilities and strengthening our financial position. We believe we are managing our cash levels prudently, considering the requirements of our business beyond doing a strategic review and valuing our shareholders.

This concludes my financial review. Melanie, we can now open the lines for questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from David Krempa of Morningstar.

David Krempa - Morningstar Inc., Research Division

Just a couple of quick questions. Can you talk about what your thought process was and why you didn't do a buyback with the cash and why you'd rather let it sit? And then secondly, will any of the corporate expense go away with the sale of TheraSphere? Or should we plan on that staying the same?

G. Peter Dans

Thanks, Dave. So I'll take those. So again, with the -- looking at doing a buyback, we did look at a variety of options for returning cash to shareholders. And as Steve mentioned, we looked at the implications of that from a tax perspective and also considered where we were at in terms of our strategic review and made the decision, really, based on those factors. In terms of the second question, from a corporate cost perspective, as we said last quarter, with the divestiture of Targeted Therapies, we wouldn't see a reduction in G&A initially from that. We do plan, following the completion of the Transition Services Agreement, to assess the requirements of the business at that point in time, and take the appropriate actions to adjust our cost structure.

Operator

The following question is from Neil Maruoka of Canaccord Genuity.

Neil Maruoka - Canaccord Genuity, Research Division

Do you anticipate a scenario where the strategic review could result in the use of cash to a purchase of asset or an acquisition of a business? And is it fair to say that any potential return of capital is pending the outcome of the strategic review?

Steve M. West

Good morning, Neil. I'll take that one. So I'm just going to reiterate a little bit what Peter said in that we looked at what were the potential ways to return the net cash proceeds to shareholders and we looked at the overall implications for shareholders of those various methodologies, and we also looked at where we were in our strategic review. And we came to a conclusion that at this current time, it was best to retain the cash on the balance sheet. In terms of other potential uses of that cash, as you're alluding to, we have no other plans for the allocation or the use of these cash proceeds at this time. And we will continue with our strategic review and make assessments during that process.

Neil Maruoka - Canaccord Genuity, Research Division

Okay. And just as a follow-up, I'll ask the same question I did last quarter. But after another 3 months of the strategic review, do you continue to believe there are multiple potential buyers out there for the sterilization business?

Steve M. West

Well, we're not talking about potential buyers, and thank you for following up again on your previous question. But we've executed on our strategic review in terms of the sale of the Targeted Therapies business, and that was definitely part of the process. As for the remaining elements of the business and our 2 business units plus our corporate overlay, we're going to look at all the options, and we're continuing to do that. And when we have something that we can discuss more publicly, we will do so. But at this moment in time, we're really not in a position to make any further comment.

Operator

The following question is from Douglas of RBC Capital Markets.

Douglas Miehm - RBC Capital Markets, LLC, Research Division

Just continuing on with that thought. Can you -- Peter, can you walk through the specific tax implications of a dividend to shareholders as it relates to the company, and also whether or not there's any specific implications of a buyback we may be unaware of as well?

G. Peter Dans

Yes. Doug, so from a tax perspective, individual shareholders will have individual tax consequences. From a dividend perspective, as you're aware, both in Canada and the U.S., generally dividends are taxable as dividend income to shareholders. As well, there may be withholding tax in Canada for U.S. shareholders. Similarly, things such as buybacks do have various tax implications, both in Canada and the U.S. where our shareholders are from. So those are some of the factors that we looked at as we went through with the buyback. There's other considerations that we look at such as liquidity of our shares, et cetera.

Douglas Miehm - RBC Capital Markets, LLC, Research Division

Okay. And when you're looking at your strategic opportunities here, if you were to go out and buy something, what type of hurdle rates would the company consider as rates that you need to exceed to make something work?

Steve M. West

Doug, it's Steve here, and I'll take that. At this moment in time, as we progress the strategic review, I want to be absolutely clear that we don't have any plans of any further allocation of cash, and I think that's how we'll leave it.

Operator

[Operator Instructions] The following question is from Alan Ridgeway of Paradigm Capital.

Alan Ridgeway - Paradigm Capital, Inc., Research Division

I just want to make sure that I'm understanding the AECL agreement and settlement completely correct. So the supply agreement goes through to October 2016 and then you have the waste management services agreement through to 2026. Are there any cash costs to you guys with the services agreement? Or is that just a situation where AECL is obligated to manage the waste? Could you just walk us through that?

G. Peter Dans

So in terms of waste, when you look at the period up to 2016, there's no material change from where we're at today. Again, beyond 2016, where we're only in a waste situation, there will be certain costs associated with sending waste to AECL during that period.

Steve M. West

They're relatively small. And the reason that we called this out is because the current supply agreement, Alan, with AECL, obviously, is predominantly reactor isotope and molybdenum agreement. But activities at Chalk River that involve Nordion go beyond that, and so we do have processing waste. I have indicated that we are now in a position where we believe we can have meaningful conversations around other supply options for reactor isotopes, which has implications in terms of continuing to process, and therefore, requirement to have a viable waste stream capability. And that's why we have that contract with AECL.

Alan Ridgeway - Paradigm Capital, Inc., Research Division

Okay. So just as a follow-up to that, is there a situation, if there's -- if nothing comes to pass from these conversations with additional suppliers, whereby there could be a negative cash drain on the company when the NRU contract is up?

G. Peter Dans

Alan, maybe just clarify, in terms of negative, are you meaning from a waste clean-up?

Alan Ridgeway - Paradigm Capital, Inc., Research Division

From a cost to you for managing the waste beyond 2016, would that piece of the business be a negative drag going forward beyond that?

G. Peter Dans

No. We would -- it would be part of the cost of the other portions of our business. So it would just be absorbed into those parts of the business.

Steve M. West

Yes. The thing about this, Alan, as Peter has pointed out, we do other things besides process moly. And whether it's in our current other activities in Medical Isotopes or whether it's in Sterilization Technologies, we always have a process waste stream. And therefore, there is a requirement for us to be able to transport that waste to Chalk River Laboratories and for them to process it. So it's effectively a continuing operational requirement to be able to have a waste stream capability, supported by the other elements of the business.

Operator

The following question is from Neil Maruoka of Canaccord Genuity.

Neil Maruoka - Canaccord Genuity, Research Division

Just one question on the sterilization business. To date, we've seen no sale of GammaFIT, and I know it has a very long sales cycle. But how does the sales funnel look? And when do you anticipate booking your first order?

Steve M. West

I'll take that, Neil. Thank you for that question, and thank you for your persistence on GammaFIT. I mean, probably I understand, it may sound a bit like a broken record but it is a long sales cycle. It's generally up to 24 months, and we launched GammaFIT in 2012. So that's part of the explanation. And GammaFIT also is positioned to new customers, not really existing customers. So it's a -- in terms of the selling cycle process, it's both new technology and new customers. But we are still optimistic that there's an opportunity. The general economic slowdown has affected all our production irradiator sales. And of course, launching a new one at that particular time, we actually felt was going to give us a better portfolio which to work with. We do believe that GammaFIT is well suited for companies entering into the gamma industry with a lower cost base. As you know, I've spoken previously about our view that in the longer term, Asia will offer some growth opportunities for our customers, and therefore, us. And so we certainly continue to work with potential customers both with GammaFIT, as well as with our standard production irradiators. And I'm optimistic that at some point, we will get back on track in terms of production irradiator sales.

Operator

The following question is from Varun Choyah of CIBC World Markets.

Varun Choyah - CIBC World Markets Inc., Research Division

With regards to looking at alternate sources of medical isotopes supply, can you talk a little bit more on that and how discussions are trending here?

Steve M. West

Thank you for your question because as I alluded to earlier in the call, since we made the settlement with AECL, we believe we're in a much better position now to have appropriate discussions with what I characterize as credible potential partners. And maybe an analogy that I would draw is that if you're married and you're going through an ugly divorce, there aren't too many people that want to date you. So we kind of finalized the settlement terms, and now I think we're open for dating. And I think that's basically where we're at. So we've been working on this for some time, but being able to move ahead now with not having an exclusive arrangement with AECL, which is obviously, which is one of the issues that we had. It was too way exclusive and being able now to, I think, free up conversations, we -- it's got to have both technical and economic feasibility. And those are the things that we're exploring with a variety of potential partners right now. Other than that, I really can't give you much color because of the commercial confidential nature and competitive elements of that. What I can say is we're making progress.

Varun Choyah - CIBC World Markets Inc., Research Division

Okay. So if you were to procure a supplier from, I guess, LEU targets, would you have to like upgrade your processing facility? And would that be something meaningful in the upgrade there?

Steve M. West

That's a pretty technical question, but I'll do my best to deal with it. Yes, so first of all, I probably should have made it clear that our view is that for a credible source of supply, it has to be non-ATU based, LEU. So that is definitely a factor. We're no different to anybody else who's going -- who's looking at long-term LEU. It requires changes in chemistry. It requires changes primarily perhaps in target dissolution. It requires changes in waste stream management. And those are the things that we would be evaluating with potential partners around the feasibility of such a supply. And currently to date, we should remind ourselves that still, by far, the majority of molybdenum that is on the world market is heavily enriched uranium based. And everybody is working towards a low-enriched technology base.

Varun Choyah - CIBC World Markets Inc., Research Division

With regards to the internal investigation, would that like conclude at the end of the year? Or would that spill over -- would costs spill over like next year and you have to incur costs there?

G. Peter Dans

I -- so I'll take that one. So in terms of the internal investigation, we did provide an update that the cost estimate for the remainder of the year is $11 million, which is just about $1 million spending in the next quarter. Again, in terms of the actual investigation, there are a number of factors that really will affect the timing and the cost, which primarily relate to the activities related to the regulator and enforcement agencies. So it's hard to predict when the costs will end and the level of spending going forward. But we'll continue to provide updates on that.

Operator

The following question is from Douglas of RBC Capital Markets.

Douglas Miehm - RBC Capital Markets, LLC, Research Division

Just a quick follow-up. As it stands right now, given the relationship with AECL, is there anything preventing someone that -- let's say, they do get interested in forming a relationship, however, they want to take it one step further. Are there any regulatory items or anything else that would prevent someone from potentially acquiring the company at this point?

Steve M. West

Doug, I'll take that. It's a bit of a hypothetical question, so a hypothetical answer. So I think if I think about that in terms of the sort of the landscape for medical isotope manufacturing, we have a situation here in Canada with a very defined, finite endpoint in terms of NRU under its current ownership by the government of Canada in terms of producing molybdenum. So I mean, it is clear. And our contract with AECL is clear that their supply capability only runs through to October 31, 2016. So that, by itself, has a fairly limited lifespan definition. If anybody other than Nordion and AECL -- wish to partner with AECL, that would be a major economic factor. And I think there are other factors in terms of proximity, startup costs. I find it hard to be able to justify off the top of my head, hypothetically speaking of course, that there would be a business case for entering into the market and setting up a processing capability with Atomic Energy of Canada. But...

Douglas Miehm - RBC Capital Markets, LLC, Research Division

No, I think you -- I'm sorry, maybe I wasn't clear. I was thinking if buying Nordion and recognizing that the most valuable asset is the Sterilization business, and I'd say that Medical Isotope at this point is probably a very small proportion of the overall asset value.

Steve M. West

I see. Well, in terms of value of the company, I mean, I think as we've highlighted, our view about our Medical Isotope business is that we still have a very strong brand, very strong recognition, very strong capability, a lot of history and some very good customer relationships. And we definitely see that as sort of an intangible asset. And that's frankly, why we continue to believe that we should maintain our progress on finding credible sources of supply that go beyond 2016 to maintain the -- our position in the marketplace.

Operator

[Operator Instructions] The following question is from Alan Ridgeway of Paradigm Capital.

Alan Ridgeway - Paradigm Capital, Inc., Research Division

Just a quick question about the sterilization business. One of the points of the 2013 outlook is to maintain your leading position and, obviously, continue to generate high margins. Is there anything going on in the sterilization market that is pressuring your market position in any way or market share in any way at this point in time?

Steve M. West

Nothing, Alan, that I would characterize as being any different to the current market dynamics that we would be aware of. As you know, we have structured multiyear agreements with our key customers, and they continue to provide us with an opportunity to provide leading services to our client base. There was a significant shift in the marketplace a few years ago when China was able to produce low cobalt. But at this moment in time, there's nothing that I think we're aware of regarding any general changes in the market. And as far as our results this year are concerned, they've been pretty close to our expectations. And through customer timing, perhaps, we've been able to deliver a little more cobalt than we'd originally anticipated.

Alan Ridgeway - Paradigm Capital, Inc., Research Division

Okay. And just if I remember correctly, the Chinese supply is largely or completely kept within the country. Is that still the case?

Steve M. West

That's absolutely the case. There's a greater demand than domestic capability, and some of our largest customers are in China. But the local supply definitely stays local at this moment in time.

Alan Ridgeway - Paradigm Capital, Inc., Research Division

Okay. Is that supply growing at all in China?

Steve M. West

No, it's capped. It's based on 2 CANDU reactors.

Operator

Thank you. There are no further questions registered at this time. I'd like to turn the meeting back over to Mr. West.

Steve M. West

Thank you, Melanie. Well, we've covered several topics on our call this morning. And what I'd like to leave everyone with today is the thought that we are continuing on our path forward. We are working to reduce complexity, and we're working to reduce uncertainty. And we remain focused on day-to-day execution of our business plan and also we're focused on the progress of our strategic review. I'd like to thank everybody for joining us on the call today, and we'll be talking to you at the next quarter. Thank you very much. Thank you, Melanie.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.

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