Supernus Pharmaceuticals Inc (SUPN) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Supernus Pharmaceuticals 2Q 2014 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would like to introduce your host of today's conference, Mr. Rich Cockrell. Sir, you may begin.

Thank you very much, and thank you for joining us today for Supernus's second-quarter 2014 results call. Results today are being discussed for the quarter ending June 30, 2014. Yesterday, the Company issued a press release announcing second-quarter financial results.

On the call with me today are Chief Executive Officer Jack Khattar, and Chief Financial Officer Greg Patrick. Today's call is being made available via the Investor Relations section of the Company's website at www.ir.supernus.com. Following remarks by management, we'll open the call to your questions. We expect the duration of the call to be approximately 30 minutes.

Now, during the course of this call, management may make certain forward-looking statements regarding future events and the Company's future performance. These forward-looking statements reflect Supernus's current perspective on existing trends and information, and can be identified by such words as expect, plan, will, may, anticipate, believe, should, intend, and other words of similar meaning.

Any such forward-looking statements are not guarantees of future performance, and involve risks and uncertainties, including those listed in the risk factors section of the Company's annual report on form 10-K, filed March 30, 2014. Actual results may differ materially from those projected in the forward-looking statements.

For the benefit of those of you who may be listening to the replay, this call is being held and recorded on August 12 at approximately 9:00 AM Eastern time. Since then, the Company may have made additional announcements related to the topics discussed. Please reference the Company's most recent press releases and current filings with the SEC. Supernus declines any obligation to update these forward-looking statements, except as may be required by applicable securities laws.

With that, I'd like to turn the call over to Jack. Go ahead, Jack.

Thank you, Rich, and good morning, everyone. We appreciate you taking the time to join us today as we discuss our second-quarter results.

In May, we completed the expansion of our sales force to more than 150 sales representatives. The number of sales calls delivered to target physicians grew by 44% in the second quarter, as compared to the first quarter of 2014. As a result, prescription trends continued to be robust for Trokendi XR and Oxtellar XR.

In addition, the combined sequential quarter-over-quarter prescription growth for both products combined, as reported by IMS, has accelerated. Between the fourth quarter of 2013 and the first quarter of 2014, total prescription growth was approximately 9,100; while between the first quarter of 2014 and second quarter of 2014, total prescriptions increased by approximately 13,000.

For Trokendi XR and Oxtellar XR combined, the second-quarter IMS prescriptions totaled 43,207, representing a 43% growth over the first quarter of 2014. Of that total, Trokendi XR prescriptions were 28,773, representing a 54% increase over the 18,727 prescriptions in the first quarter of this year. The remaining 14,434 prescriptions for Oxtellar XR represented a 26% increase over the 11,481 prescriptions filled during the first quarter of 2014.

We have been seeing, on an average, a higher WAC price per prescription and more favorable gross-to-net adjustment. Based on that, we believe we need to be around 27,000 prescriptions in December, instead of our initial estimate of 30,000, to reach cash flow breakeven on an operating basis.

For the month of June, total prescriptions for Trokendi XR and Oxtellar XR, as reported by IMS and Symphony SHA, were around 16,000. Given that the sales force expansion was completed in May, and the full impact of such expansion will be in the second half of the year, we continue to be comfortable with the growth trajectory of our prescriptions towards our break-even target.

Both products continue to see increased managed care coverage. For Oxtellar XR, we now have approximately 160 million lives covered, with 129 million lives in commercial and 31 million in Medicaid, representing an increase of 10 million lives in total. Similarly, Trokendi XR coverage increased by 1.5 million lives to 145 million lives in total, with 118 million in commercial and 27 million in Medicaid.

In addition, we are making solid progress on developing our pipeline candidates, SPN-812 for ADHD and SPN-810 for impulsive aggression in patients with ADHD. For SPN-810, we are completing our scale up in manufacturing activities, and continue to be on schedule to start patient dosing in a Phase III study on SPN-810 in 2015. For SPN-812, we initiated and completed a pharmacokinetics study in the second quarter to test extended release formulations for the product. The study was successful, and we have selected an extended release formulation that will be the basis of the product for testing in a Phase IIb study in 2015.

Finally, in the second quarter, our partner, United Therapeutics, launched Orenitram, which is the first oral prostacyclin product approved for the treatment of patients with pulmonary arterial hypertension. As announced in a prior press release, we entered into a $30-million royalty agreement with HealthCare Royalty Partners to monetize a portion of the royalty revenue stream.

This was a major accomplishment for Supernus. It strengthened our balance sheet with a strong cash position that is now expected to be in the range of $75 million to $85 million by year end, and that should take us well into sustained profitability without the need for future capital raise. It also allowed us to have significant added operational flexibility and capacity from a business development perspective.

I will now turn the call over to Greg Patrick, our CFO, to discuss our financial results.

Thanks, Jack. As I review our financial results, I'd like to remind our listeners to refer to the second-quarter 2014 earnings press release issued yesterday, as well as our form 10-Q for the second quarter, which will be filed later this week.

Net product revenue for the second quarter of 2014 was $27.6 million. This is comprised of $22.6 million for Trokendi XR and $5 million for Oxtellar XR.

As of the second quarter, we have sufficient data to estimate rebates, returns, and allowances upon shipment of Trokendi XR to wholesalers. Therefore, as of the second quarter, we have transitioned to contemporaneous revenue recognition for Trokendi XR.

Revenue for Trokendi XR for the second quarter is, therefore, comprised of three components. First, $7.2 million for prescriptions filled in the first quarter of 2014. Second, $10.5 million for prescriptions filled in the second quarter of 2014. Third, $4.9 million for product in the distribution channel as of June 30.

Net deferred product revenue on the balance sheet as of June 30 has been recognized, and the balance is eliminated, due to the transition to contemporaneous revenue recognition. On a quarter-over-quarter basis, reported Trokendi XR revenue increased by $18.5 million from $4.1 million in the first quarter, which was based on 11,244 prescriptions filled during the fourth quarter of 2013. Net revenue from shipments of Oxtellar XR to wholesalers for the second quarter of 2014 was $5 million.

Gross margin for the quarter was 94%, compared to 94.5% in the first quarter. Going forward, we continue to expect product gross margins to exceed 90%.

Selling, general and administrative expenses for the second-quarter 2014 were $19.6 million. Year over year, SG&A increased 60% from $12.2 million in the second-quarter 2013. This increase reflects the expansion of the sales force to more than 150 representatives, coupled with increased promotional- and marketing-related programs. Research and development expenses during the second-quarter 2014 were $4.7 million, as compared to $3.5 million in the second quarter of 2013.

For the quarter, operating income totaled $3.8 million, as compared to a $15.5-million loss in the second quarter of 2013. Reported net income for the second-quarter 2014 was $3.2 million, or $0.08 per diluted share, as compared to a net loss of $27.4 million, or a loss of $0.89 per diluted share, reported for the second quarter of 2013. The increase of $30.6 million year over year primarily reflects the revenue generated from our commercial products, coupled with the impact of issuing $90 million in convertible debt in 2013.

Approximately 42 million weighted average common shares were outstanding in the second-quarter 2014, as compared to 31 million shares in the second quarter of 2013. As of June 30, 2014, $50.2 million worth of six-year $90-million convertible notes bearing interest at 7.5% per annum have been converted to common stock. Excluding a non-cash gain of $0.7 million related to changes in the fair value of derivative liabilities, non-GAAP net income for the second quarter of 2014 was $2.6 million.

As of June 30, 2014, we had $62.7 million in cash, cash equivalents, marketable securities, and long-term marketable securities, compared to approximately $70.5 million as of March 31, 2014. Inclusive of the royalty monetization payment of $30 million that was mentioned earlier, we expect cash burn for full-year 2014 to range from $5 million to $15 million,(sic-see press release �$5 million to $10 million�) with the year-end cash and marketable securities balance projected to range from $75 million to $85 million.

We also now expect reported total revenue for calendar-year 2014 to be approximately $105 million. And, as Jack mentioned earlier, we continue to forecast that the Company will be cash flow breakeven by year end.

I will now turn the call back to Jack for some closing remarks.

This second quarter has been marked by continued strong momentum in prescription growth for both products. We continue to make excellent progress toward our full-year objectives.

We closed the first half of the year with record revenues of $38.7 million, reflecting the strength of our Business and the strong foundation we're building at Supernus. Combining the first-half year-to-date revenue of $38.7 million with the royalty revenues of $30 million results in a total of $68.7 million. This total is approximately two-thirds of the way towards our revised full-year revenue objective of approximately $105 million.

Our Business is well capitalized, and the stage is set for us to move to the next level in building Supernus. We are looking forward to having a banner year in Supernus history by achieving profitability for the full year, and passing the $100-million mark in revenues.

I would now like to open the call to your questions.

Certainly.

(Operator Instructions)

Annabel Samimy, Stifel.

Congratulations on the quarter. I had a few.

You mentioned that the WAC prices that you're observing are increasing. Can you tell us what's driving it, exactly? Is it that people are taking price increases, or is the gross net discounting, becoming less aggressive? Can you just explain the trends that were there?

And then I'll follow up with some other questions. Thanks.

Okay. Annabel, you asked about the WAC price increasing--

Yes.

--A bit as compared to our initial projections. I'd say it's a confluence of a couple things. First, I think there's a little bit of a different mix than we have originally anticipated, so that's enduring to our benefits. And I'd say secondly, we have taken price increases judiciously during the year, but I think, probably a little bit differently than we originally envisioned. And that, also, has factored into our WAC pricing expectations for the year.

In terms of gross-to-net, you referenced that, also, that's clearly an evolving picture and will change over time. Once again, I think we started the year with conservative expectations for gross-to-net. And as we've progressed through the year, we've found that those conservative expectations were, indeed, quite conservative. And our expectations going forward, in terms of how we frame our cash flow breakeven, have now been mated to match those revised expectations.

I think we're a couple points better, in terms of gross-to-net. And that's playing through, in terms of the comments Jack made about expectation, in terms of cash flow breakeven and run rate to do that.

Okay.

Can you actually put any numbers behind that? When you said the mix is different, is it because the doses that are being used are higher? Or when you say price increases, I guess I could look up the price increases myself. But if you could just give us an idea of what you've taken. And then, on the actual gross-to-net, would you share that with us?

Regarding the price increases, we took the 9% price increase in February, or 8.9% increase in February, on Oxtellar XR. So that's the only one that actually will take effect or have taken effect in the first half of the year.

But it's really a combination of that and, as Greg said, and the mix of the products. So we're seeing a higher number of tablets per prescription, which is really increasing the revenue, obviously, on a per-prescription basis because of the mix of the products and the way physicians are prescribing it.

Which is, obviously, always very difficult, initially, to project as to when you first launch a product, you think you might mimic the market exactly. But then, this is a once-a-day; the market is twice-a-day. Obviously, it is very difficult to see what equivalent dose strengths on daily dose basis physicians will end up using. So it's really a combination of all that, that led to the change.

I just want to add that, Annabel, you asked about gross-to-net. I would say that long-term, who knows what the long term is going to sort out? But we've always said that long-term gross-to-net for Trokendi XR we expect to be in the 75% range. So something -- gross-to-net reduction of about 25 percentage points.

And Oxtellar XR, being more heavily represented in Medicaid, would be in the lower 70s%, say 73%, 72%. So gross-to-net reduction -- 27%, 28%. I would say where we are right now is several percentage points better than that on both products.

So I won't give exact numbers, but I would say that our gross-to-net, overall, is more in -- the reductions are more in the low 20s%, rather than the mid-to-upper 20s% right now, for both products. Does that help?

Okay. Yes, that helps a lot. Thank you the for the detail.

Just a couple other questions. We know that Upsher-Smith's product was approved to be seen launched. We haven't really seen it show up in the prescription trends.

Then also, one more follow-up on the user royalty. The $30 million that you got for monetizing that royalty stream, is that $30 million up front, and we shouldn't expect any further royalties after that? Am I understanding that correctly?

Let me answer that question first because that's an easy one. I'm going to give Jack the hard one.

The $30 million, yes, we have received that July, as we said in our press release. The way it is configured is that have given certain royalty rights over to HealthCare Partners, and that for a period of time until a certain predetermined cumulative return is attained.

When and if that cumulative return is attained, then those royalty rights come back to us. So I'd say, in the short- to mid-term, you should not expect us to be recognizing royalties. But depending on how Orenitram runs, that may come back to us several years hence. Time will tell.

Okay, great. Thanks.

And then the Upsher-Smith, please?

Yes. Regarding Upsher-Smith, we saw last week, I believe, a few prescriptions recorded for their products. Just to update everybody, basically what they did, is they launched two products. It the Qudexy XR, which is the brand, but at the same time, or actually before that, they made available also an authorized generic to the Qudexy XR product.

It is very important to emphasize and clarify to everyone that the AG, or the authorized generic is a generic to their brand. There is no generic to Trokendi XR that is approved. Qudexy XR -- the authorized generic of Upsher-Smith is a different label than Trokendi XR. They are two different products. They are not buy equivalent by the FDA, and they are approved separately.

So there's no substitution, and there should be no substitution. Any substitution, if it does ever happen, will be illegal substitution by the pharmacist or by whoever could be promoting that type of substitution. So the two products are very separate. And the authorized generic is to Qudexy XR. And as I said, we saw few prescriptions last week.

Okay.

If I can follow-up on that. Have payers or PBMs been very specific about which drugs they reimburse and what they don't reimburse? And are there any that are preferred over others, other than, obviously, the generics to reference molecules? Or do they generally -- allow them all for -- provide access to all of them?

Yes. As far as managed care -- and obviously, this is still early for us, so hopefully everybody will understand that it's not like we have a full month or couple months to read what the market is doing at this point -- but our initial read and our initial market research, we believe we're well entrenched in managed care. We have very strong position, as we said, and we continue to build on the coverage of our product.

So it remains to be seen, as to what positions they will get on their product. We don't expect it to be that different from being a Tier 3, like every other extended release product the market has treated before us, and including us. So we expect this to be the norm.

As far as the authorized generic, they probably are trying to put on a Tier 1. Whether they will be successful or not, again, we'll have to wait and see what happens there. This is a little bit unprecedented for a company to launch a brand and authorized generic at the same time. And managed care can see through that strategy, and we'll see how they react to it.

All right, thank you.

Bill Tanner, FBR Capital Markets.

Thanks.

I had a couple questions, Jack, on 810. And I know, in your press release, it says that the Company is progressing towards full-scale production of the compound. Just curious if you could comment as to that.

Also, I know in the past, you've talked about working with the FDA to determine what would need to be shown for the drug to be approvable. I wonder if you can comment on what that -- presuming that, since you're going into full-scale production, you have reached some kind of agreement or feel like you may. And then one, curious if this would be done under an SPA?

Yes. To start with, it will be done under the SPA. That's the goal, and that's that discussion we've had with the FDA. And we'll continue to go down that path.

Regarding the manufacturing -- we've been very busy on the scale-up, transferring the technology. So we're really well underway on all these activities. As far as the design -- off the Phase III study, the protocols. We will be finalizing those in the third, fourth quarter, depending how quickly we can do that with the FDA -- with their agreement, obviously -- before we push the button on starting the coding sites and so forth for the Phase III.

So we're very pleased with the discussions that have been going on with the FDA on this program. Again, as I mentioned before, we believe the FDA is very happy to see somebody actually developing something in this field because it has been a neglected, unmet medical need without anything that has been approved or developed the right way. Yes, physicians use a lot of things off-label, but all these other products have their issues, as far as the side effects and negative implications to children and so forth.

So we've been very pleased with the interaction with the FDA and continue to push forward. This is our top pipeline product. So naturally, we're putting a lot of emphasis on it. And we are investing heavily in our activities.

In addition to that, I think we mentioned a little bit earlier -- it could be last quarter -- but we continue to move along as well in animal studies. The carcinogenicity studies and so forth. So all of these are moving in parallel, although they're not very visible to the street. But these are things that we need to do, regardless, to make sure we have a complete, strong NDA when we do filed the NDA.

We action completed one of the species on the carcinogenicity study. We're completing the second one. So that is actually well underway for completion. As some of you know, these are two-year carcinogenicity studies, and we're almost finished with both studies.

So a lot of progress. And on the dosage strengths and so forth, obviously, those will be finalized when the protocol is all set. But that doesn't mean we can't complete, as much as possible, the commercial scale-up of the technology itself.

Then, just a couple follow-ups on -- is it contemplated that you need to conduct a second Phase III study? And then also, can you just give us a rough timeframe of what the treatment period in the study might be?

Yes. On this program, we will need two Phase IIIs because this is a different -- although this is a 5052 NDA, this is a little bit different than, obviously, our previous two products, where they were studied for the same indication that the molecules have been known for.

So Molindone, which is an antipsychotic originally, a very old antipsychotic, given that now we are studying it for a new indication, we will be required to do a minimum two Phase III studies. I say minimum because there is a potential we might go for a much broader indication that is not just for ADHD patients.

You may recall, we do believe, and we have said that the potential of this product is not only in ADHD patients. There is a pretty strong prevalence of compulsive aggression in autism, in bipolar, and schizophrenic patients, and so forth.

So part of the discussion with the FDA that is going on and will continue to go on is that we need only two Phase III studies, and you will give us an indication for only ADHD. Or could we do three studies and then we get a much broader indication? So, obviously, we're weighing all that and trying to make sure we have the best development package here and the best approvable package with the broadest potential label we can get.

Okay.

And maybe just on the treatment period -- the duration. Just trying to get a handle on --

The specific treatment duration is still in discussion with the FDA. The previous ones we did, if you look at the Phase IIa study and the Phase IIb studies, those were well within the 12-week treatment. So we don't expect this to be a very long-term treatment, because you can fairly easily detect and count the number of episodes of aggression and the extent of the aggression. So it's not like you have to wait for a long period of time to see the effect of the drug.

Okay, perfect. Thanks very much.

(Operator Instructions)

Sal Rais, Cowen and Company.

Hello.

Last quarter, you mentioned that you are aggressively looking at the -- on that BD front. And just want to get an update on where things stand there.

And if you can also give us a sense of what the earlier profitability and cash flow positive now, how you think about your ability to lever up. And just a little bit of context on the covenants that are on the convertible notes that you have?

Sure. Why don't I take the back end of that question, and perhaps Jack will handle the front end of the question.

In terms of the covenants -- the covenants regarding the convertible notes are several. The two most important ones regard profitability. They're measured on a 12-month trailing basis EBITDA and free cash flow. And those limit how much leverage the Company can apply.

So in terms of applying leverage to our balance sheet, were we to want to do that in any substantial way, would have consider both where we stand on a 12-month rolling basis, and then, perhaps, also consider even taking out or doing something about the existing residual notes. As Bob mentioned earlier, $50 million of the $90 million of notes have converted. We continue to see conversions come through rather sporadically.

That, frankly, is an issue that we'll address, going forward. Right now, the Company has no plans to try to preemptively take out the rest of the notes. But that's always something we could do, if the facts and circumstances warranted it. So I'll ask Jack to respond to the BD question.

Regarding BD, as I mentioned earlier, we will continue to say that. We are very active in BD. We continue to always look at opportunities as they come along, whether they're products, they're companies, they're in licensing, they're M&A. We're always active on that front and looking at things that strategically fit well with what we do.

Clearly, today we have probably one of the biggest footprints in the neurology space with our extended sales force. We're very busy and have been very busy launching two products. And therefore, at some point, it will make, probably, more sense to bring in other products. But we don't want to neglect what we have, and we want to make sure we do a very successful launch of our products and entrench them well in the marketplace.

But we continue to look at these different assets as they become available over time. We've been involved and active all along, actually, for the last two years or so. And it's very hard to predict, obviously, what we do or we don't do because, as you all know, these things come and go very quickly sometimes.

As far as your comment on profitability -- looking forward, clearly the $30 million transaction that we did this year, back in June, July timeframe, was an important and significant accomplishment for this Company. It really changed the landscape, as we believe, for Supernus, because it bridged us pretty quickly to get to the cash flow breakeven point and profitability.

And as you'll recall, both products, Trokendi XR and Oxtellar XR, are fairly high-margin products. And therefore, given we haven't given any guidance for 2015 and what the profitability will be and so forth, we certainly believe we're getting to profitability, but getting to it in a sustainable a sustainable manner. This is not just a quick hit, that it just happened.

The $30 million, obviously, helped us to get there, but it helped us to get to a sustainable position, not to hit it in one quarter, and then we're going to go back to cash flow negative. So that's why we're very comfortable with the projections and the way the Company and the business is building over time. And 2015 should be a solid year for us, given the strong gross margins of Trokendi XR and Oxtellar XR.

Thank you.

Joel Beatty, Citi.

Hi. I'm calling in for John [Ecker]. Thanks for taken our question.

A question on the royalty agreement. Does the new breakeven point that you mentioned also consider the royalty agreement?

The new breakeven point -- you mean the 26,000, 27,000 prescriptions?

Right.

The royalty agreement, the $30 million exclusive of everything we are doing, so the base brand, or the base business in Trokendi XR and Oxtellar XR, and the cash flow breakeven, which we said on an operating basis -- what we meant by that is really normal operations, excluding one-time events, such as the royalty.

Okay, great. Yes, that make sense.

Then one last question on Oxtellar, notice the script growth looks pretty good, 26% quarter-over-quarter, but the revenue was almost flat. What you think are the contributing factors to that, and how should we think about the revenue growth for Oxtellar in the next quarters?

Quarter-over-quarter, there's always sometimes fluctuations in shipments to wholesalers. So the key to us, what we, obviously, we look at is mainly the growth in the business. And it's been very, very healthy. The 26% is a fairly strong growth in prescriptions. We continue to see strong withdrawals from wholesalers to pharmacists. So we get that data sometimes, on and off, to keep our finger on the pulse of the business.

So this is expected -- to see these kind of fluctuations on a quarter-to-quarter, in a business that is still being established. Especially with the expansion of our sales force. So from that perspective, we're not concerned about it.

All that notwithstanding, our anticipation is that in the steady-state, that shipments to wholesalers and the underlying prescription trends are going to mimic one another.

Great, thanks.

Sure.

David Amsellam, Piper Jaffray.

Hello. This is Traver Davis, on for David. Thanks for taking the questions.

Just a quick couple, drilling down on expenses. Is there any early estimate on what the top of the Phase III program will be for the impulse suppressive product -- aggression product?

Then secondly, on SG&A expense and how that's trending. So it looks like you did about $20 million in the third quarter. Now that the expansion of sales force -- at least this round -- is now complete, how can we see that number trending for the rest of the year? And are we looking at a number closer to $100 million in SG&A expense for 2015, or should we see the growth normalized on that front? Thanks.

I'll start by talking about the Phase III on SPN-810. Again, given that we are in discussions with FDA on finalizing protocols and designs and so forth, I'm sure you'll appreciate -- any numbers I throw out may change completely, depending on [reasons]. It's very hard for me to give you the specific number, as to what these Phase IIIs cost.

I think, if you look at what normally a Phase III costs, and ADHD, in general, maybe increase it a little bit because this is a new indication whatsoever, you probably would end up in a good place anyway.

Regarding the other issues, clearly, we are having issues, any guidance for 2015, so it's going to be hard for us to give you specific numbers as to what 2015 is going to look like from an expenses or SG&A point of view and so forth. But we did say, several times, that the expansion of the sales force -- as you rightfully pointed out -- has been basically completed.

So it's not like, in 2015, we're going to be further expanding our infrastructure. We don't need to do that. We are done with the expansion of the sales force, and therefore, we look for 2015 to be a much more efficient year for us, obviously.

Greg?

Thanks, guys.

I think that Jack hit the nail on the head. The only thing that I would add, regarding SG&A, is that actually, with the [recruitment of sales force] in the second quarter, we are seeing and deploying numbers -- seeing some one-time expenses, which we don't expect to repeat, going forward. So if anything, my expectation around SG&A is, it's going to be very flattish.

As was mentioned innumerable times, the sales force has been configured to create a scalable business model. In other words, that the sales force, once deployed, doesn't need additional augmentation, spending-wise or otherwise, to continue to drive revenue growth. So as we hit cash flow breakeven by year-end and expand the business next year, we expect a very significant portion of that incremental revenue and margin to drop the bottom line.

Okay. Thanks.

Thank you. I would now like to turn the call over to Management for any closing remarks.

Thank you, all, for joining us today. We're very excited about our accomplishments in the first half of this year and very much look forward to the second half.

As I mentioned earlier, we are well capitalized, and the stage is set for us to move to the next level in building Supernus. We are very much looking forward to having a banner year in Supernus' history, by achieving profitability for the full year and passing the $100 million-dollar mark in revenues. Thank you so much.

Ladies and gentlemen, thank you for your participation on--