Ligand Pharmaceuticals Inc (LGND) 2002 Q4 法說會逐字稿

Good morning and thank you very much for holding.

I would like to welcome you to your conference with our Chairperson, David Robinson.

I would like to let everyone know that conference call is being recorded for transcription and replay purposes, so before speaking, please state your name.

Also your lines will be in a listen-only mode until they open up for question and answers, and at that time I will give instructions.

Mr. Robinson, I'll go ahead and turn the call over to you now.

Thank you.

Good morning.

This is Paul Maier, the Chief Financial Officer of Ligand, and first I want to apologize for being a little late.

As many of you know, we had another call preceding this, and we had quite a few questions and answers.

In any event, thank you for joining us for our fourth quarter 2002 and year-end result conference call.

With me today is David Robinson, our Chairman, President and CEO.

Also Thomas Silberg, our EVP and COO, and Michael Watts, our Director of Investor Relations and Corporate Communications.

And today we will be making some forward-looking statements, so I will direct you to our Safe Harbor Statement and our SEC filings for more complete disclosure.

David?

Thank you Paul, and thank you all for joining us.

I think I would like to make just a few comments on 2002 to try and put some perspective on it and then throw it open for Q&A.

If we look at Ligand's financial results for 2002, they clearly reflect a challenging year for the company.

It's very clear that our commercial organization's overall slower product sales growth in 2002 reflected a dual challenge.

That is, launching AVINZA, which is a totally new type of business for us, a retail, large scale specialty and primary-care prescription product in a new segment called "pain," at the same time as we needed to sustain the momentum of our specialty inline niche oncology products.

That challenge clearly was met with some bumps in the road in the first half of the year.

I think the numbers, as they emerged throughout 2002, clearly highlighted our challenges.

We had to evaluate how we are executing both of those commercial strategies.

We took some corrective actions in the third quarter, and I believe through those corrective strategies began to reinvigorate the growth rate that we have seen over the prior 3 years in our specialty businesses.

And to separate those two, such that the launch of AVINZA and the resources on AVINZA, were increasingly focused and selective and a corresponding separation of our oncology businesses.

I believe that while those corrective strategies did not affect a great enough change to make 2002 turn out as strongly growth oriented for our product sales, as we would have liked, I believe that by year-end, the rebound of our oncology products was particularly strong.

And as we have monitored carefully end-user demand for the inline oncology products, their rebound in the second half did hit record highs across the products in the fourth quarter.

We believe that rebound of the inline products will increasingly be reflected in wholesaler purchase patterns, and therefore in strengthening of net sales.

And I believe we saw some of that in the third and fourth quarter net sales results.

I believe we will see it continuing into 2003.

That gives us some substantial confidence in now the evolution back on track of a good growth pattern of our inline oncology products.

Clearly, we needed additional capabilities in the AVINZA arena to put that business segment on a similar kind of growth and success track, and we believe that with the announcement of a co-promotion agreement with Organon, that that piece of the commercial puzzle and all of the corresponding resources are now in place for 2003, such that we believe as we look at 2003, there is good objective reason to be confident of a return to growth of our oncology products and now an exciting leverage in the growth rate of AVINZA.

We believe, therefore, that while 2002 was a challenging set of challenges, the corrective actions and the agreements we now have in place have addressed most of those issues, such that both very distinct businesses can be driving to much stronger product sales growth this year.

And I believe that we will talk a little bit more about the co-promotion agreement as it relates to that and to future financial results.

The co-promotion agreement that we have entered into to address AVINZA's needs for capabilities, I believe, is an important one.

It has been fairly clear that what Ligand needed was additional critical mass.

We believe that with the coming on board of Organon starting in March with their specialty sales forces, and April with their primary care sales forces, that we will be adding somewhere around 700 representatives to Ligand's 70, and that the two combined capabilities will now give us number two share of voice in the AVINZA market.

We believe that not only the sales force capabilities are important, but Organon brings to us important capabilities in long-term care, managed care, retail and wholesale distribution capabilities, that we have found particularly challenging as a small company with no retail distributed products.

And I believe that those strengths, plus their medical marketing infrastructure, will truly help us to make AVINZA all that it can be in a big growing market going forward.

I believe that combination of events, a partner now to realize the AVINZA potential, and our oncology products back on a firm growth track, we would like to be looking at 2003 as a year where we will realize the growth potential of these products with those more focused business strategies.

Therefore, going into 2003, and we looked at the outlook and prospects, we believe that the company is poised to have the kind of growth year that we believe the products can achieve.

And therefore, we are giving total year guidance of revenues in the range of $160-175m, net product sales conservatively in the $125-135m range, and operating expenses, reflecting our investments in clinical trials and investments in AVINZA, consistent with the co-promotion investments that we've dialogued with our partner, we see operating expenses growing to the $125-135m range, and that in a blend, producing a full-year operating income between $2-8m for the year.

And with the obvious charges, that would produce a small overall EPS loss for the year.

We would note that in 2002, we had rather strong growth of other revenue, reflecting milestones in the corporate partner product portfolio growth that we have seen and witnessed as that portfolio is increasingly expanding up to 11 products now in human clinical trials.

That strong revenue growth, we are taking a more conservative position on for 2003, and so we see most of the growth in our revenue coming from the product sales arena, as we believe the ramp-up of AVINZA now will be more accelerated.

And the return to growth of our oncology products will drive those two segments of product sales.

We do believe that the prospects for that to be achieved in 2003 are now solidly underpinned in the capabilities on the products.

The separation of the two business segments that we gained as we increasingly separated the commercial activities on Avinza and on our oncology products.

We believe those are very important drivers of the return to growth of the oncology products.

I think, we also would note that the medical marketing activities related to our oncology products are producing a substantial amount of additional clinical data, across all of those products and that is helping renew physician interest in those products and accelerate their use in larger market segments.

We believe that trend has been accelerated in the second half of last year.

And with continued focus coming in to this year, we believe that will continue to pay substantial dividends in the rate of product growth.

We would note that while we are giving overall guidance for the year, because of the nature of our business, smaller specialty products that quarter-to-quarter have a higher degree of volatility around wholesaler purchasing patterns, and the not completely knowable ramp rate of co-promotion revenues on Avinza, we are not going to giving quarterly guidance, per say, in a detailed way as we have in prior years.

We believe that it is important for a solid pattern that is a little bit more predictable to be seen, before we try to look in to the crystal ball and give any more quarterly guidance.

So, we are happy to dialogue about the overall year's guidance, which we believe is achievable for the Company, and so we will be happy to take Q&A on those things.

I think we will only make a couple of other comments on 2002.

We do believe that the Company's overall product portfolio continued to strengthen during the course of 2002, witness a number of new products entering the human clinical trials and a number of other products continuing to advance through.

So we continue to have that strength of our underlying business, with the commercial resources now commensurate to the challenges for both Avinza and our oncology products, we believe that those two components, the Company's long-term strength are in very, very solid shape.

The only other comment I would make before Q&A, really relates to very strong progress that we made on some of the clinical challenges for Targretin capsules, our frontline combination with chemotherapy trials in non-small cell long cancer have achieved to date now about the halfway mark of accruals in those trials and more recent months have been extremely encouraging in terms of the rate of accrual of both of those trials, leaving us confident that we will achieve our objectives to complete accrual of those trials this year and therefore have data next year on the survival parameters.

We are also delighted with the outcome of our Phase I/II randomized trails with Targretin gel in a large dermatologic market and dermatitis, and we believe that clinical data portends an exciting drug, in that rather unique RXR-selective topical [rexinoid].

And we plan to continue our investments in that area.

Finally, we do believe that the rate of publication of clinical data on ONTAK has accelerated quite dramatically with new uses and Graft-Versus-Host-Disease, data out for the first time in B-cell non-Hodgkin's lymphoma, and in increasing amount of data, that's very encouraging in CLL.

We believe those will continue to translate to expansion of interest in ONTAK and that certainly was the case in the second half of last year.

We believe that will be even more so this year.

I think with those comments, I will open the call to Q&A and be happy to take any questions.

Thank you.

At this time we will open up the lines for question and answers.

If you have a question, press star 1 on your touchtone phone at this time.

Thank you.

The first question comes from John Woolford from Legg Mason.

Go ahead please

Yes.

Good morning.

This is actually Stefan Loren from Legg Mason.

Good morning.

A couple of quick questions, I didn't get unfortunately to the queue in last conference call, but very quickly, I was wondering if you can tell us, if there’s going to be a push in the primary care area, what are you planning to do it different from what you did before the help get the pharmacies to stock of Avinza?

I think we have done a few surveys, as have others to show that it's actually relatively difficult to get still.

Yes, I think there is a simple answer to that and there probably is a more complicated one.

The first one is, clearly the level of prescriptions drive the ability to expand distribution of a C2 drug.

If you look at our current level of distribution, 4,000-5,000 pharmacies, they tend to be clustered more closely around the specialist's offices, and so where we have been successful with prescriptions, we have been successful in getting distribution.

Where we had not seen a multiple prescription flow, it’s much more difficult particularly because the pharmacy chains, whether they are independent or the large retail chains, are reluctant to put controlled drugs in until they are confident that one or two things is in place - the scale of promotional effort, i.e. number of reps that they are quite confident will send prescriptions in to their hundreds or thousands of pharmacies, or the actual prescriptions themselves.

We believe that from the feedback we have gotten, both directly ourselves and through our co-promotion partner, what most of the channels were waiting for was to see the muscle of a much larger sales force come on to the product.

We had certainly talked with them about somewhere in the neighborhood of 200-300 additional reps.

We are delighted that we are now able to deliver nearly 700 additional reps.

We think that's going to change dramatically the dynamic of when these pharmacies are prepared to stock.

I think that, that is an important part of the answer.

Then there is the technical, mechanical part, and that is the confidence of the wholesalers who work very closely with the chains and stock the chains.

The confidence of those wholesalers to do their job of promotional activity also stems from the size of the effort that’s out there.

That will be, I think, a barometer of how quickly and whether they will uptake prior to a large volume of prescriptions actually physically hitting the pharmacy.

I don't think there is a scenario in which we generate the prescriptions, but the distribution simply won't follow.

I think most of the channels have said that they will respect prescriptions hitting, stock the product and supply the demand.

So, I think there is a combination of -- how quick will it happen is what we are not sure.

Some of the channels are telling us and our partner, that they will do as they see the larger sales forces roll out.

That would be typical of a re-launch scenario, where they will say, “alright you are putting 700 reps on this, it’s going to move, we will put it, we stock it in half of our pharmacies and we will wait for the other half.” I think that’s what the rule-out is going to produce.

I think both parties have some relationships with the wholesalers and with some of the larger retail pharmacies.

I do believe that the depth and breath of the Organon's business and the type of relationship that they have is qualitative different than Ligand's and so there will be some, I think, benefit of just the relationships that a larger business units has with the channels of distribution.

So I don't know whether that got at your question, Stefan.

Almost all the way, and just very quickly then, so we don't expect to see a continuation of the discounts that you been giving?

Or at least the level of discounting?

By discounting, do you mean at retail level?

Actually, at retail and wholesale level, both.

Yes, we really haven't done much at wholesale level.

So there really hasn't been much of a discounting going on at wholesale level.

The retail certainly some level of discount is going to be required, whether it will be of the level of discounts that we been doing, probably not.

I think the level of discounts we been doing, for example in our fourth quarter deal, we are pretty much competitive with the other smaller organizations out there that have the same challenges to get the distribution on a limited prescription base.

So I think that they were appropriate for that scenario.

Now that we have larger capability, we obviously would like to scale back to those somewhat.

But I do want to highlight that some level of support on new products is traditional at retail.

So, some level would be continued.

Okay one question, before I jump back in the queue then, also Endo and Penwest recently filed an NDA that was also accepted [inaudible].

I was wondering, if you could give us a little thought about how you intend you to combat initial launch of this product.

I know it’s almost a year out, but not the end point.

It’s clearly coming in the bad time for the AVINZA launch?

Well I think is probably more like 18 months, to a couple of years out but time will tell how quickly the FDA will process things.

The sustained-release opioids are getting cleared typically in 2 years, so I think its probably that timeline.

I think that twice-a-day products, or once-a-day that are injectibles, are not really a major concern because they don't shift the best in class.

They just become another multiple times a day competitive product out there.

So we would track more closely and be more concerned about other once-a-day products that were actually oral because they could then if they were truly once-a-day could be potential competitors to our once-a-day.

But otherwise, I think we are not going to do anything different than to stay on the high ground of the best in class once-a-day, 24-hour around the clock treatment of pain, that's the message that both in our market research and in the Organon's market research, is proving to be a winning message with the physicians and being validated by their experience with the drug.

So I think we are not going to change anything with that, that's what they like.

And the benefits of that as the clinical data is emerging, the benefits of the once-a-day on better quality and quantity of sleep, those kinds of things are just getting stronger.

So I think we will stay with that message.

We won't change that.

And I believe its certainly will come down to the kind of critical mass we have now on the product with a couple of years head start, I think we will be just fine.

Okay thanks.

David Cohen (ph) with Fairlawn (ph) has a question.

Go ahead please.

Yes, morning.

Your last conference call got overwritten, there were two conference calls running at the same time, so it is kind of hard to hear a bunch of things that were said.

For instance Michael said something about peak sales.

Could you just repeat what you said?

I think, Mike's comments after the usual caveat, that it is always hard to predict, which we all know, I think his perspective and ours, is that the level of resources we are putting on this product, the goal for Ligand and Organon should be to get to at least a 10% share by year five in this market.

I think that was the bottom line of his comments.

How quickly we can ramp to that, I think is always a lot more speculative.

I think we would certainly this year like to see a run rate by year end of 3% or 4% of the market going forward.

And I think that, therefore, the 10% goal, if you look at the market last year, it was $2.7b.

We think it is going to continue to slow down in terms of dollar growth, probably grow at about 8-10% a year over the next five years.

So you can pretty much round the numbers from there, David.

That's great.

Thank you.

Secondly, on the pharmacies, if you could just follow-up, do you still expect to get to 20,000 pharmacies by the middle of this year?

I think we are obviously and immediately focused with our Organon colleagues on that mission.

I think that both us as we look at the marketplace have the appreciation that it is in fact the appropriate goal.

Can we get there with their assistance?

We have got about another 15,000 pharmacies to get over the next three to four months.

I think it’s probably within the realm of doable.

I think it is probably safer to assume that it will take a couple of quarters from this initiation of the relationship.

So somewhere in the second or third quarter is probably where we would accept to accomplish that.

We have made some interesting progress even on our own, David.

This doesn't show up in dramatic numbers yet, but we actually now have the three warehousing chain pharmacies that have put the product into their central systems and that was actually a very important step for us.

We got that accomplished in fourth quarter and early first quarter of this year.

So there continues to be good progress.

There is good enthusiasm in the retail chains for AVINZA.

I think that doesn't come across yet in the volume of purchasing, but they are very supportive of the product and they are moving it into their systems.

And so we were making incremental progress, I think the capabilities of Organon and the jump-in prescription rate are probably the two factors that I think will give us a confidence to get to that 20,000 pharmacies.

And the third question, is when you did the comparisons for upfront payments versus the structure of the deal you went for now.

Can you comment on what sort of discount rates you were thinking of?

And by discount rates, David you mean?

In your last conference call, you were comparing future cash flows versus present cash flows in making your decisions to structure the deal this way.

You said it was sort of a breakeven, in your sense of getting that upfront payment versus doing it this way.

Well I am not so sure I said it was a breakeven, I think what --

Between the two structures was breakeven.

It was pretty close in either way. 60, 40 or something like that.

But that implied a discount rate I thought.

Now probably I was inartful in my comments, if that was the conclusion you came to.

Let me see if I can help with the question.

We had several different, in fact, we had probably five or six different dialogues on AVINZA with different partners.

Each one of those, through the dynamics of the timing of the negotiations, the negotiations was a different kind of deal and with the different a risk return profile.

As we move through, and got the restructuring of the economics of AVINZA and rights on AVINZA, it became very clear to us that once you have that completed, what's really important for your shareholders is not whether you get a little bit of cash upfront or a lot of cash upfront, if the expense of that cash is to give away a lot of the operational economics from the product or to delay the return of that economics.

So the two kinds of trade-offs we had, were how much of the cash flow -- in order to get some cash upfront, how much of the cash flow the product do you give away?

And how long do you ask your shareholders to wait for the return in the operational setting?

Because cash upfront, you put it in the bank but it does no good to drive your EPS, nor to drive the value of your shares.

So, as we looked at some of the trade-offs, you can see in the structure of this deal, the economics, we are extremely leveraged to take a lot of earnings for our shareholders from the first few years of cash flow on this product, while not having to pay for the commercial resources that are producing those sales.

That's the kind of leverage we wanted to build in.

Some of the other discussions we had, the parties wanted a different risk return.

They wanted their commercial investments paid for from the product and then their would be a sharing percentage.

Well when you watch that out, we felt the balance was -- and the good examples I think are this year -- right up through breakeven level sales we are going to take 80-85 cents on the dollar from the cash flow of AVINZA and not be paying for a huge commercial effort on the product.

That's very financially attractive.

Even in 2004, when the full revenue effects of that number two share of voice should be seen.

Even then we are going to be taking 65 cents plus on the dollar from the cash flows.

That drops a tremendous amount of operating earnings to Ligand and its shareholders and we felt that was the best way to translate value from AVINZA.

Not giving away a lot of that economics over the next few years to get some cash upfront.

So, I don’t know how to answer the discount question, but what I can tell you is the sharing of the overall NPV on this particular deal was the highest of any of the deals that we looked at.

And my point is just to do an NPV, you need a discount rate.

And you must have used the discount rate.

I don't know the cost of capital at discount rate to do the NPV's for that.

Yeah, we actually did several, David, because we are dealing with Organon who has probably an NPV issue and you are trying to negotiate relative value sharing.

We used as low as 10% discount rate, and as high as 15%, as we did the valuations.

And, per se, if you could just comment about pricing on AVINZA, as part of the Organon launch, do you expect any change in pricing of the product?

Well we don’t expect a change in price as a result of the Organon relationship.

We would expect the usual annual price increase this year.

We launched last year, haven't changed prices, and since we launched, all the other competitors in the marketplace have raised their prices substantially.

So, the space that we had on launch between ourselves and Purdue Frederick, between ourselves and the other competitors has only grown wider.

So --

When do you expect the price increase then?

We certainly would expect it sometime in the first half of this year.

Great.

And then last thing, I wonder if you could just comment on the AVINZA script and the breakdown between 30 mg, 60, 90, 120 mg, what are you seeing on that stuff?

Yeah, we are seeing a lot of volatility in the mix, and some of it related to patient's starter pack couponing.

So we use coupons to help new patients get started.

They get a 10-day trial of product to make sure they adjust to it well for a small co-pay fee, and that's done through a couponing program.

So when you track through the flow and redemption of those coupons, which have been important sources of new patients, you see it drives a change in mix.

And so that one factor that's causing some of the volatility.

Right now what we are seeing is a preponderance of the 30 mg starter dose.

So it means the largest part of our patients are new patients, opioid [naïve].

We are beginning to see the growth of the 90 and 120 mg, which are more reflective of patients being converted.

So I think right now we are running about 50% of our prescriptions in the 30 mg and then the balance in 60, 90 and 120.

Thank you very much.

The next question comes from Alan Auerbach from Wells Fargo Securities, go ahead please.

Yes.

I have two question related to AVINZA.

First of all, is there any reason that you guys haven’t given AVINZA guidance for '03?

I guess, there are a couple of answers to that.

The first is, we did give overall product revenue guidance, and we did say that slightly more than half of that would be oncology products.

So, obviously, the balance of that is some gross [amount of] guidance on AVINZA.

To do more than that, we would like to, I think have a little bit of experience with our co-promotion partner and to get at least a few months of prescription read outs so that we do a, let's say a more accurate job of giving guidance on the nearer term prospects.

When you put that level of resources -- we know what our 25-50 men sales force has generated in AVINZA prescriptions.

We put that in our earnings release.

It's a little scary when you say we are putting at least 10 times the scale of effort on the product.

The degrees of variability were just too great for us to get into too much specific quarterly guidance or more specific guidance till we actually have some experience.

And I think, Alan, that was the reason for a little bit of caution on how we give additional guidance on AVINZA.

I think, as we have a quarter under our belt, we can see the response to all three of the Organon sales forces.

We are quite confident it will be very positive, how positive and how fast is what we would be a little cautious on.

We have clearly not been able to predict, as with many new product launches, the response to our own limited efforts and now the degrees of freedom with that scale of effort are just pretty big.

Okay.

And my second question.

Although it is early in AVINZA's launch, have you been able to figure out whether AVINZA is taking share away from other drugs?

Or where exactly your market share is coming from with AVINZA?

I think, what we would say right now, is the initial early assessments are that we are competing quite effectively for new patients.

We have not seen, yet, a large movement of changing patients from one drug to other.

So, clearly, we are getting a little bit of the potential business for all the competitors in the competition for new patient prescriptions.

I think that the co-promotion dynamics, we now will be number two share of voice, and really competing pretty head-to-head with number one.

I think that's going to change dramatically, Alan.

And I think we will begin to see some real inroads into the other multiple times per day therapeutics.

I think to achieve the goals, it won't now only come from just new patient prescription competition.

It will be coming from some conversions and really start to bite into the other products.

Okay, great.

Thank you

John Woolford from Legg Mason has a question.

Go ahead.

Yes, hi its Stefan Loren again.

Very quickly, David you renegotiated the Royalty Pharma deal twice now.

That has really brought in quite a bit in just in terms of cash to the company.

I was wondering if the guidance for this year is predicted on the current deal, or if you anticipate any changes going further on that, or any acceleration of payments as we saw in 3Q?

Yes, it's a great question.

Our guidance is really based upon the current deal, and the current deal as you know has two options.

One, in the third quarter and one in the fourth quarter of $12.5m each for additional increments of the SERM royalties.

Our guidance is based on the exercise of only one of those options.

So, should both options be exercised, we would view that as an upside to our guidance.

Okay.

I think it's very interesting.

One final comment as well.

As you are looking at -- you were talking about the net present value of the deal, did the $106m that you paid to Elan to actually facilitate this deal enter into those calculations in terms of the net present value, or is this net present value going forward?

They did figure into the calculations.

Okay.

Yes.

There are no more questions at this time, but if anyone has a question, press star 1.

Okay, Mr. Robinson, there are no more questions at this time.

Thank you very much.

We appreciate your participation this morning, and again we will make ourselves available later on today if there are additional follow-up questions.

Thank you.