Paratek Pharmaceuticals, Inc.
Q2 2012 Earnings Call Transcript

Published: 13 Aug 2012

[Operator:]

Good day, ladies and gentlemen, and welcome to Transcept Pharmaceuticals Second Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to hand the conference over to Mr. Tom Soloway, Executive Vice President and Chief Operating Officer. Sir, you may begin.

[Thomas P. Soloway:]

Thank you, operator, and good afternoon, everyone. Thank you for joining us today to discuss the Transcept Pharmaceuticals' 2012 second quarter results. My name is Tom Soloway, Executive Vice President and Chief Operating Officer of Transcept. And joining me on the call today are Glenn Oclassen, President and Chief Executive Officer; and Leone Patterson, our newly appointed Vice President and Chief Financial Officer. After market close this afternoon, we released financial results for the quarter ended June 30, 2012. A copy of this press release is available on our website and has been filed on Form 8-K with the SEC. In addition, we plan to file our Form 10-Q with the SEC this afternoon and encourage everyone to read these documents. We remind you that this conference call will contain forward-looking statements that are intended to be covered under the Safe Harbor provided by the Private Securities Litigation Reform Act. Examples of such statements include, but are not limited to

[Glenn A. Oclassen:]

Thanks, Tom, and good afternoon, everyone, and thank you for joining the call today. Intermezzo, our lead product, was launched on April 4, 2012, by our marketing partner, Purdue Pharma. As we've discussed in the past, Purdue is investing as much as $100 million in the first 12 months of the Intermezzo launch, and has created a new sales force of 275 representatives devoted exclusively to the promotion of Intermezzo. Intermezzo was approved by the FDA in November of 2011 as the first and only prescription sleep aid indicated for use as needed for the treatment of insomnia at the time that a middle-of-the-night awakening is followed by difficulty returning to sleep. We are still in the early stages of the Intermezzo launch. Both we and Purdue continue to receive positive feedback regarding patient experience with the product. Prescriptions are growing at a compounded rate of approximately 4% each week since the beginning of May. But at a weekly total of approximately 1,000 prescriptions, it is clear that significant work remains to establish Intermezzo as an important insomnia product. The job that still remains for us and for Purdue is reflected in the royalty revenue numbers we'll discuss shortly. We share a common view with Purdue of the challenges faced in the field. There are -- these are challenges that we think will take time to overcome and we believe can be addressed constructively as the launch progresses. We see 3 key marketing and selling challenges. These include

[Leone D. Patterson:]

Thanks, Glenn. On June 30, 2012, Transcept had approximately $92.2 million of cash, cash equivalents and marketable securities. This balance reflects the net proceeds of approximately $37.7 million from a public offering of 4.5 million shares of common stock that closed on May 1, 2012. During the quarter ended June 30, 2012, Transcept spent on average approximately $1.6 million per month, which does not include cash inflows from stock option exercises, revenue received from Purdue or the public offering in April 2012. Revenue for the quarter was approximately $493,000, which represents royalties related to Purdue sales of Intermezzo to wholesalers. Purdue pays royalties to us by some [ph] sales to wholesalers, less certain sales adjustment, including estimates for returns, rebates and sales incentives. For several quarters, these adjustments can be expected to reflect the uncertainty inherent in the early stages of launching a new product. While royalty revenue is likely to vary accordingly, the better measure of Intermezzo's success will be more directly indicated by future prescription growth. Research and development expense for the quarter ended June 30, 2012, was approximately $2.9 million, compared to approximately $2.8 million for the same period in 2011. Research and development expense in both periods was primarily related to expense associated with our Phase II study for the TO-2061 program. General and administrative expense for the quarter ended June 30, 2012, was approximately $2.7 million, compared to approximately $2.6 million for the same period in 2011. Net loss for the quarter ended June 30, 2012, was approximately $5.1 million, or $0.30 per basic and diluted share, compared to a net loss of approximately $2.2 million, or $0.17 per basic and diluted share for the same period in 2011. This increase in net loss was primarily due to the fact that in 2011, we completed the revenue recognition associated with the $25 million license fee related to the Purdue collaboration agreement. At June 30, 2012, there were approximately 18.6 million shares of common stock outstanding and approximately 3.5 million shares of common stock related to the outstanding options and warrants, resulting in a total of approximately 22.1 million shares outstanding on a fully diluted basis. That concludes our prepared remarks for this afternoon. We would now open the call to your questions. Operator, you may now review the instructions for Q&A.

[Operator:]

[Operator Instructions] Our first question comes from Charles Duncan from JMP Securities.

[Charles C. Duncan:]

My question is regarding that feedback or perhaps challenges or roadblocks to wider adoption for Intermezzo. You listed out 3, Glenn, and I appreciate that. But which one of those do you think is the most impactful? And do you think that Purdue is making progress, at least with the second one in terms of motivating physicians to identify middle-of-the-night awakenings?

[Glenn A. Oclassen:]

Thanks, Charles. Yes, I think you've zeroed in on the key issue. Physicians have been in strong habit patterns over many, many years of prescribing drugs for -- to aid in sleep that aren't differentiated between what kind of sleep problem the patient is having, whether it's bedtime or middle-of-the-night, because there has never been a reason to differentiate. And the challenge here is to provide the physicians sufficient incentive in terms of the performance of the product to actually make a small change in the interaction with the patient to not simply hear that there's a sleeping problem and therefore write a prescription, but rather, to ask a few questions. Purdue is, we believe, fully aware of this issue. I think they began to sense it as a key issue early in the game. And they are making adjustments accordingly, and we're pleased to see it moving in that direction. But that's one that is, as I've said in the prepared presentation, it's not simply from going from prescription A to prescription B, you're actually having to change the physician's behavior in the office, and that takes some time.

[Charles C. Duncan:]

And I assume that applies for newly diagnosed patients with insomnia. But what are they doing about the insomniacs who are chronically taking the drugs that are meant for induction, but are -- and maybe they're taking them prophylactically to treat middle-of-the-nights?

[Glenn A. Oclassen:]

The -- insomnia almost never presents in the general practice office or most other offices as a primary complaint. It's really a secondary issue. And so the most likely encounter for a patient who has an existing prescription and an existing usage pattern, the most likely encounter will be when that patient shows up in the office for some other reason, and one would hope that the same product advantages that motivate the physician to ask these questions of a new patient would motivate them to go back and talk a bit to a patient with a previously existing and previously diagnosed condition. The advantages here are the potential for a significant reduction in total exposure to hypnotic drugs as compared to prophylactic use. And the fact that Intermezzo is rapidly absorbed and produces rapid sleep onset, which is so important in the middle of the night. But here again, we need to motivate the physician to make a routine, a change in their routine, a change in their behavior, a change in their interaction with the patient, and that will require a persistent effort.

[Charles C. Duncan:]

Let me ask you if there are any other metrics besides scripts, prescriptions that you can track or maybe initiatives that are being undertaken by Purdue to make that change in the physicians' behavior, perhaps, a patient registry or anything like that? And if you think that you'll have results of that before, call it, the end of the first quarter next year?

[Glenn A. Oclassen:]

There are a variety of different kinds of efforts going on, but I will say that our primary measure of success with the product still remains weekly prescriptions. No matter how irrational it may be to track prescriptions on a weekly basis, obviously, we all do it. And the long-term trends, you can pick up over time. I think in addition to that, there is a fairly continuous process of market research that goes on. And in the final analysis, you never know what kind of a product you have until you actually launch it. And Purdue is going through exactly that process now of listening to the marketplace and understanding what the product is beyond what all of our sense was before the launch. And I expect that, that process will be a positive one and lead to greater success in the marketplace.

[Charles C. Duncan:]

And one last question along the lines of intellectual property. I'm wondering, you made a comment regarding evaluation of the formulation patents. Is it possible that you may switch up and not rely so much on those, and instead, rely on the other patents that could be, you said, issued soon, I believe? And when would your Orange Book list those?

[Glenn A. Oclassen:]

Charles, Tom Soloway has been actively involved with the patents for the last year, and I've asked him to comment on that.

[Thomas P. Soloway:]

Sure, Charles. Thanks, Glenn. As we've always said, Charles, the 2 patents that are currently listed in the Orange Book are formulation patents. They are a little bit narrower in scope than the method of use patent that Glenn discussed a little bit earlier today that we anticipate issuing tomorrow. We will submit that patent once it issues to the Orange Book quickly with Purdue, and would hope to have it listed in the Orange Book in the not-too-distant future. That patent is certainly a little bit broader in scope, and generally claims low doses of zolpidem for use in treating middle-of-the-night insomnia. However, in terms of how we would rely on what patents and in what order and how we go about that remains a, sort of, confidential information of Transcept and of Purdue. As you know, we have 3 end of filings now, and as we're looking potential litigation here in the eye over the next several months, probably I can't really comment on it publicly.

[Charles C. Duncan:]

Okay. That make sense. And just one clarification because I'm not sure I caught this right. Glenn, you were talking about evaluating the launch. Is it 4 quarters or by the end of this year in the fourth quarter that you think that you'll have a pretty good handle on how things are going?

[Glenn A. Oclassen:]

We -- in terms of when to begin making judgments on the launch, clearly, that's a continuous process. But at the same time, we've been looking toward the fourth quarter and we're only 3.5 months, if I'm correct, into the launch at this point. So there's a great deal that remains to happen, and that's also driven by the nature of the task that we described that we have to perform here, that we described earlier. So over the next 6 months, we expect to gradually have an understanding of where this product can go in the future.

[Operator:]

[Operator Instructions] Our next question comes from Bill Tanner from Lazard Capital.

[William Tanner:]

I've got a couple of different topics. Number one, Glenn, I guess, first on the patent litigation, can you remind us of how the costs are shared? And then it looks like around August 27 should be a date that a lawsuit could be filed against Activis. I don't know if you can comment on that.

[Glenn A. Oclassen:]

Yes, I'll ask Tom to take that one, too.

[Thomas P. Soloway:]

Thanks, Glenn. Hi, Bill. Yes, as it relates to the decision and when and how it would be made, that remains to play out over the next several weeks between us and Purdue. But in general, what the agreement calls for is for Transcept and Purdue to split patent defense costs, 60-40, 60% to Purdue, 40% to Transcept. And Transcept is capped on those cost at $1 million per calendar year and $4 million in aggregate.

[William Tanner:]

Okay. And then just back, Glenn, on your prepared comments, at the outset, on the challenges. Obviously, formulary adoption really isn't anything unique, I presume, to Intermezzo, and I think we've all assumed that the physician education would be an integral component of the drug being adopted. I'm just wondering if you could at least maybe semi-qualitatively speak to how the uptake is tracking to expectations? And then I just have one follow on.

[Glenn A. Oclassen:]

I think, clearly, both we and Purdue expected more rapid uptake on launch. It's interesting because on a week-to-week basis, we're trending upward 4% to 5% a week on a compounded basis. Not unhappy with that, it's just the absolute level at this point is below where we thought we'd be. The key to that is in the office, obviously, in the physician's office. And we think the key to that part of it is in the physician interaction with the patient. And in my experience, that is always a great deal more substantial challenge, getting the doc to do something different. Getting he or she to come out of their normal habit pattern. Physicians are extremely conservative in terms of how they conduct their day. And here, we have to have them ask a different kind of question about sleep. We think we can offer eminently rational reasons to do so, in terms of the nature of Intermezzo and its advantages over bedtime sleep aids. But that's going to take some time.

[William Tanner:]

And when you mentioned that it's tracking on an absolute basis below, can you give us a, I mean, you may not want to give that fine of a level of detail, but just in terms if you present, just...

[Glenn A. Oclassen:]

That sort of moves over into the same old problem that we've raised before and -- or complication, and that is that Purdue is a private company and, obviously, we are not. And as a result, they limit us on specifics where we can be forthcoming qualitatively, but when it comes to quantitative stuff, it's much more difficult. Suffice it to say, we both thought we would be at a higher absolute level, but we think the trend line is certainly in the right direction, and that over time we'll see this one come into line with expectations, particularly given the modifications in the promotional program that are currently underway.

[William Tanner:]

And just last question, as it relates to the marketing materials. Can you remind us when those were available, and I guess, in their fullest sense in terms of the DDMAC approved relative to the launch, relative to having an opportunity to have some good exposure at APSS in June?

[Glenn A. Oclassen:]

Yes, that began in July. The final revised stuff didn't come back from DDMAC until July, and that was when it began to be used. So it's pretty recent.

[Operator:]

Our next question comes from Jason Gerberry from Leerink Swann.

[Jason M. Gerberry:]

Just a couple. Just maybe on the -- we've heard some of the docs talk about how patients with pain have a higher degree of comorbid insomnia. Just kind of wondering if you can comment at all, are the Purdue reps that are promoting OxyContin, are they also detailing Intermezzo at this point? Or is it solely the 275 reps that are exclusively promoting Intermezzo?

[Glenn A. Oclassen:]

Jason, it is the latter. Purdue made the affirmative decision initially to just go with this sales force that is devoted entirely to the product. We do believe that over time, they may consider moving the Intermezzo into the larger sales force. But we don't have any specific information on that at this point. We think at this point, they're still committed to going with the specialty team.

[Jason M. Gerberry:]

Got it. Got it. Okay. And then the other patent -- the other outstanding patent that is a little further out. Is there another milestone associated with issuance of that patent? So I know you'll -- you're planning the issuance tomorrow on the one method of use patent. But is there, with the other patent, another milestone we should be thinking about there?

[Glenn A. Oclassen:]

No. There was originally a $10 million milestone against the patent that was issued, I guess, last year. And then there was only one other IP milestone, and that is the $10 million milestone that will be associated with one of these patents that is just -- have recently been allowed and about to be issued.

[Jason M. Gerberry:]

Okay. And then just last question. What is your guys' confidence level that there are potentially other regulatory barriers around this formulation? Is this something where we could potentially see a Citizens Petition filed with respect to formulation challenges around this product? Or is that something that -- your expectations there is a little on that one?

[Glenn A. Oclassen:]

Clearly, we are looking at every possible avenue to protect our investment and our shareholders' investment in the development and approval of Intermezzo. So we're looking to IP. We'll be looking to the regulatory path. We haven't made any final and affirmative decisions in that regard, but we're considering all the possibilities.

[Operator:]

[Operator Instructions] The next question comes from Ed Arce from MLV Company.

[Ed Arce:]

So I appreciate the commentary around the difficulties that you see around the uptake not being quite as what you had initially expected. And I can see how that you specifically isolated the physician interaction with the patient, and changing that behavioral pattern as being a difficult one to accomplish. Just wondering then, as the sales reps start to see all of the physicians, what could you say, at least qualitatively, about the success rate or traction that they see in explaining the benefits and getting the doctors that they've seen to agree to begin to ask patients about middle-of-the-night insomnia?

[Glenn A. Oclassen:]

Well, it's an interesting situation because the physicians have a pattern of hearing secondary comment about, "Hey, doc, I'm having some trouble sleeping." And responding to that almost automatically without further questions, but with writing a prescription. That's not a considered mode of behavior. It's not as though physicians are sitting around saying, "How am I going to deal about questions with regard to insomnia?" It's just the path, by far, of least resistance, given that they only had one route and strategy for administration available to them in the past. And that was to treat these problems with a bedtime drug. So we don't have to overcome some firmly held belief. We need to overcome habit. And we need to offer a sufficient rationale to overcome that habit. We believe that is eminently available in the Intermezzo story with the unique dosage form and the unique dose and the way in which it performs. But it's going to take some time. In our industry, changing minds is seen to be something that only occurs with multiple calls. And changing behavior, versus changing mind, takes even longer. So this is one that is going to play out as we move forward over the next months and quarters.

[Ed Arce:]

But just generally qualitatively, would you say that a good number of the sales reps have come back with positive feedback in their interactions with doctors?

[Glenn A. Oclassen:]

Too soon to tell. This is really something we just began working with, Purdue just began working with, within the last, literally, month. So it is too early.

[Ed Arce:]

Okay. Do you -- could you tell us the percentage of targeted physician nationwide that reps have seen so far?

[Glenn A. Oclassen:]

I actually do not have a number on that. But I would say that the overwhelming majority of targeted physicians would have been called on at least once, if not multiple times, by this point.

[Ed Arce:]

Okay. And then I guess just a follow-on, on that sense. These -- do these early results, perhaps -- this is a loaded question, but does this affect your thinking and Purdue's thinking about how you might ultimately think about engaging direct-to-consumer advertising?

[Glenn A. Oclassen:]

Well, certainly, all of the issues that surround the product, our and Purdue's basic belief in the performance and positioning of the drug, as well as what we see happening in the field, all those things affect future marketing decisions. And the decision to begin DTC promotion is one that is in the future, given the limitations that PhRMA puts on when you can begin that sort of thing. But I -- it's clear that Purdue has, from the beginning, shared with us the thought that Intermezzo might be a particularly appropriate pharmaceutical product for direct-to-consumer marketing. But beyond that, any comment I might make on that would move in the area of providing information to competitors. So I can't comment further. The -- I think the key issue is that we and they remain interested in the concept, and we'll be looking to that in the future.

[Ed Arce:]

Okay. And then one last one, if I may. Just in general, I guess, even -- because it's still rather early in the launch despite this -- the less-than-expected uptake, at this point, Purdue does not really plan any sort of substantive changes from where you've been -- what you've been doing yet. Is that right?

[Glenn A. Oclassen:]

Well, I would say that they're going to be making midcourse corrections on a continuing basis. That's kind of the way this process works with the product launches. You put it out there, you tell the story, you listen to what the field is telling you, what the reps are having to say about the effectiveness of that story, as well as, obviously, watching the prescription line to see what that might yield. But I -- it's -- this is an effort that -- and a journey that requires literally constant course correction. And certainly, that is even more pronounced during the first year after launch.

[Operator:]

Our next question comes from Bill Tanner from Lazard Capital.

[William Tanner:]

For Glenn or Tom. Just on the royalties. I think, just confirm that the company does get paid royalties on sales of Intermezzo to the wholesalers. This is not sales that are from wholesale, a product is being shipped from the wholesalers to the pharmacies.

[Thomas P. Soloway:]

Bill, this is Tom. Indeed, we get paid. We at Transcept get paid on, or get -- receive royalties on net wholesale sales or net sales to wholesalers, however you might want to say it. So that is indeed how we get paid.

[William Tanner:]

Okay. And is there any commentary as to the level of inventory that currently exists, and the adequacy of it?

[Thomas P. Soloway:]

At this point, Bill, we're not really in a position to have that particular conversation. Obviously, the net sales number is net, and that is adjusted for rebates, sales incentives and returns. We expect that over time, that, certainly, in the early parts of launch that the royalty revenues received by Transcept for the first few quarters may be a little bumpy, but that over time, 3, 4 quarters, we would expect that the patient pull-through revenue and the wholesale revenue lines would begin to merge. And that the real focus for The Street gauge, the success of Intermezzo, should continue to be and remain focused upon patient pull-through scripts as reported by Wolters Kluwer or IMS.

[William Tanner:]

Okay. And then is it -- I mean, since the drug has not been out that long, I would suppose that there hasn't been much in the way of returns. So is it -- and again, this is just a gross approximation or just tell me if we're thinking about it the right way that the rebating or the discounting to the wholesalers early on to the launch to, I guess, accommodate them for the risk of not knowing how well the drug is going to go out the other end of the channel. Is that -- is it fair to say that perhaps the discount is greater, the rebate is greater at the outset than it might be at a steady state when the demand is better known?

[Thomas P. Soloway:]

Yes. I'm not sure that we can comment on that level of detail, Bill. But I would -- you can assume that Purdue is pursuing a standard launch approach in that regard. But with regard to specifics, we can't really get into details.

[Glenn A. Oclassen:]

Yes, Bill, in general, though, I think your comment is correct, that all of these kinds of adjustments tend to be bigger early on, because there's an attempt to get a number to generate a number that reasonably reflects what is actual demand in the world. And that over time, the quarterly numbers on which we are paid royalty will gradually move toward representing what is happening on the prescription line. And so it's a process that takes some time to true up all of these different numbers.

[Operator:]

I'm showing no further questions at this time. I would like to hand the conference back over for any closing remarks.

[Glenn A. Oclassen:]

Thanks. To reiterate, the Intermezzo launch is fully underway, but we believe that more time will be needed for the impact of the very substantial Purdue sales and marketing effort to be reflected in the Intermezzo prescription numbers. Purdue is actively implementing several strategies that are designed to increase Intermezzo adoption. And we believe that the recent notices of allowance from the U.S. PTO have significantly strengthened the Intermezzo IP position out to 2026. And finally, we look forward to announcing results from our Phase II study of TO-2061 in the treatment of obsessive compulsive disorder in the first quarter of 2013. And thereafter, updating you on our progress during our next quarterly call. Thanks for participating. And operator, that concludes our call today.

[Operator:]

Thank you, sir. And, ladies and gentlemen, thank you for participating in today's conference. This concludes our program. You may all disconnect and have a wonderful day.