Avadel Pharmaceuticals plc
Q2 2019 Earnings Call Transcript

Published: 9 Aug 2019

[Operator:]

Good morning, ladies and gentlemen. Thank you for standing by and welcome to the Avadel Pharmaceuticals Second Quarter 2019 Financial Results Conference Call. At this time, all participants are in a listen-only mode.I will now turn the call over to Mr. Mike Kanan, Chief Financial Officer of Avadel. You may begin.

[Mike Kanan:]

Thank you, and good morning to everyone and thanks for joining us on our conference call. This morning we issued our second quarter 2019 financial results news release. This release can be accessed on our website at www.avadel.com.As a reminder, before we begin, the following presentation includes a number of matters that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements.These risks include

[Greg Divis:]

Thank you, Mike. Good morning, everyone and thank you for joining us on our call today. As 2019 has progressed, we continued to make a great deal of progress across our strategic objectives that we communicated earlier this year including

[Jordan Dubow:]

Thank you Greg and good morning everyone. I'm now three months into my tenure at Avadel and remain excited about where we are today, and more importantly, where we're headed. When I joined Avadel at the end of April, I had several immediate objectives

[Mike Kanan:]

Thanks Jordan. Before detailing the financials for the quarter, I want to summarize some important financial highlights. First, as you heard Greg say, revenues from our hospital business were better than we anticipated when we began the year and when we updated our full year revenue guidance back in May.Revenues were $17.6 million in the second quarter and this is $1.1 million higher than the first quarter of 2019. We are pleased with this quarter's performance as our legacy hospital business continues to generate positive cash flow.Second, our cost reduction actions are taking hold. We have cut cost by about $40 million through the first six months of 2019. And as you heard Greg say, we are on track to meet the $80 million to $90 million cost reduction goal we targeted earlier this year. These actions including cost reductions in France, Ireland, and the U.S. were needed to align the company's cost structure with the realities of our business.It's worth noting that virtually all cost associated with Noctiva and Avadel Specialty Pharmaceutical LLC have been eliminated. Our restructuring actions in Ireland are complete and well underway in France.I'm pleased to say that the cost to implement these restructuring actions are trending lower than we originally we projected. As you may recall we expect $10 million to $15 million of restructuring costs. Through June 30th, we've incurred about $3 million of restructuring cost and now expect cash restructuring cost could be between $5 million to $7 million in total.And finally, I'm pleased to say that our use of cash or our quarterly cash burn was minimal in Q2. Cash at the end of June was $79.3 million compared to $79.9 million at the end of March. Better than forecasted revenue as mentioned, improvements in working capital, and our aggressive cost reductions have been key components of mitigating our cash use. Based on these cash flow trends and factoring in our current plan, including anticipated cost reductions resulting from our restructuring actions and our longer-term cash flow projection for our hospital portfolio and the continued investment in FT218, cash on hand is expected to be sufficient to fund operations into 2021 and this includes completion of the REST-ON study and disclosure of topline results.Now, I would like to touch on the rest of the financial highlights for the quarter. As mentioned, revenues were $17.6 million for the second quarter, down from $29.2 million in the second quarter last year, due to lower net selling prices across all of our hospital products, as a result of increased market competition and price compression. As previously stated, Q2, 2019 revenues were higher than we anticipated due primarily to competitive launches and/or pricing actions that did not occur during the quarter.We still do expect increased competition from products launched or expected to be launched in 2019. That said however, due to the strength seen to date, we now project annual revenues to be in excess of $45 million for 2019. This represents an increase from our prior guidance which call for total revenues to be above $30 million.R&D expense was $10.3 million in the second quarter of 2019, compared to $11.9 million in the second quarter last year. This decline was primarily the result of lower spending associated with the exit of NOCTIVA and the cost reduction actions we've taken at our Lyons France R&D center. We continue to invest however a substantial amount of our R&D expenses towards the clinical development of FT218.SG&A was $6.8 million in the second quarter, compared to $27.8 million in the second quarter of 2018. This significant reduction was primarily due to cost reduction associated with the exit from NOCTIVA which was about $18 million and lower G&A expenses resulting from cost reduction actions we implemented as part of our commitment to preserve cash. Restructuring charges were $1.5 million in the second quarter of 2019, mostly related to the restructuring actions in France that we initiated early in 2019.And finally, as some of you may be aware, the IRS made a $51 million claim as part of the bankruptcy claims process against Avadel Specialty Pharmaceuticals LLC. Specialty Pharma files its U.S. Federal tax return as a member of the company's consolidated U.S. tax group. The IRS claim was filed against Specialty Pharma in the bankruptcy proceedings as Specialty Pharma has joined in several liability for all members of the consolidated U.S. tax group.We are working closely with a big four tax adviser and our legal advisers on this matter. Both Specialty Pharma and the company disagree with the merits of the IRS claim and we intend to defend our positions vigorously. We are pleased with our overall financial performance over the last quarter and through the first half of the year. The benefits of our cost reduction initiatives we've undertaken are beginning to be reflected in our results and we are positioned well moving forward.Now, I'd like to turn the call back over to Greg.

[Greg Divis:]

Thanks, Mike. Avadel continues to make substantive progress in reshaping itself to focus on our investigational product FT218 and to ensure, we have the necessary financial flexibility to optimally position this novel once-nightly therapy to address the major unmet medical needs in the narcolepsy community. Thus far in 2019, we have undertaken a number of actions aimed at maximizing the potential for success of FT218.Over the last several months, we have preserved cash by advancing the restructuring and cost savings plan announced in early February. We've strengthened our clinical medical team with key appointments. We've completed the rapid exit of NOCTIVA via the bankruptcy sale of the assets of Avadel Specialty Pharmaceuticals LLC to stem that subsidiary's untenable cash burn.We've created a new level of transparency with our investors, including on REST-ON enrollment which has continued to progress according to plan. We've presented data further highlighting the potential compelling value proposition of FT218 at the SLEEP 2019 conference. We've obtained intellectual property protecting FT218, through mid-2037. And our AV001 NDA was accepted for priority review with the third quarter 2019 PDUFA date, which has subsequently been extended to the fourth quarter, as previously described. As a result of these milestones, we are confident in the progress we're making organizationally and specifically with FT218, a Phase 3 asset targeting a market that exceeds $1.5 billion.Our registration study is proceeding according to plan, and we are well on track to complete enrollment next year, while simultaneously our strength in clinical and medical team are pursuing potential opportunities to enhance our FT218 program, including the REST-ON trial.Although, we are not disclosing any of these possible enhancements at this stage, given the competitive dynamics of this therapeutic area, we will most certainly update our investors as appropriate on the progress of all material aspects of the FT218 program, both quarterly and as necessary to ensure we keep our shareholders duly informed of these important developments as we continue to work toward our objective of bringing this novel once-nightly therapy to patients. We're proud of the progress we have made to-date and look forward to the opportunities that lie ahead.With that, I believe operator, we're ready to open the line for some Q&A.

[Operator:]

[Operator Instructions] Our first question is from the line of Matt Kaplan from Ladenburg Thalmann. Your line is open. I'm sorry. Our first question is from the line of François Brisebois from Laidlaw.

[François Brisebois:]

All right. Thank you. Congrats on the progress. Thanks for taking the questions here. So a couple, so I'm just looking at – so now it seems like it's – sorry, the percentage is now 69% enrolled from 63% on the last quarter. Are there reasons to expect lumpiness in terms of enrollment due to maybe seasonality or whatnot? Or is it fair to see – I guess with the ramp that you've been doing it seems like late in the second half 2020 it'd be fine right now. But are there any reasons to expect certain lumpiness throughout this enrollment process?

[Greg Divis:]

Jordan?

[Jordan Dubow:]

Yeah. Thanks for the question. I think in all clinical trials, there's ups and downs, with enrollment. Some of it is seasonality based and how they are given, we're in an international trial. However, we believe that enrollment is going to continue with plan and it's been continuing this way the last two quarters. And now when we expect that continue – to continue through next year.

[François Brisebois:]

Okay. Great. And then in terms of -- you've talked about the – at the SLEEP conference the PK results the difference there is that lower Cmax? Can you discuss potentially the importance of this? Or are you just trying to be pretty much equivalent to the two times nightly and just have it onetime instead of twice?

[Jordan Dubow:]

So our data that we presented at the 4.5 gram dose level showed that our total exposure was comparable and basically identical to that of the reference product twice-nightly sodium oxybate. The Cmax that we have our overall Cmax was lower than their Cmax at the highest dose. In terms of what that means can't really comment on that. I think we're just – we're comfortable with our PK and it gave us the confidence we needed to move into the Phase 3 trial.

[François Brisebois:]

Understood. Okay. And then just in respect on the FT218. From the complete potential enrollment in the second half 2020 can you just remind us of the steps following that in terms of seeing data from it?

[Greg Divis:]

Yeah. So, Frank, this is Greg. I think as we think about completing last patients into the trial last patient, first visit, it's approximately 13 weeks of treatment that follows that and then you would have what would be last patient last visit we would data log. And then our expectation is that, we would have top line results likely within 90 days of that last patient last visit in the data log.

[François Brisebois:]

But then, do you have to kind of look at that top line result and digest it? Or is this something that could be quickly showed to the Street?

[Greg Divis:]

Yes. I think that 90 days would be the approximate time frame of when that data as we think about it today would be disclosed.

[François Brisebois:]

Okay, great. And then on the -- I guess on the top line, the hospital products it's quite a beat that you guys had versus the trend that's been going on with that platform. Anything specific on any product in specific or a competitor that did not come in necessarily? Or anything to explain this jump?

[Greg Divis:]

Yes, I think Frank, the really, the primary drivers of what we would characterize as the favorability of the business the strength of the business to date has really been, really tied to the timing of competitive launches. Earlier this year, when we came out with our initial guidance, there has been a number of recently approved competitors that we had assumed would have come to market by this time. And quite frankly they haven't. So that's been a positive for us. And the performance of the business, we can't speak to when they will come or if they will come. Our assumptions are that they will come and -- but that's been the primary driver.

[François Brisebois:]

Okay. Great. No that's all very helpful. And then just lastly Mike the last comment you had in terms of the IRS. Can you just talk about maybe the cost related to this? Is this something that is a big hit potentially? Or is this kind of de minimis for the -- if you look at the numbers that you guys have?

[Mike Kanan:]

Frank, it's Mike. No, this IRS claim was a complete surprise to us. It's really without merit. We're defending ourselves vigorously around this. We do have an audit that's open for 2015 and they're starting to audit 2016 and 2017. And none of the issues that have been raised so far in the audit have even come close to what this claim is. Administratively, we're going to defend ourselves. We will incur some cost for lawyers and accountants and tax advisers to help us through this, but it won't be significant in nature.So we are not -- you've got to take these things seriously from the IRS. But honestly, it's without merit and we're going to defend ourselves vigorously through this process. When we prepare our audited financial statements each year as you may know, we look at all of our tax positions and we record any tax provisions or tax liabilities we may have for any exposures. And we've done all that as part of the preparation of our 10-K and 10-Q. And we're not going to take any further charges around this matter at this point.

[François Brisebois:]

Okay. Great. And just -- can you just remind me when this kind of came about and I guess when you would expect the resolution?

[Mike Kanan:]

Well it came about in very late June, but we didn't become aware of it through the bankruptcy process until early July. That's when we became aware of it. And I can't predict how fast or how long this will take to get resolution to, but we all have a sense of urgency for it, because we want to exit bankruptcy and complete the plan of bankruptcy. And this is part of that process to get through bankruptcy. But we've got a sense of urgency around it to get this completed.

[François Brisebois:]

Okay. All right. Well thank you. That's it for me and congrats on the progress.

[Mike Kanan:]

Thanks, Frank.

[Operator:]

Our next question is from the line of Matt Kaplan from Ladenburg Thalmann. Your line is open.

[Yinglu Zhang:]

Hi. This is Yinglu again for Matt. I think I have a couple of questions. First for FT218 given the recent progress you made enrolling patients into the REST-ON study, are you considering adding more study size to continue the acceleration of enrollment? And also based on the PK profile you presented at the SLEEP conference, are there any potential safety or efficacy advantages for FT218 versus Xyrem which we could be seeing in the REST-ON study?

[Jordan Dubow:]

Yes. So thanks for the questions. So in terms of size we're focused on our actively enrolling sites right now resources, efforts. Everything is focused on those sites that are being active. In terms of adding additional sites, we're constantly evaluating ways to improve enrollment on the study, but I'm not going to comment specifically on sites that we may or may not add. In terms of the pharmacokinetic profile, as I said, we were -- the data that we presented at SLEEP gave us the confidence to move forward in Phase 3. We're, obviously, excited and feel good about our exposure is the same, it's twice-nightly sodium oxybate that our Cmax is lower. We feel very confident that our PK profile is what's needed to give us a once-nightly formulation to provide clinical benefit in these patients. In terms of specifics efficacy or safety versus twice-nightly sodium oxybate I can't comment on that.

[Yinglu Zhang:]

All right. Thank you. And also for the AV001, can you provide us some details around the nature of the data that FDA requested? And also what are you seeing as the market potential for this product? And are there any potential advantages from a safety perspective, which could differentiate this product from the current product on the market? Thanks.

[Greg Divis:]

Yeah. Thank you for the question. With regards to AV001, I would -- we would describe the additional data that was requested was much more analytical data that they requested. Remember I would say for reference purposes as a company, we've done three of these NDAs prior. We have extensive experience and a track record of understanding how to move these unapproved to approved. And the team executed that plan based on a lot of experience and success.What the FDA requested was some additional we wound -- I would characterize it as analytical data. There's -- we don't do any clinical studies with these products, so it's much more analytical data as it relates to our product and that's the data we provide. That's really all I can share about it.With regards to the market potential and the safety benefit if you will, what we've said historically has been we have value in the market at around $30 million as a market potential and that's as we see it today. It was larger in the past but there's been some experiences of product shortages in this category in its history, which we believe has the potential to see the market get stronger again.And part of our uncovering during this development process was some potential safety issues that were identified with the unapproved product on the market and that is what we have corrected for in our program and our product, and that's what our application now represents with the product that we have developed and have submitted for approval.

[Yinglu Zhang:]

Thank you. That was really helpful. My last question is on the hospital product franchise, which was asked about before but I was wondering if you can provide some additional details on the competitive landscape you're seeing for these three products? Thank you.

[Greg Divis:]

Yeah, I would say that since the beginning of this year we're early on. We saw a number of new approvals come across in particular in our phenylephrine, our vascular product. That's been -- that was probably the largest category that had the most change in it as we enter 2019. And it's some of those products that we have been forecasting or projecting potential launches that continued to be delayed for whatever reason.In terms of neostigmine category, it's a fairly stable marketplace at this point. There is a number of competitors. There's I believe nine or 10 in the marketplace now and we remain the market leader there.In terms of Vazculep phenylephrine there's five in the marketplace and we remain the market leader there. And with regards to ephedrine or Akovaz, there's four. We haven't seen a new approval in that category now for coming up upon nearly two years and that's been fairly stable during the balance of 2019 in terms of both volume and pricing.

[Yinglu Zhang:]

Great. Thank you so much and congrats on the quarter.

[Greg Divis:]

Thank you.

[Mike Kanan:]

Thank you.

[Operator:]

Our next question is from the line of Michael Sesser from DWS. Your line is open.

[Michael Sesser:]

Hi, guys. Just one more quick question with respect to the bankruptcy of Specialty Pharmaceuticals. Is Serenity pursuing any legal action against the company? And do you have any legal liability from that respect?

[Greg Divis:]

Frank with regards to the claim that had -- I mean sorry, sorry Mike with regards to the suit of claims that have been filed within the bankruptcy proceedings there's no -- I would describe as within -- any active litigation between us or Serenity. They have -- they are an entity within the bankruptcy proceeding that has filed a -- as a creditor in the bankruptcy proceeding. They have filed a claim as a creditor -- as an unsecured creditor and the within the bankruptcy proceeding, but that is the only claim at this point.

[Michael Sesser:]

So do we know like what -- can you elaborate on their claim as a creditor? And what liability there could ultimately be to Avadel from that claim?

[Greg Divis:]

Yes. Well I'll speak to that kind of overall. We had -- we have a number of unsecured creditors within that pool and the pool of dollars that are available to be distributed upon planned confirmation pro rata assuming those claims are accepted and not disputed is the $250,000 of proceeds that we've received. So we have $250,000 of proceeds as a result of the sale of Noctiva of the NDA and marketing materials and inventory of Noctiva to the party that acquired it. Those proceeds are what are set aside within the bankruptcy proceeding to be distributed across the claims as the plan gets confirmed.

[Michael Sesser:]

So there's no way that this could come back to the $70-odd million of cash that's on Avadel's balance sheet.

[Greg Divis:]

Yes. We believe that Noctiva and Avadel Specialty is its own entity. Our contractual agreements with -- and contracts with the vendors and partners and those stakeholders within the bankruptcy proceeding are only with that entity and therefore are being adjudicated through this bankruptcy proceeding.

[Michael Sesser:]

Okay. Thank you.

[Greg Divis:]

Thanks, Mike.

[Operator:]

At this time, I would now like to turn the conference back to Mr. Greg Divis, CEO. Please go ahead, sir.

[Greg Divis:]

Thank you. And as we wrap-up we just want to say thank you for joining us this morning and we appreciate your interest and look forward to following up with all of you. Take care and have a great weekend.

[Operator:]

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.