Good day, everyone, and welcome to today's Neurocrine Biosciences First Quarter Results presentation. It is now my pleasure to hand over the program to Todd Tushla, VP of Investor Relations.

Thank you, operator. Good morning, everyone, and thanks for joining our first quarter 2022 earnings call. With me as usual are Kevin Gorman, our Chief Executive Officer; Matt Abernethy, our Chief Financial Officer; Amy Roberts, our Chief Medical Officer; Eric Benevich, our Chief Commercial Officer; and Kyle Gano, our Chief Business Development and Strategy Officer. Before we get going, I'll remind everyone that during today's call, we will be making forward-looking statements. These statements are subject to certain risks and uncertainties, and our actual results may differ materially. I encourage you to review the risk factors discussed in our latest SEC filings. After our prepared remarks, we'll be happy to address your questions. Now I'll hand the call over to Kevin Gorman.

Thank you, Todd. Good morning, everyone. I'm sure you saw our press release this morning, and I have to say I'm very pleased with the work of our entire commercial and medical organizations in educating health care professionals on tardive dyskinesia (TD), which resulted in a record number of TD patients being treated with INGREZZA last quarter. Now while the external environment has improved, it is not back to normal, and there are still challenges. However, I believe we are adapting well to the remote delivery of health care, which we know will persist at some level moving forward. So we have now seen our fourth consecutive quarter of sequential growth. We're not only making progress on our commercial business. As you may recall, at the beginning of the year, we updated you on the portfolio of clinical programs that we have started, what we are anticipating starting this year, and the data readouts. It was very aggressive. I'm pleased that we remain on track for most of these programs, importantly, including filing the sNDA for INGREZZA in Huntington's disease and our two data readouts in essential tremor and continuous spike and wave during sleep. Now as I will share with you, there are two programs that have been impacted by the invasion of Ukraine, and we are currently mitigating the impact of the loss of those potential clinical sites. But aside from that, we have handled this growing and complex pipeline extremely well, and I'm looking forward to sharing data with you later this year. With that, I'd like to hand it over to Matt.

Good morning. As you saw in our earnings release, we delivered strong Q1 performance with INGREZZA sales totaling $303 million in what is typically the most challenging quarter of the year. Our team did a very nice job managing through the Q1 payer-related seasonal dynamics and also rectifying the Q4 pharmacy distribution challenges we experienced. These two items ultimately benefited our refill rate for patients as compared to the previous first quarters. In addition, we exited Q1 with a record number of new patients, reflecting an improving external environment and benefits from our commercial initiatives. As you think about Q2, we do expect sequential growth. However, the dollar growth will likely not be as strong as prior years given the benefit we saw in Q1 from our team's improvement in managing through the seasonal dynamics. On the financial front, we continue to have plenty of flexibility with a strong balance sheet and attractive P&L profile to continue to invest in INGREZZA and advance our pipeline. With that, I'll now hand the call over to Eric Benevich, our Chief Commercial Officer.

Thanks, Matt. I'm pleased to provide an update for everyone regarding our Q1 commercial progress. With our INGREZZA franchise, Q1 has always been a tale of two half quarters, with the first half of the quarter impacted by seasonal payer dynamics largely related to the prescription reauthorization process. The second half of Q1 is when we usually see an uptick in new patient starts. But with more than 30% year-over-year growth in Q1 this year, what were the drivers of our growth? Despite the surge in the Omicron variant early in Q1, we did see a general improvement in the external environment translating into improved access for health care professionals and favorable conditions to mitigate the typical Q1 payer dynamics. We knew the key to a successful Q1 was to focus on execution, and our field teams did a phenomenal job delivering not only on strong rates of compliance but also record levels of new patients. These results were accomplished while we recruited, trained, and onboarded 140 additional sales representatives to complete our sales force expansion at the end of the quarter. We expect to see the benefit of the expanded sales force as we get into the back half of the year. As it relates to the second quarter, as Matt mentioned, given our strong performance in Q1, we do expect to see continued growth in Q2 over Q1, but at a slightly lower percentage increase compared to prior years given the stronger-than-expected growth in Q1. This past Sunday was the 5-year anniversary of the launch of INGREZZA. You expected us to achieve the level of success we've had given the effort required related to diagnosis and treatment of tardive dyskinesia. From a regulatory perspective, INGREZZA was designated a breakthrough medicine by the FDA. It's also been a breakthrough in the sense of completely changing the paradigm of TD treatment. What was once an untreatable condition is now viewed as treatable and is becoming more mainstream. We worked hard to change the historical paradigm, and our results speak for themselves. However, our work remains largely unfinished with approximately 85% of the estimated 600,000 people living with TD either not yet diagnosed or not being treated with a VMAT2 inhibitor like INGREZZA. So we've made significant commercial investments to accelerate the diagnosis and treatment of TD, not just this year, but for years to come. The expansion of our field sales team and continuation of our direct-to-consumer campaign provide evidence of our conviction to help many more TD patients. Lastly, I'd like to share that May has been designated as Mental Health Awareness Month. This week, in particular, is recognized as Tardive Dyskinesia Awareness week, or TDA for short. Five years ago, most people living with mental health conditions were unaware that TD existed. Today, TDA is officially recognized across the entire United States. We've made great progress raising awareness in the mental health community. I’m in awe of what our team has been able to achieve in these past 5 years, and I’m humbled by the scope of what we aim to accomplish in the years ahead as we improve the lives of the many thousands of patients still suffering from TD. So with that, I'll turn the call over to my colleague, Eiry Roberts, our Chief Medical Officer.

Thank you, Eric, and good morning to everyone. I'm happy to provide a brief update regarding a selection of our clinical programs, beginning with valbenazine. In March, we received very good news from our partner, the Mitsubishi Tanabe Pharma Corporation, regarding the regulatory approval of valbenazine in Japan for the treatment of tardive dyskinesia. We were very impressed with the data that was generated from the KINECT Phase III study, and we look forward to supporting our Japanese partner as they proceed with launch plans for DYSVAL, the Japanese brand name of valbenazine. Turning to valbenazine for the treatment of chorea in Huntington's disease. In collaboration with the Huntington's Disease Study Group, we were pleased to present additional safety and efficacy data at the American Academy of Neurology meeting earlier this month. You'll recall in the KINECT-HD study that valbenazine met the primary endpoint of significant improvement in severity versus placebo, as measured by the Unified Huntington's Disease Rating Scale, Total Maximal Chorea Score, with improvement beginning as early as week 2 of treatment. In addition, the percentage of study participants with clinician or self-rated global improvement was significantly higher at 12 weeks with valbenazine treatment than with placebo. Importantly, the safety profile was consistent with valbenazine's known safety profile in TD with no suicidal behavior or ideation. We remain on track to submit the supplemental NDA to the FDA in the second half of this year. I'd be remiss if I did not mention the humanitarian crisis occurring in Ukraine. Our thoughts are always with everyone tragically impacted by the current situation in Ukraine, including our contract research organization and clinical research partners in the region. Like many in our industry, several of our recently initiated clinical programs in psychiatry and neurology intended to involve sites located in Ukraine and Russia. While we've pivoted contingency plans across our portfolio, the war has already impacted the timeline for the Phase III study for valbenazine and dyskinesia related to cerebral palsy, and the initiation timing for the second Phase III study of valbenazine for the adjunctive treatment of schizophrenia. We now expect to have top line data for the treatment of dyskinesia due to cerebral palsy in 2024, while the first Phase III study of valbenazine for the adjunctive treatment of schizophrenia remains on track for 2023. Initiation of the second Phase III study, however, has been delayed to 2023. All other clinical programs remain on track at this time. Turning to NBI-104, our selective T-type calcium channel antagonists in development. Mid-year, we will read out the data from our Phase II proof-of-concept study in essential tremor. In the second half of 2022, we'll complete our ongoing trial in epilepsy with continuous spike and wave during sleep. Based on the review of the totality of data generated for NBI-104, we will then determine potential next steps for 104 in each of these indications. In closing, I'm very pleased with the progress of our clinical pipeline. I want to thank the teams working on each of these programs for their hard work and dedication. With that, I'll hand back to Kevin.

Thanks, Eiry. Operator, we are now ready for questions.

We'll take our first question from Paul Matteis with Stifel.

Congrats on the quarter. As it relates to your improvement with compliance this quarter, I was wondering if you could just add a little bit of context around that. So I think historically, you've said something like a 7% to 8% headwind can happen in Q1 with refill delays. What does this look like relative to prior years? And then maybe can you just comment a little bit on your expectations for gross to net this year and if there's going to be any increased impact of contracting?

Paul, for the gross to net side of the equation, we've guided that the first quarter should be around $5,300 per script and then for the full year, around $5,400 per TRx. That implies around a 2% headwind in the first quarter. As it relates to the seasonal dynamics, I won't get into specifics here, but we did see, I guess, less of a decline moving from refill rate per patient from Q4 to Q1. And that was a good thing. It was good that we were able to manage through the reauthorization process much more effectively, I think, due to experience and an improving environment from an access perspective that afforded us to be able to do that. So historically, you've seen that recovery from Q1 to Q2 that added a very nice bump. And what we're saying is we do expect to grow sequentially into Q2, but it might not be at as high a clip as what you've seen historically. Anything to add, Eric?

We will take our next question from Neena Bitritto-Garg with Citi.

I was just wondering, first, if you could comment on whether there was any impact from inventory during the quarter. And then also just thinking about the guidance, the reiterated guidance, maybe if you could talk a little bit about what you would have needed to see in the first quarter to feel comfortable raising the guidance just given the strength in gross numbers this quarter?

Yes. So we're really encouraged by what we saw in the first quarter, record number of new patients, and an improving environment. But we're really looking through the first quarter. And we've just launched our expanded sales force. So we felt it prudent to simply reiterate guidance at this point. As it relates to inventory, no real comment this quarter. We have gotten into a place where we don't have as many significant swings in inventory. So nothing to flag right now. A clean quarter from that regard.

We will take our next question from Tazeen Ahmad with Bank of America.

Can you give us a little bit of color on how the split is looking these days between psychiatrists and neurologists in terms of scripts? I know you've had a focus on increasing penetration in the neurologist community. Just wondering how that's going? And if you could give us a sense of where you think you'll be by the end of the year in terms of penetration with new neurologists versus adding patients to the group of psychiatrists who are already using INGREZZA?

Tazeen, so historically, it's really been pretty consistent over the last few years. The split of our business between neurology and psychiatry has been about 80% in psychiatry and about 20% in neurology. Certainly, in looking at the development of the TD market, we felt that there was an opportunity to better penetrate the neurology segment, and that was an important consideration in our decision to expand and reorganize the sales team. We just deployed our new standalone neurology group. Obviously, we've hired people with considerable experience and relationships in neurology, but that team is just hitting the ground, so to speak. I think we'll have a better sense of how it's going with further developing the neurology segment of our business as we get into the second half of the year. But I should also comment that an important group for us across both psychiatry and neurology is advanced practice providers. As part of the rationale for expanding our field sales organization is to do a better job of reaching and educating nurse practitioners and physician assistants in both neurology and psychiatry.

Okay. Maybe just a quick follow-up. This year was the first year that you provided sales guidance for the year. Some companies have gone as much as to provide their thoughts on what they think peak sales could be for products. Do you at Neurocrine have a sense of where you think INGREZZA sales could peak longer term?

Tazeen, we're not prepared to talk about peak sales. We haven't been and probably won't be.

We will take our next question from Josh Schimmer with Evercore.

First, SG&A seems to be annualizing much higher than the guidance for the one-time charges in the quarter to note. And then ONGENTYS doesn't seem like it's doing particularly well commercially. What do you think is going on that's limiting uptake? What are your plans to minimize losses from this product and then to avoid launching other products in the future that don't achieve commercial success?

Josh, it's Matt. In regards to the SG&A spending, really two dynamics occurred during the quarter. The first is the seasonal spending. If you look back over time, there has historically been a step-up from Q4 to Q1 that are Q1 specific investments that we make. You would expect that might pull back a bit as we head into the second quarter. In addition to that, we did invest in our sales force. Most of them were on board for the quarter going through training and were recently pushed out into the field at the beginning of April. With our current guidance range, we’re confident that is the right level of spending. As it relates to ONGENTYS, as Eric mentioned previously, we have an expanded sales force at this point with a higher focus on neurology. We're going to continue to focus on reaching neurologists for both TD and also Parkinson's disease. It’s something that we're looking at, ensuring that if we are making the investment in ONGENTYS that it drives the right kind of returns. Sales are a bit lower than what any of us would have expected at this point, but we do hear positive feedback regarding the benefit that it provides to patients. So we're spending a significant amount of time looking at and talking through this.

Yes. If I could just tack on to that. ONGENTYS is a really good product, but the Parkinson's category is challenging from a payer access perspective. The way that health plans manage any Parkinson's drugs is to limit access to branded medicines across the board. ONGENTYS will continue in 2022 to be primarily approved in the prescription process through formulary exceptions. The feedback that we get from prescribers is very positive. So we're going to continue to press forward with our new neurology team to drive initial trials and adoption of this medicine. We feel like it provides an important benefit for Parkinson's patients, and we're committed to moving it to neurologists.

We will take our next question from Anupam Rama with JPMorgan.

Maybe a quick pipeline question for me. Just thinking about the midyear readout in essential tremor, Phase II, how are you thinking about that data set? And what would you describe as a winning scenario there?

Thanks, Anupam. So we are on track to read out the data from our proof-of-concept signal-seeking Phase II study in essential tremor with the calcium channel antagonist midyear. The primary impact of that study is the crossover study, single center, well-controlled program in 28 patients. The primary endpoint is an accelerometer measured quantitative endpoint of maximal change from baseline. We'll obviously be interested in that as evidence of pharmacological activity of the drug in this important disease state. In addition to that, we do have the more traditional TETRAS clinical endpoints in that study as well, and we'll be able to compare the tremor measures across placebo and active treatment for each patient against those endpoints. We'll look at the totality of those data to understand what signal we're seeing and using that we'll go forward to regulators if we have a positive outcome to understand next steps for the registration program.

We will take our next question from Carter Gould with Barclays.

I'm going to ask a follow-up to Anupam's question there. Just as we think about that 104 data coming out, can you talk about the urgency to move forward given that you're somewhat behind your peers. Should we be thinking that you'll wait for the CSWS data before then engaging with regulators, or once you have the data, you can move forward on its own and not wait for those data?

I think we're looking at these programs independently. They're both very important potential indications for this medication. Obviously, we'll learn from one study to the other, particularly in terms of tolerability and different patient sets. But we will be looking at these independently and moving forward.

We will take our next question from Phil Nadeau with Cowen and Company.

Back on INGREZZA's commercial success, we're curious to understand where the psychiatry field is today in terms of in-person visits? What's the lay statistics on the proportion of visits that are in-person? What are your thoughts on when the reimbursement could change to make in-person better compensated than virtual visits? And how levered is INGREZZA's performance to in-person visits? Would you expect an acceleration in INGREZZA growth once more in-person visits occur, or do you think the virtual commercial efforts that you're doing have really made it less relevant?

Phil, so the latest data that we've seen is that telemedicine still constitutes about half of all visits in psychiatry. Telemedicine is utilized at a lower rate than other physician specialties. It's less than 10% of paid visits in neurology, for example. Psychiatry stands out as an outlier in terms of the use of telemedicine. In terms of how that will change over time? Certainly, as long as the public health emergency declaration is still in place, the temporary waivers that were issued by CMS remain in place, including parity of reimbursement for a virtual visit versus an in-person visit. In market research that we've done with physicians and psychiatrists in particular, their expectation is that in the future, they will utilize telemedicine at a lower rate, probably more like in the 20% to 30% range after there are changes to reimbursement and some of the temporary waivers have been removed. From a business perspective, we continue to operate as if the status quo will continue out into at least 2023. A lot of the work that we've done to adapt our business model to our ECP customers’ changes in how they're delivering health care has paid dividends. I think that’s reflected in, for example, the strong Q1 we just experienced. Any changes to telemedicine in the future or any reduction in telemedicine and an increase in in-person visits is really just upside from our perspective.

The only thing I would add to that is, as Eric said earlier, our enhanced focus on advanced practice professionals, they utilize telemedicine far less than psychiatrists do; they're really the front lines delivering psychiatric care. So that gives us more in-person contact with health care professionals than if we just focused on psychiatrists.

We will take our next question from Brian Skorney with Baird.

I know it's been a while, but we're finally seeing Conestofon's Phase III program coming on the horizon next year. Assuming success, I'm just wondering how you're thinking about commercializing? It seems over the years, you've come to focus more on the neuro side of things, but less on the print side of things. Is this an area that you would want to build out a separate sales force? Or are you thinking about evaluating strategic partnerships or full sale? Just trying to think ahead to next year of success, what the build-out should look like.

Thanks, Brian. I think our plan is still, as we've said all along, we plan on commercializing Conestofon ourselves. We're looking to internationalize, and it could be one of several drugs that we find would be ideal for us to start putting down a commercial footprint in Europe. We do not plan on looking for a partner either in North America or in Europe.

Is there any way you could give some qualitative description or quantitative on what kind of the build-out to launch Conestofon would look like?

Brian, we'll get into more detail around that as we get closer to a potential launch. But the footprint isn't too large. Patients are cared for in a very concentrated way by either pediatric endocrinologists or adult endocrinologists. So the sales infrastructure needed to commercialize this isn't too significant and something that's well within our wheelhouse and capabilities.

We will take our next question from Brian Abrahams with RBC Capital Markets.

This is Steve on for Brian. Congrats on the progress. For INGREZZA and Huntington's chorea, curious if we could get a little more on how clinicians reacted to the full data presented recently? And maybe your view on what type of patients will see the strongest uptake early on.

Yes, I can start on that, Brian. We were able to present more data from our Phase III KINECT-HD trial at the AAN just recently. The response was very favorable as it has been from the investigative group and even the community regarding the data we shared. We saw a highly statistically significant improvement in the Total Maximal Chorea score, week 10 to 12 compared to baseline in individuals with Huntington's disease, along with improvements in the clinician's global assessment and features of global assessment of severity. From that perspective, the tolerability and safety profile was consistent with what we've already seen for INGREZZA in tardive dyskinesia, with no indication of suicidality. We are on track with the long-term safety data generation from the six-month data required for submission later this year, and we'll be moving forward with that.

We will take our next question from Jay Olson with Oppenheimer.

Congrats on the quarter. Since Neurocrine has a strong cash position on the balance sheet and a solid track record of business development, can you talk about what types of deals and therapeutic approaches you're most interested in these days?

Thanks, Jay. This is Kyle. What you've seen over time is a three-pronged strategy for how we allocate capital. First, focusing on INGREZZA and building out indications there with the lead in tardive dyskinesia. Second, supporting our pipeline, and lastly, the business development side of things. You've seen a range of collaborations that we’ve struck over the years. The strategy lies at the intersection of looking for novel medicines in development that treat conditions of unmet medical need, and then looking at partners that offer technology and expertise that complement our own programs. We'll continue down that line in that strategy as we move forward, where we can find programs that range from early to late stage. These are all things we can consider as time goes along. Matt, do you have anything to add to that?

No. I think we have a lot of flexibility to your point, Jay, and we're going to continue to operate our business focused on INGREZZA and changing our pipeline, but we are open to things to in-license or potentially acquire.

We'll take our next question from Danielle Brill with Raymond James.

This is Alex on for Danielle. Just had a curiosity. What do you think is the key driver for new patient starts, increased foot traffic, the sales force, or direct-to-consumer campaigns? And on the foot traffic angle, we're curious whether you are seeing any sort of inhibition based on some of these variants.

I think that the answer is all of the above in terms of what's driving new patient starts. Certainly, the overarching theme for our launch these past 5 years has been to increase awareness and drive diagnosis of tardive dyskinesia by educating health care professionals. Recently, we've had success with our direct-to-consumer campaign. Whether it's HCPs, psychiatrists, or nurse practitioners being more diligent in having an awareness and proactive screening approach for TD, or whether it's the patient bringing these symptoms up during their visit, our goal is to ensure that TD gets diagnosed and treatment gets offered. As the COVID environment improves and in-person interactions between providers and patients increase, that also helps. All of these factors we believe are positive drivers for growth in the franchise. Regarding the most recent variants, while regional changes in reported rates exist, we're not seeing as much now with how society is handling COVID their closures, etc. Overall, I’m pleased with the progress we’re seeing in the market.

We will take our next question from Myles Minter with William Blair.

Congrats on the quarter. Just on 568, the M4 agonist, that's moving into Phase II this year. Are you planning to do any cardiac safety monitoring studies either before or alongside that study, just given the debate in the field with the cholinergic mechanism?

We are moving forward and are on track with our plan to commence a Phase II study in schizophrenia for our selective M4 agonist later this year. We will be including all appropriate safety and efficacy measures in that study in the acute treatment of schizophrenia. Once we release the full protocol in the context of clinicaltrials.gov, obviously, you'll be able to see how we are measuring some of those cardiovascular and other safety measures in the context of the study.

We will take our next question from Chris Shibutani with Goldman Sachs.

I just wanted to clarify the updated operating expense guidance. It looks like the range for R&D is slightly diminished, and SG&A is slightly higher. You have discussed some of the push-pulls that are reflected in the first quarter, but maybe if you could just help provide further color in terms of what guided those changes.

Yes. From an expense guidance perspective, overall expense guidance was held neutral, but we saw, as you mentioned, an increase in SG&A and a slight decrease in R&D. That's a reflection of onboarding sites, as I mentioned in Eiry's prepared remarks concerning Ukraine, where spending behind those programs was a bit delayed. On the SG&A side, we saw continued investment opportunities that would allow us to market INGREZZA more effectively. We felt it prudent to update the operating expense guidance for those reallocations of our spending.

We will take our next question from Charles Duncan with Cantor Fitzgerald.

Congrats on the commercial successes this year. I had a quick pipeline question, actually a multi-part question for 104. I'm wondering if you would leverage the existing neurology sales force for essential tremor and continuous spike and wave during sleep (CSWS). Will this represent an opportunity to move into rare epilepsy? Would that result in perhaps expanding the sales force to capture that? Can you also compare and contrast the burden of disease in essential tremor versus CSWS?

Charles, this is Matt. Similar to the question on TAH, we'll provide more insight as we get closer on the commercial call points. But clearly, some of the neurologists treat patients with epilepsy, but we would have to expand the call activity if we did go into epilepsy, especially on the rare side. When you look at a broader indication like focal onset, that would be a consideration as well. However, from an epilepsy perspective, the call activity won't be specific to our current efforts.

To comment on the two different indications, essential tremor and CSWS are very different regarding their indications. I would note a couple of points. First of all, I think from a mechanism of action perspective, there’s good reason to believe that we have an opportunity potentially in each of those indications to add value to patients. The second thing to mention is that there’s significant unmet need in both indications. For essential tremor, no medications have been approved since propranolol back in the 1970s. For CSWS, there are currently no approved medications for those individuals. I think we believe it is worth exploring both indications, and we’ll know soon whether we have positive signals and adequate tolerability to be able to move forward.

Take our next question from Laura Chico with Wedbush Securities.

I just wanted to ask a follow-up with respect to the essential tremor commercial opportunity and market access. So in the case of ONGENTYS, we've seen difficulties driving revenue there, and you've talked about challenges. I'm wondering if you could discuss a little bit about the ET market? What gives you confidence that those barriers would not replicate from Parkinson's to the essential tremor opportunity?

As we're going through this program, essential tremor is the largest disorder that exists with nearly 10 million patients in the United States and a bit over in Europe. We're at the very beginning of this program. We've done initial work that shows a very good commercial opportunity here. But it will be several years until we are out in that marketplace. A lot is going to change between now and then. Anything we say now about commercial plans in the marketplace will almost certainly be obsolete by the time we reach market. So as we get closer, we'll start discussing those aspects of the program. Right now, we're solely focused on the signal-seeking study we have ongoing, which will report shortly.

Take our next question from Vamil Divan with Mizuho Securities.

Congrats on a solid quarter. If I could just sort of follow up on the 104 questions from before. You've spoken a lot about essential tremor and expectations. Can you frame how you're thinking about CSWS? What are the key factors to decide whether to proceed with that program and that specific indication?

The Phase II study ongoing in CSWS right now involves 24 patients. With CSWS, these patients not only have significant issues with seizures, but they also have a characteristic signal on their EEG. The primary endpoint in this initial Phase II study is the ability for the 104 to reduce that EEG signal overnight when compared to baseline in an inpatient setting. In addition, we'll look at seizure frequency in this patient population together with other safety, tolerability, and functionality measures both clinically and physician-assessed. We'll examine the totality of the information from this early Phase II study to determine whether we see a signal of appropriate magnitude to move forward.

We will take our next question from Marc Goodman with SVB Leerink.

Kyle, you talked about business development and strategy, but I'm curious about discussions with companies and valuations. Have discussions been enhanced given the significant declines in valuations? Are companies you were previously talking to now more receptive?

On the business development side, I would make two points. One is, I don't think we've had sufficient time during this downturn for companies to fully come to terms with the current valuation. There's still a line of sight to where they were 12 to 18 months ago. The other thing we noticed is that quality companies with quality programs tend not to be the ones that have been hit as hard in this downturn. For many things we’re interested in, valuation and decreased valuation isn't much of a topic. Those good quality assets tend to do well.

On the tax rate, yes, from a cash tax perspective, you could expect us to be a state cash taxpayer this year with a bit of cash tax on the federal side by the end of this year. There’s tax legislation requiring us to capitalize our R&D and take deductions over a long period. Hence, we’ll burn through NOLs faster than expected. This issue affects not just us, but the entire industry. We hope it either gets delayed or pushed aside permanently because it could impact innovation. For us, it puts us in a position where we will spend around $10 million as we exit this year; next year, we'd be a full cash taxpayer on the federal and state sides. Our medium-term effective tax rate should be around 24% to 25%.

We will take our next question from Jeff Hung with Morgan Stanley.

For the INGREZZA sales team expansion, I realize it might be a bit early, but what are you seeing in the leading indicators? Typically, how much of a lag is there from leading indicators to seeing new patient starts being generated? Is it more like 2 to 3 months or more like 6 to 8 months?

Yes. Leading indicators from my perspective are related to promotional activity, sales calls, peer-to-peer speaker programs, use of samples, etc. The typical lag we see is within a quarter. The activity we're doing now will lead to patients being identified and started on treatment in a month or two. This is a normal lag time we see.

From a sales force expansion perspective, what we saw two or three years ago when we did the most recent expansion, it took two quarters to see some benefit, and by the end of the third quarter, they were performing at a similar rate. We’re looking at a lot of leading indicators in KPIs to measure traction, but it does take a few quarters for incremental revenue.

I will clarify with Matt's comments that it takes a while for someone new to achieve the same level of traction that someone experienced in the market has. That's what we're focusing on now, helping our new hires reach the same productivity level as the legacy team.

We will take our next question from Amy.

This is asking for Amy. I was wondering if you can elaborate on how you differentiate the 104 program from the competition. There are other companies pursuing similar indications.

I think the 104 program is a highly potent T-type calcium channel antagonist. The CNS preferential distribution offers a favorable profile to take into the clinic. We are designing the study to look at both efficacy and tolerability in these initial Phase II studies. We will provide more information once we have that data.

We will take our next question from Yatin Suneja with Guggenheim.

I have a question on the M4 program. Can you talk about how your program differentiates from other M4 agonists or PAMs in development, considering some are significantly ahead? How do you plan to differentiate? Is specificity on the M4, potency, or tolerability profile a differentiator? What are your next steps beyond schizophrenia?

The M4 program, through our collaboration, is a highly selective orthosteric agonist. A potential advantage of agonists is that they do not require a co-factor to be effective. While we don’t have clinical data yet, we will start the Phase II program in schizophrenia later this year. As we move forward with potential indications, we’ll be able to provide more information.

We will take our next question from David Amsellem with Piper Sandler. And there are no further questions on the line. I will turn the program back over to Kevin Gorman for any additional or closing remarks.

Thank you very much. I really appreciate everyone's participation today. As you can see, we're trying to get through all of the questions important to us so that everyone gets a chance to ask us questions. I'm going to close with that the company is hitting on all cylinders, as I would say. We're very pleased with the trajectory of INGREZZA and our ability to bring that into more TD patients, even without the sizable investment we've made with the new sales forces out there. I'm also pleased with our large and growing pipeline with aggressive objectives this year. Eiry mentioned the conflict in Ukraine has impacted a couple of programs we were starting up clinical sites for, but we're going to work through that. The challenges we face are small compared to the suffering of those in Ukraine. We will get through this with minimal impact on the company. All of our other programs are progressing well. We're looking forward to sharing results later this year for the T-type calcium channel 104 in both essential tremor and CSWS. 2023 is going to be filled with data readouts that we're excited about. We look forward to progressing our business in what is shaping up to be a much more open and normal environment. No guarantees, but we’re pleased with how things are shaping up for us throughout 2022. Looking forward to getting together with many of you in person in the coming months. Thank you very much.

This does conclude the program. Thank you for your participation. You may disconnect at any time.