Cortexyme, Inc.
Q2 2013 Earnings Call Transcript

Published: 6 Aug 2013

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to the Cornerstone Therapeutics Second Quarter 2013 Financial Results Call. [Operator Instructions] As a reminder, today's call is being recorded. With that said, I'd like to turn the call over to Amy Diebler of Cornerstone Therapeutics. Please go ahead.

[Amy Diebler:]

Thank you, operator. Good morning, everyone, and welcome to Cornerstone Therapeutics' conference call to discuss our second quarter 2013 results. We are glad to have you with us. I am Amy Diebler, Senior Director of Corporate Finance and Development for Cornerstone Therapeutics. We are joined by Craig Collard, Cornerstone's Chief Executive Officer; and Alastair McEwan, Cornerstone's Chief Financial Officer. Craig will provide perspective on both the quarter and on our 2013 outlook, and Alastair will cover the financial and operational results. Both Craig and Alastair will be available to answer your questions. We issued a press release this morning containing financial results for the quarter ending June 30, 2013. Before we proceed with the call, please let me remind everyone that the following discussions and responses to your questions reflect management's view only as of today, August 6, 2013. Any statements about future expectations, plans prospects, including, without limitation, statements regarding our business strategy, future operations, financial position, anticipated regulatory approval of our products, possible therapeutic benefits, market acceptance, prospects and management's plans and objectives, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results and events may differ materially from those indicated by our forward-looking statements. Additional information about factors that could cause actual results or events to differ materially from those indicated by our forward-looking statements is included in the Safe Harbor statement in today's press release and in our filings with the Securities and Exchange Commission, including Item 1A to our Annual Report on Form 10-K filed on March 14, 2013, and in our subsequent Form 10-Q and other filings with the SEC. Cornerstone disclaims any obligation to update its forward-looking statements except as required by law. In addition, please note that Cornerstone's remarks contain supplementary non-GAAP financial measures, including non-GAAP income from operations, non-GAAP net income and non-GAAP net income per share diluted. A reconciliation of these measures to the comparable GAAP numbers is included in the press release, which is posted on our website. With that, I will now turn the call over to Craig.

[Craig A. Collard:]

Thank you, Amy, and good morning, everyone. We appreciate you joining us on this call. This was another very successful quarter for Cornerstone. In fact, it was the second consecutive quarter during which we achieved record revenue. We were extremely pleased with these results, which reflect the success of our strategic focus on the hospital and adjacent specialty markets. These results are also a testament to the strength of our products and everyone's supporting on the Cornerstone. Because of our continued positive momentum, we believe that our company is well positioned for ongoing growth. Some highlights from this quarter include

[Alastair McEwan:]

Thanks, Craig. Good morning, everyone. As Craig indicated, we're very pleased with our performance this quarter with strong top and bottom line growth and cash generation. Net revenues grew 88% year-over-year, bringing us to $40.4 million compared to $21.5 million in the second quarter of 2012. Looking at the marketed products that Craig mentioned, for CARDENE, net product sales were $14.2 million for the quarter compared to sales of $736,000 for the second quarter of 2012. You will recall that Cornerstone acquired CARDENE's product rights just before the end of the second quarter of 2012. As a result, we only reported revenue for a few days within the second quarter of 2012, causing the significant year-over-year increase in sales. CUROSURF net product sales totaled a record $11.3 million during the quarter, representing an increase of 21% compared to the second quarter of 2012. This increase was driven by increased unit volume and an increased net selling price. The ZYFLO family of products continues to be a solid performer. Net sales amounted at $14.8 million for the second quarter of 2013, an increase of 37% over second quarter of 2012. Growth was largely due to price increases, which were partially offset by a slight reduction in unit volume. Gross margin for the second quarter of 2013 was 75%, up from 59% in the comparable quarter of 2012. This increase was driven by product mix and particularly the addition of CARDENE. The drop in estimated rates of chargebacks and price adjustments for CUROSURF, as well as improved margins for ZYFLO also aided gross margin. Looking to expenses, SG&A were $13.8 million during the second quarter of 2013, a 55% increase over $8.9 million in 2012. This was driven by higher payroll, travel and other related employee benefits due to the continued growth of the company's products and related sales force as well as timing of advertising and promotional expenses related to CARDENE, PERTZYE and BETHKIS. While I mentioned earlier, the EKR transaction closed at the end of June 2012, and so our expense ratio compares favorably to last year's when taking into account the increased scale of our business. Our R&D costs decreased to $615,000 compared with $686,000 in the second quarter of 2012. Our development expense is going to vary from quarter-to-quarter depending on product development stages and the activities undertaken to advance a candidate within a given quarter. This quarter, R&D costs decreased due to costs related to LIXAR incurred during the second quarter of 2012, which were partly offset by an increase in development expenses related to RETAVASE during the second quarter of 2013. For the quarter, we reported net income of $5.8 million, or $0.19 per diluted share, compared with a net loss of $4.4 million or a loss of $0.17 per diluted share in 2012. On a non-GAAP basis, net income for the quarter tripled to $9.9 million to $0.33 per diluted share, up from $2.8 million or $0.11 per diluted share in the same quarter of 2012. For clarity, non-GAAP net income and net income per diluted share exclude stock-based compensation expense, amortization of product rights, transaction-related expenses, acquisition adjustments related to inventory sold, the change in acquisition-related contingent payments and the gain on divestiture of certain product rights. Lastly, looking at our cash position. At the end of the second quarter, we had the $55.5 million in cash and cash equivalents, a decrease of $700,000 compared with December 31, 2012. The impact on cash was largely due to our upfront payment related to the license of PERTZYE, which was $10 million, and continued payments related to CARDENE of $2.6 million. This was offset by $12 million cash generated by operating activities during the 6 months ended June 30, 2013. Now back to Craig for a look into the remainder of 2013. Craig?

[Craig A. Collard:]

Thanks, Alastair. As you can see by our continued financial and operational progress, we are more confident than ever that we have the right strategy in place and that our company can successfully execute within this market. Let's now take a look at what lies ahead. As we have said, in addition to our market products, we developed and maintained a promising pipeline and are working diligently to move these products forward through approval and commercial launch. Leveraging our commercial strength and all the know-how from growing our current product portfolio, we are confident in their prospects. I'd like to share a few additional updates regarding our pipeline. Let's start with our generic equivalent of Tussionex, used for the relief of cough and upper respiratory symptoms associated with allergy or a cold in adults and children 6 years of age and older. We are pleased with the significant progress of the manufacturing efforts in the most recent quarter and continue to look forward to entering the market for the upcoming 2013 cough and cold season. We do not anticipate any further delays. Looking at RETAVASE. As we've discussed during the Q&A on our last earnings call, there was an unknown inherent stability failure. We have identified a number of manufacturing issues that may have contributed to this failure, and we are making good progress in our work on the stability data. The silver lining in the stability failure is that it provides us the opportunity to do something that Cornerstone does very well, and that's improving the supply chain of products that we acquire. We have made great strides towards improving the RETAVASE supply chain. To be clear, there are 3 steps in the RETAVASE supply chain process. These steps are

[Operator:]

[Operator Instructions] We'll hear first from Matt Kaplan with Ladenburg.

[Matthew L. Kaplan:]

I just want to start out maybe focusing on your current portfolio of products a little bit first. Can you talk about CARDENE and its potential kind of looking forward, especially with, I guess, the Paragraph IV filing by Exela, which you mentioned in your prepared remarks?

[Craig A. Collard:]

Yes. So Matt, I would start by -- let's kind of separate the issues first, just looking at CARDENE and how it's doing. One of the things that we're seeing is the -- that the CARDENE market in general is growing a little higher rate than I think we had forecasted. But all along, we've said that we'd like to have some unit growth and we'd like to try to maintain price as best we can, although we realize that price may -- just with the competitive nature of having generics out there and that type of thing, could decrease. But the good news for us is that we had, I think, 8% in unit growth, but we also -- price year-over-year is only down like 1.2%. So it's doing much better than our expectations. So we're really pleased with CARDENE's performance. And I think the other piece of this, too -- being able to integrate these sales forces with the Cornerstone group and the EKR group to -- in such a short time frame, and now to show the kind of performance that we're showing, I think, goes a long way to show what Cornerstone does very well as far as commercialization. In regards to the P IV, I mean, obviously, as we stated, we're in a -- into the stay under the Hatch-Waxman Act. I mean, there's going to be a lot of things going back and forth, obviously, over the next several months. But at this point, it's going to be business as usual until we obviously get to a point of the court date and so forth. So longer term, I just -- I don't have an answer yet to how that plays out, but we feel very comfortable with our patent position. We did a lot of diligence around this when we bought about the product and feel very comfortable there.

[Matthew L. Kaplan:]

And just remind us in terms of your patent position. When does it go out to on the bags [ph]?

[Craig A. Collard:]

2027. And there's 3 patents.

[Matthew L. Kaplan:]

Great. Now CUROSURF also, you guys did a great job there of $11 million. What do you see going forward, for CUROSURF and growing the sales there, I guess, in light of potential competition as well?

[Craig A. Collard:]

Yes, no, I mean, it's -- we're still -- I think every time we have this call, we talk potentially about new competitors and so forth. But taking that aside, the best thing that we've seen that's -- hasn't happened for several years is that the surfactant market is again growing, and when -- we've been growing share and growing ml [ph] usage in a declining market. And we've literally had that happen since we've owned the product or since we've been marketing the product. So to have -- in the last 6 months to see that turn around and to see growth in the market has really been helpful to us. But even with that said, to give you an idea of how we're performing, we've already converted over 70 hospitals, which is about the total that we converted entirely -- in its entirety of last year, and we're also -- for -- at half a year, we've already sold more mls or grown more mls than we did all of last year. So the product is performing extremely well. I think again, this goes back to now having the sales force. We have much more territories now. I mean, we had situations before where we would have a rep covering 4 or 5 states. And I think now, having basically a rep in every state and having much smaller territories and much more focus around the product, I think it's really beginning to show. So again, we feel very comfortable with where we are. We think we'll continue to grow. We're the market leader, and we think we've got the best story. In a sense, CUROSURF is more concentrated than the other competitors and you use less volume. And you're dealing with patients that are obviously very small in weight, and we think it's the best product on the market.

[Matthew L. Kaplan:]

Okay. And then ZYFLO, it seems as though -- and maybe -- sorry, just back to CUROSURF one more time. In terms of ability to increase price, where do you see that going forward, I guess, in the remainder of the year?

[Craig A. Collard:]

We did take a price increase earlier this year. And again, this is a fairly price-sensitive market, and a lot of that depends on market dynamics. So a little bit -- you mentioned ZYFLO. A little different than that market obviously. So again, we're going to continue to seek price if we can, but we're also going to be competitive.

[Matthew L. Kaplan:]

And then ZYFLO, it seems like you, as you said, got stable demand there, but you've been able to increase price there to drive the revenues. And is that going to continue, that trend? Or what are your thoughts?

[Craig A. Collard:]

Yes, we just took a price increase actually a couple of weeks ago. And so again, we've been able to maintain our unit volume, which is typically about 1,000 bottles a week, and that's stayed pretty consistent. And again, we have been able to take price. And you're dealing with such a niche market and such a specialized patient. I mean, we're getting really the tougher-to-treat asthmatics, and the product performs very well in that market. So now that we've niched this product, we've been able to do a lot more with price and "specialize" the product, if you will.

[Matthew L. Kaplan:]

Right, right. And I guess now, PERTZYE is part of the portfolio. Help us understand what the opportunity is there, I guess, going into 20 -- for this year and then out looking into next year as well.

[Craig A. Collard:]

Yes. So we've -- in fairness, I don't have a ton of data yet just because we've just started selling the product. We had a national launch meeting in Denver a few weeks ago, and so we're 2 weeks into selling the product. What I can say is we've got a hub set up. We've got all these specialty pharmacies set up. I think this is going to be a nice runway, if you will, into BETHKIS, which I think will be helpful to get that product launched, which should be out in October. But so far so good. We think we've got a really nice message. And with the product, with this bicarbonate story, typically patients can get away without having to use PPIs in this product. And it really differentiates itself within this marketplace. I think the tough thing for us is going to be -- is if a patient has been on enzyme [indiscernible] for quite a while is converting that patient over, but we've got a nice story in order to do that. And you start getting into body mass index and that type of thing. And we really help train the reps around understanding that, understanding things to look for in patients to convert some of these over. But this is a $200 million marketplace and growing just within the CF space and largely dominated by really 2 folks. And so we feel fairly confident that we can get the product certainly back to where it was, which it was approaching $20 million before when it was on the market, and the prices are a bit higher now. So there's some flexibility there as well. But we feel very confident with the product, and we think we're in a good space.

[Matthew L. Kaplan:]

Now in terms of the ramp-up to potentially $20 million, is that something you think you could either exceed by next year or its first full year in the market? Or what's your sense?

[Craig A. Collard:]

I would probably reserve that until we have a little more data just due to the fact that we're just getting started with the product. But our intention is that sort of peak sales, we would certainly be north of that.

[Matthew L. Kaplan:]

Good. Now shifting, I guess, to the pipeline. In terms of RETAVASE, where are you in terms of addressing the manufacturing instability issues?

[Craig A. Collard:]

Yes, so we spent quite a bit of time, as you can imagine, trying to search for root cause and that type of thing. And we believe we've come up with some reasons that the product did fall off stability. And again, keep in mind we inherited this, and this was not visible to us upon acquiring the product. There have been no -- there would have been no way to see this. However, what this has done, and again not being overly optimistic, but it really has allowed us to take a step back and improve this whole process. I think where we end up going from here, as I mentioned in my comments, you've got sort of 3 steps to this process. And we're going to pull 2 of these steps together in our API manufacturer, which is in Germany called SCIO. That's S-C-I-O. And so those first 2 steps will be done there. But we're still finalizing and looking at a couple of other sort of finish/fill manufacturers. But there's a really good possibility that all this will now be done in Germany. And the reason that's important is Roche is there as well, and we're -- as you know, when this process was working properly, Roche was behind it and making the product. So having their help, I think, is going to prove to be invaluable to us. And they're sort of walking hand-in-hand with us now and we're -- actually, our Head of Development is over there now in Germany with Roche. And so, we feel very confident that we'll make stability batches this year and get the product back and then also in parallel start the work on the cat clearance [ph]. So again, it's a product that's going forward. We're still comfortable with where we are. And again, I think we'll have this sorted out, and we'll have this out by 2015.

[Matthew L. Kaplan:]

And then just a sense of time line for the cat clearance program?

[Craig A. Collard:]

That's going to be a little bit behind just because we've got more work to do with the FDA and so forth. But what we have said is 2017, we're hoping we can cut that down a bit. But as of now, that's what it looks like.

[Matthew L. Kaplan:]

Okay, okay. And there's a couple more questions on the pipeline in terms of the product launches -- additional product launches this year, 067. You -- in your prepared remarks, you said you plan to enter the market later on this year for the cough -- cold season. So should we assume that all the manufacturing issues that you ran into previously are behind us?

[Craig A. Collard:]

Yes.

[Matthew L. Kaplan:]

Great. And I guess last question, in terms of BETHKIS' launch in October. What's the potential for that product?

[Craig A. Collard:]

Well, again, you've got a really big market out there. There has been a number of price increase with tobramycin. Our issue is just runway, if tobramycin is supposed to go -- or Tobi, excuse me, is supposed to go generic in late '14. And so, the question will be how much share can we gain in that time frame. Again, I've thrown numbers out before that in a couple year time frame, they were able to get about 20% in Europe. We feel pretty confident this could be a $15 million to $25 million drug in that time frame. And again, with having PERTZYE now, having -- being built and building some of these relationships and so forth out there, we think that's going to be helpful. But we've -- we're getting quite involved with the CF Foundation and others, and we feel pretty confident that there's a real possibility for patients to try this because it does offer some advantages. And again, it's another treatment to try for some of these patients who are sometimes having a really difficult time when they go on a tobramycin-type product. So again, I think we'll do quite well with it, and I think the response will be fairly quickly on the uptake.

[Matthew L. Kaplan:]

Great. I guess a question that I understand you can't comment on, but I have to ask in terms of the KAC [ph] negotiations and where they are. It seems they have taken perhaps a lot longer than I would have expected. Perhaps the CARDENE Paragraph IV came into play there as something that slowed down the negotiations. But I guess fundamentally, has the KAC presence at all impacted your ability to, I guess, continue to grow the business as you look -- continue to be acquisitive in your business?

[Craig A. Collard:]

Yes, no, it does [indiscernible] matter. Again, I think Alas and I sincerely apologize that we can't comment because we don't have anything to say because we don't know. And it's a difficult position to be in, but I'm sure everyone out there on the phone understands. I think it -- if I'm in your position or others as an investor, I think the thing you mentioned is really -- the point is what's the business doing in this time frame that one could argue may have taken longer than we had hoped or what have you and you've got the Paragraph IV and so forth? And the comeback to that would be we just recorded 2 record quarters this year, and we're only half of the year, into the -- halfway into the year. So I would say the business is doing better than it ever has under these circumstances. And we're also launching 3 products, and we're clearing up things with the RETAVASE and so forth. So I think all that is going extremely well. From the acquisitive [ph] side, we've got a number of things that we're still looking at product-wise and companies and so forth. And so, it really depends on how this deal goes. Either way, I think will have no impact, quite honestly, because I think we'll continue to thrive as a business and we're in a better position to do all the things that you mentioned than we ever have. So -- and if you look, too, Matt, think about the cash position we have now, and we continue to throw cash off and we think that's going to continue. And especially with ZYFLO, we have this in our models to come off patent in September, but the likelihood is that's not going to happen. And so that's going to continue to throw out more cash for us even more so than we predicted. And the longer that goes, the more cash it throws to the bottom line. So we're really in a good spot. I mean, it's unfortunate. I do wish we could talk more about this. I just don't know anything. And so, we just keep our nose to the grindstone. We keep doing what we do.

[Matthew L. Kaplan:]

And I guess just one follow-up in terms of -- do you see any -- I guess in terms of time line, what -- where this could finally get an answer or a conclusion to this KAC question?

[Craig A. Collard:]

Yes, again, I don't know. I mean, obviously, this can't go on forever. And we're impatient as well. And so we'd like to see a decision either way soon. But again, I've certainly voiced my opinions, and I think they're heard. But that's really all I can tell you.

[Operator:]

[Operator Instructions] And at this time, I show we -- there are no further questions. I'd like to turn the call back to Craig Collard for closing remarks.

[Craig A. Collard:]

We'd just like to thank everyone for joining the call today and look forward to speaking to everyone next quarter.

[Operator:]

This does conclude today's conference call. We thank you for your participation. You may now disconnect.