Zogenix, Inc.
Q3 2014 Earnings Call Transcript

Published: 7 Nov 2014

[Operator:]

Good day, ladies and gentlemen, and welcome to your Zogenix’s Third Quarter 2014 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we’ll have a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, as a reminder this conference call is being recorded. I would now like to introduce your host for today’s conference, Catherine O’Connor, you may begin.

[Catherine O’Connor:]

Thank you, operator, and thank you all for joining us this afternoon. With me on today’s call are Roger Hawley, Chief Executive Officer; Dr. Stephen Farr, President; and Ann Rhoads, Executive Vice President and Chief Financial Officer. Earlier today Zogenix issued a news release announcing the company’s financial results for the third quarter 2014. We encourage everyone to read today’s news, as well as Zogenix’s Quarterly Report on Form 10-Q, which will be available on the company’s website at www.zogenix.com. Please note that certain of the information discussed on the call today is covered under the Safe Harbor provision of the Private Securities Litigation Reform Act. We caution listeners that during this call, Zogenix’s management will be making forward-looking statements. Actual results could differ materially from those stated or implied by these forward-looking statements, due to risks and uncertainties associated with the company’s business. These forward-looking statements are qualified by cautionary statements contained in Zogenix’s news releases and SEC filings, including in its Annual Report on Form 10-K. This conference call also contains time sensitive information that is accurate only as of the date of this live broadcast, November 6, 2014. Zogenix undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call. Now, I’d like to turn the call over to Roger Hawley, Chief Executive Officer of Zogenix.

[Roger Hawley:]

Thank you, and thanks to everyone for joining us today. I’m going to be covering the highlights of our very active quarter, and provide a deeper dive into Zohydro ER strategy. Then Steve will be reviewing development programs and our upcoming key milestones that we believe will drive significant future value for the company. And Ann will provide the details related to the third quarter financial statements. You probably know that we’ve been active recently, issuing several important press releases, in addition to our earnings release. I’m going to spend just a few moments on the highlights of those. We’ve had very positive developments and a very lot of activity for Zogenix. We continue to drive the adoption of Zohydro ER to over 15,000 prescriptions for the third quarter, which is an increase of 47% compared to the previous quarter. Through October 24th, we have over 31,000 total prescriptions since the launch. Through our education and outreach to prescriber’s, we have expanded the prescriber base for Zohydro ER, from 2,800 to over 4,000 prescriber’s during the third quarter. We filed the SNDA for a modified formulation with potential abuse-deterrent properties of Zohydro ER, and also reduced the future risk of both ADT product candidates that we’re developing, through a $10 million exclusivity waiver exchange received from Purdue Pharma, which was the subject of an earlier press release. We have also acquired UK based Brabant Pharma, which provides global rights for Brabafen, for the treatment of Dravet syndrome, enhancing and diversifying our product pipeline. Ann will be accessing additional non-dilutive capital to execute on our commercial and development initiatives through a signed non-binding term sheet for up to $24 million in debt, Ann will talk more about that. We’re very pleased with the continued adoption and the interest in Zohydro ER from pain specialist, and we are encouraged by the ongoing positive feedback from physicians and patients, who are experienced with the product. All indications to date, point to the product providing clinical benefits as we expected. In terms of reimbursement during the quarter, 8 out of 10 prescriptions were approved by payers. We’re meeting, and even exceeding our expectations for successfully contracting with top PBMs and a number of Medicare part B plans. To date, we have roughly 7,000 pharmacies where patients can receive fulfillment of their Zohydro ER prescription. We have helped direct over 3,000 patients to a local pharmacy that’s already stocking Zohydro ER through our pharmacy locator service. We are extremely encouraged by the uptake of this service, and how well the added support has been received by our targeted prescribers and their patients. Our overall execution since launch has been excellent, and I’m proud of our commitment to responsibly commercialize, educate, and conduct surveillance to ensure that the appropriate use of Zohydro ER is as planned and as we’ve committed. We are equally committed to protecting access for people suffering from chronic pain and continue to advocate for patients’ rights, while also embracing our responsibilities to the communities in which these patients live. We believe that with the recent rescheduling of hydrocodone combination products, and our SNDA filling being on track for potential approval at the end of January 2015, we have enhanced the attractiveness for the addition of a potential co-promotion partner. Discussions are ongoing, and we believe we’re well positioned to secure partner, potentially by the first quarter of 2015. Now I’m going to comment briefly on the recent exclusivity waiver exchange that we entered with Purdue Pharma, since it has broad implications across our commercial and development activities. Importantly, this agreement reduces risks for Zohydro ER in the near-term and long-term, and removes a level of uncertainty related to the FDAs new product exclusivity rules in the context of products featuring abuse-deterrent technologies. Let me outline the key benefits of this agreement for Zogenix. First, it ensures that if approved, Purdue’s extended release hydrocodone product with abuse-deterrent properties will not block our current SNDA for Zohydro ER with abuse-deterrent properties, nor will it block any future versions of extended release hydrocodone with abuse-deterrent properties that we may develop. This will also allow us to continue to confidently invest in both of our ADT development programs. Second, it removes the risk of potential legal activity that we might have been forced to undertake if there were any adverse decisions related to exclusivity by the FDA. And third, it provides us with an additional $10 million in non-dilutive capital to invest in our commercial activities and development pipeline. We’ll also be eligible for potential royalty payments from Purdue, if the product gets approved and reaches sales in excess of certain levels, mitigating some of the risk of their launch. We believe this is a fair price, given our respective positions and the additional benefits I’ve just described. Also, just today we announced, as part of our earnings release, that we will be receiving $3.5 million payment from Teva this quarter. This is a negotiated collaboration for an FDA required post-approval study, for the right to reference our carcinogenicity data for their pending NDA for ER hydrocodone. This was a negotiated collaboration for an FDA required post-approval study allowing Teva to reference the data from our study, does not reduce the timeline for review of their pending NDA for extended release of hydrocodone. And now I’m going to turn it over to Steve to talk about our development pipeline, Steve?

[Steve Farr:]

Thanks Roger and good afternoon to everyone. Today I’ll provide an update on our Zohydro ER abuse-deterrent technology programs and the Relday clinical program. I’ll also provide some brief comments on Brabafen, our new potential breakthrough product candidate, as the treatment of Dravet syndrome. At the end of September, we submitted a supplemental NDA for a modified formulation of Zohydro ER capsules, with abuse-deterrent properties. The new formulation has identical hydrocodone released characteristics compared to the Zohydro product approved today, when it’s used as intended it has been designed to make it difficult to manipulate the purpose of abuse by injection or nasal insufflations or snorting. The supplemental submission has been assigned to Purdue for a target action date of the 30th January 2015. If approved, we intend to begin a transitional launch of this product in the second quarter. We’re also continuing to characterize the products abuse-deterrent properties, towards that objective we recently obtained FDA feedback on the abuse liability study protocols, which are now being finalized for starter studies later this year and in early January. This puts us on track to submit further data to potentially support an amended product label with abuse-deterrent claims in mid-2015. In parallel, we are continuing to make great progress in the development of an abuse-deterrent tablet formulation of extended release hydrocodone under our collaboration with Altus Formulation. As we previously communicated, a new drug application submission is being targeted for the first half of 2016, which will reference the approved Zohydro NDA with respect to previous findings of safety and efficacy. We have selected the final tablet formulation candidates to enter a clinical pharmacokinetic study and clinical trial supplies are now being prepared along with all the regulatory paperwork to enable a scheduled study to start in January of next year. In addition, we recently selected Halo Pharma as our development and manufacturing partner for future commercial supply. We are really pleased to have Halo join our team with Altus Formulation, and have already started technology transfer and manufacturing scale of projects in Halo’s facility in New Jersey. Now let me switch to Relday, our propriety once-monthly subcutaneous formulation of risperidone for the treatment of schizophrenia. During this quarter, we successfully concluded the chronic toxicology studies required for further clinical development of Relday. The study results support initiation of the 20 week, multi-dose clinical pharmacokinetic and safety trial. We are now working with the U.S. based CRO for entirely initiation of this study in January. We expect to report top line data from this multi-dose study in the third quarter of 2015. Overall, we continue to make solid progress with our development programs. We are very excited to have started this week, the preparation work for the Brabafen phase 3 program, which we expect to begin in the second quarter of 2015. Based on this timeline, we could have results from the phase 3 trials by early 2016. We are also committed to continuing the positive relationships with Brabant Pharma have established within the Dravet syndrome community, expert clinical leaders, treatment centers, patient advocacy organizations, and the families and patients affected by these catastrophic epilepsy syndrome. As we close out 2014, we have an exciting and promising pipeline with important clinical and regulatory milestones for abuse-deterrent Zohydro ER, Brabafen and Relday, in each calendar year from now, through 2018. And now I’ll turn the call over to Ann for a financial update.

[Ann Rhoads:]

Thanks Steve. During the course of our discussion today, I’ll be referring to today’s press release on our third quarter financial results and to be included unaudited statements of operation and the balance sheet. I’ll be rounding numbers for purposes of this call, so please refer to these documents for the precise figures. Total net revenue for the third quarter of 2014 was $8.8 million up 23% from 7.2 million in the third quarter of last year. Total revenue for the third quarter of 2014 includes net product revenue on sales of Zohydro ER, contract manufacturing revenue, and service and other revenue. Net product revenue for the second quarter was 4.1 million. The company began commercializing Zohydro ER in March of 2014 with recognized revenue based on product distance through patient prescriptions. Zohydro ER gross factory sales for wholesalers were 6.5 million for the third quarter. And as of September 30th 2014 the company had 7.9 million in deferred revenue for Zohydro ER sold to wholesalers, but not yet dispensed through patient prescriptions. Gross to net sales deductions will be recorded at the time these prescription units are dispensed. Contract manufacturing revenue on supply of two of our DosePro to Endo was 4.2 million. And service and other revenue was 447,000 primarily for the co-promotion of Migranal. Our product gross margin improved to 83% in the third quarter of 2014 due to product mix given the launch of Zohydro ER in March of 2014 and the sale of SUMAVEL DosePro in May of 2014. Separately the cost of contract manufacturing for SUMAVEL DosePro supply to Endo was $4 million. Research and development expenses were 5.3 million, primarily for development expenses for Zohydro abuse-deterrent formulations and Relday. Our selling, general and administrative expenses were 19.1 million, a significant increase from the third quarter of 2013 primarily due to the launch of Zohydro ER. Other income was 7.9 million reflecting non-cash mark-to-market adjustments for the fair value of the company’s outstanding warrants. And our net loss for the third quarter 2014 was 12.8 million or $0.09 per share, compared to a net loss of 10.9 million or $0.10 per share in the third quarter of 2013. Our non-GAAP net loss for the third quarter of 2014 adjusted for certain non-cash or non-recurring items was $0.15 per share compared to a loss of $0.12 per share in the third quarter of 2013. The non-GAAP financial results are detailed in the table included in our financial results, press release issued today. We finished the quarter with cash and cash equivalents of 50.5 million, additionally we continue to have restricted cash of 8.5 million consisting of the portion of the proceeds from the sale of SUMAVEL DosePro held in escrow until May 2015. This combined with the expected completion of the $24 million debt transaction plus the cash from the Purdue and Teva transactions, we believe will provide us with sufficient cash run rate through the end of 2015. The company reiterates its 2014 financial guidance of expected combined R&D and SG&A expenses at 25 to 27 million for the fourth quarter towards the low end of the full year range we had previously provided. I’ll also note this does include incremental expenses related to the Brabafen program and the current outlook for Zohydro ER commercial activities. I’ll now turn the call back over to Roger.

[Roger Hawley:]

Alright. Thanks Ann and Steve, great report. We’ve made tremendous progress in the third quarter, and this past month. And to all the Zogenix employees who made this possible. Thank you for your hard work and dedication. We remain on track with our ADT development programs; on the development side we significantly enhanced our new product pipeline with the Brabant acquisition and employees to begin the Relday multi-dose clinical trial in January. And we are supporting all of this with improved cash, resources that will allow us to execute on our strategy. We’ll also continue to push forward with our business development efforts with the planned goal of securing a co-promotion partner for Zohydro ER. All of these key initiatives for the entire organization represent a significant opportunity to build value for our employees and shareholders while bringing important new medications to patients. And now I’d like to turn the call over to the operator to begin the question-and-answer session. Operator?

[Operator:]

[Operator Instructions] Our first question comes from the line of Akiva Felt of Oppenheimer. Your line is open.

[Akiva Felt:]

Hey good afternoon. Thanks for taking the questions. To start, so well looking back at Purdue’s announcement in late April about receiving the six months review, I mean we’re now almost a week past the end of October. At what point do you make assumptions about the status of that application and any impact that could happen, how you think about Zohydro commercialization?

[Roger Hawley:]

Well look, we don’t really have any insight about what’s going on there, the timelines. And I really think it would be inappropriate for us to make assumptions or comment about their current situation. What I can say is, we believe that we both worked in good faith to make the progress of both companies, ADT formulations, possible without anything in the way that could have happened. So we certainly know it’s not an issue of exclusivity that could be holding them up. So that’s the part we do know. What we also know from our own experience and everything that’s happened in this landscape for opioids, it’s not been easy for anyone. So I think we just have to wait and see what happens and Purdue being a private company, we may be a long time before we know the outcome unless it’s something that’s publicly announced. Akiva, I’d just say one thing to it, it certainly doesn’t change anything we’re doing commercially. We have assumed that they will get approval and we’re prepared for that, and we’re focused on our product and obviously by agreeing to that waiver, we think we’re prepared for the entry of their product.

[Akiva Felt:]

Okay. I wanted to ask about the waiver as well, do these discussions come about after some kind of input from FDA on maybe how they were looking at assessing the situation, which is obviously complicated. And then you announced the deal with Teva to reference your carcinogenicity data, but is there discussion about the exclusivity waiver with them as well. Or today it’s still potentially de-blocked from launching until October 2016.

[Roger Hawley:]

Yeah, well let me start at the beginning, the discussions that we’ve had, we have been quite clear all along that this was a complex issue and without precedent. And there was also in the public record, reality that we did have a fairly extensive meeting with all the appropriate people at FDA that was our meeting with the FDA about our exclusivity. And so we’ve all been giving this a lot of thought. Clearly the FDA had their own meeting recently, the two-day public meeting, where these topics were also discussed, including asking for input about should exclusivity be awarded for ADT itself. And again, that’s not happened, to our knowledge, at any time in the past but we also recognized that it could happen. So we reached out to Purdue to talk about the possibility of doing this. And we did it at a time before their Purdue date, and I think we both did it facing the uncertainty of what was going to happen, but we did both did it for the right reasons, and that was to encourage competition and to support the ongoing development of ADT technologies in both companies, so that’s what we achieved. As far as making any other comments about it and what dialogue would or could have been with Purdue and the FDA, I don’t think we should discuss that, that’s for either one of those parties to talk about. On Teva, I would say it had absolutely nothing to do with the separate matter or agreement on exclusivity with Teva or with Purdue, and the agreement with Teva had been in discussion for a very long time. This is something that’s not uncommon when one party already has the carcinogenicity data. And it was opposed to approve the commitment for us, we know that we didn’t advance the timeline; it was basically a way to effectively share cost and to remove the burden on doing those studies. So again, we just think it was the right thing to do and not unique and unrelated to exclusivity.

[Akiva Felt:]

Okay, I appreciate the color thank you.

[Operator:]

[Operator Instructions] And our next question comes from the line of Tim Lugo of William Blair. Your line is open.

[Roger:]

Hi guys, this is Roger in for Tim, thanks for taking my question. I’m just trying to think about Zohydro script growth in 2015 in light of the formulary changes that were announced earlier this year as well as the potential approval, and obviously you guys made a kind of progress in the ADT formulation. So could you just provide some color on how to think about that moving forward?

[Roger Hawley:]

Yeah, well I think on the express script issue in particular, which we talked about on earlier calls that was unexpected, in fact it really happened right around the time of our last call. But since that time, we’ve actually contracted for the availability Zohydro ER on other formularies that are Express Script clients that we actually weren’t assuming that we could penetrate. So, while we had some bad news on the national formulary side, that’s actually a relatively small percentage of our current prescription activity. And right now, that is still covered under their plan, but that will change in January. We do hope to revisit that once we have abuse-deterrent formulation of Zohydro. So I don’t know what the outcome of that would be. But overall, we feel very good about where we stand in our formulary position next year, we think we offset the loss of the national formulary with other wins on other contracts. So overall net-net we didn’t change our internal forecast or expectation for that reason for next year.

[Roger:]

Great, thank you.

[Operator:]

Our next question comes from the line of Difei Yang of R.F. Lafferty. Your line is open.

[Difei Yang:]

Good afternoon, and thanks for taking my question, just a couple. The first question is related to business development activity in the case that, if you signed up a co-promotion partner for Zohydro ER, how should we think about the sales force? Would we rather to take the opportunity right size the sales force or would you rather in-license or potentially add another product in the bag?

[Roger Hawley:]

Well two separate decisions, you’re exactly right, but we feel we’re about the right size today of our sales force. On the last call, I mentioned that we have been overtime reducing our sales force; there were some territories we deemed that weren’t really buyable today. And then we also had many new reps that joined us at the launch. And some of those representatives unfortunately left for performance reasons, but right now, we’re about right size of our sales force. We believe that if we get a co-promotion partner, all of those reps would be additive to the promotion of our product. And having said that, we would still like to get a second product for our bag and that will also be something that we continue to work on. So we’re first focused right now on trying to conclude a co-promotion where we bring another team on to Zohydro. It would be what we consider to be the most effective kind of structure, where they earn based on performance of their teams and the value that they add to the brand, for a certain percentage share of the revenue generated. And that’s the kind of deal and structure that we’ve liked. And we’re going to try to continue to accomplish that sort of goal in the future. Independent of that assuming we get the co-promote in place on Zohydro, we will still be looking for that second product opportunity, either a co-promote for a product in our bag or if we could find the right product even a potential product acquisition.

[Difei Yang:]

Thank you, that’s helpful. And the next question is relative to Q4 guidance, it seems like its implying increase R&D spending in Q4. Is that how we should think about for the full year 2015?

[Ann Rhoads:]

So, we haven’t yet given any expense guidance for 2015, but we do have an uptick in R&D spending in the fourth quarter that it captured in the numbers that I shared during the call today. That does include kind of the Brabafen acquisition, so we’ve already factored that into our existing plan and we should be just fine to come in within that range.

[Difei Yang:]

Thank you.

[Operator:]

And at this time I’m showing no further questions in the queue. And I’d like to turn the call back to management for closing remarks.

[Roger Hawley:]

All right. Thank you. We appreciate everyone’s time. And we’ve had a great quarter, appreciate you following up with us and thanks for the questions today. We’ll keep you posted as we move forward and achieve the future milestones that we’ve laid out. Thank you

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. And you may now disconnect. Everyone have a wonderful evening.