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Transcept Pharmaceuticals, Inc. (NASDAQ:TSPT)

Q3 2012 Results Earnings Call

November 12, 2012 4:30 PM ET

Executives

Tom Soloway - Executive Vice President and COO

Glenn Oclassen - President and CEO

Leone Patterson - Vice President and CFO

Analysts

Bill Tanner - Lazard Capital Markets

Jason Gerberry - Leerink Swann

Jason Butler - JMP Securities

Operator

Good day, ladies and gentlemen. And welcome to Transcept Pharmaceuticals Third Quarter 2012 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we’ll conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions)

As a reminder, this conference call may be recorded. Now, I would like to hand the conference over to Mr. Tom Soloway, Executive Vice President and Chief Operating Officer of Transcept Pharmaceuticals. Sir, you may begin.

Tom Soloway

Thank you, Operator, and good afternoon, everyone. Thank you for joining us today to discuss the Transcept Pharmaceuticals’ 2012 third quarter results. My name is Tom Soloway, Executive Vice President and Chief Operating Officer of Transcept. Joining me on the call today are Glenn Oclassen, President and Chief Executive Officer; and Leone Patterson, Vice President and Chief Financial Officer.

After market close this afternoon, we released financial results for the quarter ended September 30, 2012. A copy of this press release is available on our website.

We remind you that this conference call will contain forward-looking statements that 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, our beliefs regarding the timing, size and nature of commercial opportunities for Intermezzo, including managed care replacement, as well as physician and patient acceptance, our beliefs regarding the key challenges facing the market acceptance of Intermezzo, including what we believe to be the factors affecting Purdue’s ability to effectively address such challenges, our expectations regarding the trajectory of prescriptions for and revenue derived from Intermezzo and the timing of such projections, our expectations regarding the timing, investment in and benefit of in Intermezzo direct-to-consumer promotional campaign, our beliefs regarding Internet intellectual property and product exclusivity for Intermezzo and its importance and duration, including plans and results relating to ANDA proceedings or litigation, our beliefs regarding the accounting treatment and adjustment of royalties on net sales of Intermezzo generated by Purdue, our beliefs regarding the importance of Intermezzo prescription growth as an indicator of success, our plans, strategies and ability to identify and finance additional products for in-licensing or acquisition, the nature of such products and the ability of those products to be accretive to our earnings, our beliefs regarding the potential patient benefits of TO-2061 and its mechanism of action, and our plans to develop TO-2061 and expectations for the timing of the Phase 2 study completion, topline data availability, and an ANDA Phase 2 meeting with the FDA.

These statements are based on information that is available to us today. We may not actually achieve our goals, carry out our plans or intentions, or meet the expectations or projections disclosed in our forward-looking statements. And you should not place undue reliance on these statements.

Our forward-looking statements do not reflect the potential impact of any in-licensing agreements, acquisitions, mergers, dispositions, joint ventures or investments that we may enter into or terminate. Actual results or events could differ materially, we assume no obligation to update these statements as circumstances change, except as required by law.

For additional information concerning the factors that could cause actual results to differ materially, please see the Forward-Looking Statements section in today’s press release and the Risk Factors section of our quarterly report on Form 10-Q for the quarter ended June 30, 2012, and the 10-Q we plan to file tomorrow for the quarter ended September 30, 2012.

I’ll now turn the call over to Glenn Oclassen.

Glenn Oclassen

Thanks, Tom, and good afternoon, everyone, and thank you for joining the call today. Intermezzo, our lead product is the first and only prescription sleep aid approved for use as needed in the treatment of insomnia when a middle of the night awakening is followed by difficulty returning to sleep.

In the past prescription sleep aids including oral zolpidem of 5 milligrams to 12.5 milligrams have been designed to be use at bed time and have required seven to eight hours of remaining time in bed.

Unlikely these bed time sleep aids in Intermezzo which is a sublingual tablet containing 1.75 milligrams to 3.5 milligrams of zolpidem was specially formulated to be taken in the middle of the night at the time that an insomnia patient awakens and it’s a first drug ever approved by the FDA for this specific indication.

Intermezzo was launched in April of 2012 by our marketing partner Purdue Pharma. While we are seeing continuing month-to-month growth in total Intermezzo prescriptions, the absolute numbers indicate that significant work remains to establish Intermezzo as an important insomnia product we believe it will be.

We see three key marketing and selling challenges. These include further expanding managed care access for Intermezzo, motivating physicians to identify middle of the night awakening as an important manifestation of insomnia and building awareness among physicians and patients of Intermezzo as the right treatment option.

Purdue is continuing to make progress with insurers and managed care organizations, and we expect that managed care restrictions will become less of an obstacle to adoption over time.

In addition, for the many patients whose managed care plans currently cover Intermezzo, Purdue is offering a patient savings card that can reduce the co-pay to as little as $15. The unique Intermezzo indication requires that we change the way in which physicians interact with patients with regard to their sleep problems.

Until the introduction of Intermezzo physicians did not have compelling clinical reasons to differentiate between insomnia patients having problems going to sleep at bed time and patients whose insomnia was characterize by middle of the night awakenings. An important future goal is to help physicians distinguish between these manifestations of insomnia and prescribe Intermezzo for the appropriate patients.

Finally, we believe that Intermezzo is an excellent candidate for direct-to-consumer promotion. As we have indicated in the past, following the launch of Intermezzo, Purdue hasn’t hear to pharma guidelines which preclude DTC advertising for a period of approximately six months after product launch. We know that Purdue has evaluated the DTC opportunity and we have discussed a range of DTC strategies with them.

However, until final decision are reached we will not be in a position to comment on what additional strategies or investments if any, we or Purdue may pursue with regard to the mix of Intermezzo marketing activities or the timing of these decisions.

With regard to our patent protection, in August of 2012 the USPTO issued two additional patents covering Intermezzo. The first of these includes claims directed to methods of treating middle of the night insomnia with low doses of zolpidem and is an important part of the Intermezzo patent strategy.

The FDA subsequently listed this patent in its Orange Book and this listing should triggered a $10 million milestone payment from Purdue, which we received and recognized during the third quarter of 2012.

The second of these patents include claims directed to compositions for treating middle of night insomnia and has also been listed in the FDA Orange Book. These patents expire in 2029 and 2025, respectively.

We recently received Paragraph IV challenges from Activis, Novel Laboratories, Par Pharmaceuticals, Par Formulations and Watson Pharmaceuticals. Transcept and Purdue patent counsel have reviewed these Paragraph IV challenges and we have jointly filed actions against these generic manufacturers.

Now, I’d like to briefly comment on the progress of our TO-2061 program in the treatment of obsessive compulsive disorder. It’s estimated that OCD affects up to 2% of the U.S. population and OCD is seen to be a disorder as disabling as schizophrenia.

The only medications currently approved for the treatment OCD include four of the SSRIs and clomipramine, and the literature suggests that 40% to 60% of OCD patients fail to adequately respond to these primary therapies.

TO-2061 is an adjunctive therapy that is being evaluated in the treatment of patients with obsessive compulsive disorder. We have not adequately responded to an approved OCD medication. We believe that the potential benefits of TO-2061 may be related to the ability of the drug to down regulate dopamine even at very low doses.

Our investment in the program is based on the result of two pilot studies in which the majority of treatment resistant OCD patients showed substantial improvement when low dose ondansetron was added to their treatment regimen.

We are moving toward the completion of a double-blind placebo-controlled study to evaluate the safety and efficacy of adjunctive therapy with TO-2061 as compared to placebo in treatment resistant OCD patients.

On September 12th, we announced that enrollment and randomization of 168 patients was completed. The last patient visit is schedule to occur before the end of the year, in the calendar year and we expect that to announce topline results in the first quarter of 2013.

Depending on these results, we plan to schedule an ANDA Phase 2 meeting soon thereafter with the FDA to discuss the additional development program that will be required for an NDA filing.

Finally, as we look to expand our product portfolio beyond Intermezzo and TO-2061, we are engaged in an active business development effort to identify an additional late-stage product for potential licensing or acquisition.

We are targeting product assets that are consistent with our neuroscience development capabilities and our focus on the psychiatry audience, and with our intention to prudently manage our cash resources.

I will now turn the call over to Leone Patterson, our CFO to review our third quarter financial performance, after which we’ll open the call for questions. Leone?

Leone Patterson

Thanks, Glenn. On September 30, 2012, Transcept had $98.7 million of cash, cash equivalents and marketable securities. During the quarter ended September 30, 2012, Transcept spent on average approximately $1.5 million per month, which does not include cash inflows from stock option exercises or revenue received from Purdue.

Revenue for the quarter was $10.4 million, which included $10 million milestone payment from Purdue, $250,000 from Purdue for the non-refundable options to negotiate for the commercialization of Intermezzo in Mexico and Canada, and $190,000 of royalties related to Purdue, net sales of Intermezzo to wholesalers. Purdue pays royalties to us by some 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, we believe that prescription data trends are better near-term measure of Intermezzo’s success.

Research and development expense for the quarter ended September 30, 2012, was $3.1 million, compared to $2.7 million for the same period in 2011. Research and development expense in both periods was primarily related to expense associated with our Phase 2 study the TO-2061 program.

General and administrative expense for the quarter ended September 30, 2012, was $2.5 million, compared to $2.9 million for the same period in 2011.

Net income for the quarter ended September 30, 2012, was $4.9 million or $0.26 per basic share and $0.25 per diluted share, compared to a net loss of $5 million or $0.37 per basic and diluted share for the same period in 2011. This increase in net income was primarily attributable to the $10 million milestone payment from Purdue.

At September 30, 2012, there were 18.6 million shares of common stock outstanding and 3.3 million shares of common stock related to the outstanding options and warrants.

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.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Bill Tanner from Lazard Capital Markets.

Bill Tanner - Lazard Capital Markets

Thanks for taking the question. Glenn, I guess, if you, for you, one is really, so you kicked off managed care physician prescription patents and building awareness. On managed care could you give us a sense as to where you are with respect to formulary position -- formulary wins relative to maybe the initial expectorations and if you are further behind, is this something that its more of win and then after what needs to be done there and then I have couple of follow ups.

Glenn Oclassen

The managed care process in general especially in the last five years became an increasingly slow one. And but I would say that at this point we are about up to a levels that we expect that this long after launch and most of that is Tier 3 payment and most of that is without restrictions.

We are not going to release any specific numbers on this for the basically the same reason that we’ve talked about on previous quarterly calls and that is that Purdue is a private company. We respect that and want to make sure that we’re revealing on these sort of things as something that’s comfortable to them.

Bottom line is that I don’t think we see managed care coverage as the principal impediment to Intermezzo living up to it’s potential. And we do expect to see continued improvement on this as time goes by.

Bill Tanner - Lazard Capital Markets

Okay. And so then the two other items that you ticked off, physician prescribing habits and then building awareness. I mean, it seems like those are going to improve with as a function of increased effort in better targeting and then obviously, the latter part as it relates maybe more to dedicating more capital to it.

So I’m wondering, further physician prescribing habits, are changes afoot to try to get physicians to be more inclined to as you mentioned to diagnose middle-of-the-night insomnia as the primary issue. How should we think about that?

Glenn Oclassen

I think it’s an issue of promotional strategy. I think it’s been recognized that you have to -- especially for a busy physician, you have to provide sufficient motivation to them to get into a discussion with the patient that they normally haven’t have to engage with in the past because they didn’t have the middle-of-the-night choice.

So that’s a product alternative, a therapeutic alternative to treat middle-of-the-night awakening. And that’s been our continuous adjustment as the rollout has moved forward. And I think that this is a matter as it is with every product launch that you learn as you go. And this is something that’s been recognized and will be continuously adapted to overtime.

Bill Tanner - Lazard Capital Markets

And then just the last question, on the -- on raising the awareness, I mean, it does seem like DTC advertising makes sense. And you guys have called out the fact that airtime should be pretty inexpensive if, obviously, you’re able to do at the middle of the night. I mean, is it still something that you could share with us. How much of a debate is that it’s going to happen at all of her, is it not so much that versus when it’s going to be implemented and how?

Glenn Oclassen

Yeah. This is not really something we can make a call on at this point. I think we wanted to be, for coming and indicating that -- and I think fairly obviously that for a product like this DTC is an important item for discussion. But we’re not in a position to confirm that anything is going forward because we don’t have such confirmation. As soon as we know about it, you will.

Bill Tanner - Lazard Capital Markets

Okay. So this is not a discussion that is ongoing between Transcept and Purdue. And it sounds like it’s not something that you would really have expected there to be much of back-and-forth versus them just telling you this is the way it’s going to go?

Glenn Oclassen

We have actually a very productive relationship with Purdue. And they’ve been good partners in particular and particularly, in the sense of communicating. But we’re just not in a position to say any more about DTC because it’s a decision that has not yet been made.

Bill Tanner - Lazard Capital Markets

Okay. All right. Thank you.

Operator

Thank you. Our next question comes from Jason Gerberry from Leerink Swann.

Jason Gerberry - Leerink Swann

Thanks for taking the questions. Do you think marked by the use of that close to $100 million in cash. It sounds like there is an option for Transcept to potentially incur some of the DTC cost. My understanding was that it was Purdue that would be shouldering all those costs? And then I have a follow-up.

Glenn Oclassen

Well, certainly the marketing of this drug has -- Purdue is our marketing partner. But our involvement in that is something that we will always consider to see what is going to best support the product going forward but no decisions of any kind have been made in that regard.

Jason Gerberry - Leerink Swann

Okay. So anything about this as being a potential option and then on a product acquisition front, I mean, I guess, how should we be thinking about sequencing of that. You’ve got data for the OCD product. You’ve got to wait to a couple of quarters to see how Intermezzo scripts shake out before you think about doing a product acquisition?

Glenn Oclassen

I think we see these projects to be quite independent of one another. Now, obviously the company has to look at it. So overall cash resources and overall uses of those but at this point, we believe that we can support going forward with TO-2061, pending of course discussions with FDA. We haven’t had those discussions yet and won’t have them until after we have the data.

And with regard to product acquisition or licensing whatever, we’re trying to only look at those things that are within our ability to afford them. So we’re managing all of these issues with the intention that we’ll conduct them within the boundaries of our existing cash position as much as that is possible.

Jason Gerberry - Leerink Swann

Okay. And if I could just ask one last one on the managed care front. The coupon or the co-pay coupon assistance that Purdue has to the extent that you can characterize redemption by customers of that. Is it high, medium, low? I’m trying to get a sense of -- I appreciate that you’re getting all of tier 3 coverage but to the extent that those are actually being utilized? That will be helpful. Thanks.

Leone Patterson

I can’t give you any hard numbers on it. I will that you that Purdue seems to continue to consider this an important part of the promotion of the product. And because it does cut co-pay from something tier 3 co-pay from something on the order of $50 down to about $15, or in some cases even less.

But I don’t have any specific numbers to give you on the penetration on that. Suffice to say as I said the Purdue seems to consider this -- continue to consider this an important part of the program.

Jason Gerberry - Leerink Swann

Okay. Thank you.

Operator

Thank you. (Operator Instructions) And our next question comes from Jason Butler from JMP Securities.

Jason Butler - JMP Securities

Hi guys. Thanks for taking the question? Just another one on physician prescribing habits. Just wondering what you think could be the -- or could be the most important change that needs to happen here. Is it just getting in front of the docs more or is there any clinical or pharmacoeconomic data you think could be useful?

Glenn Oclassen

I don’t think there is any change in the -- an acknowledgement at a discussion with the physician that until now, until Intermezzo that there was no real incentive for the physician to ask are you having trouble -- you tell me you’re having difficulty sleeping. Does that mean you’re having trouble going to sleep at bedtime or are you waking up in the middle-of-the-night and having problems going back to sleep.

Now, there’s a motivation to ask that question because you got the product specifically designed for exactly that use. And in some ways, I think it is a matter of putting the condition out in the front of the product rather than putting the product first and then talking about the condition.

So I think that starting the presentation with a discussion of middle of the night awakening. And its importance within the overall manifestations of insomnia is a key part of motivating busy physicians to take a few more moments in our discussion with the patient with sleep problems in order to better characterize their particular difficulty.

Jason Butler - JMP Securities

Okay. Thanks and then, just on the OCD trial, could you just talk about what level of benefit you think you need to see here, both from a regulatory and commercial perspective on whether there’s actually a different benefit you need to see for commercial success versus regulatory success?

Glenn Oclassen

Well, first thing you need to do is get an NDA approved clearly. My understanding in OCD studies is that the -- sort of pass, fail line in terms of product efficacy is at 25% improvement in the so called wire box score, which is withstanding -- standard scoring mechanism that’s used.

What we saw in our initial studies which were open label studies, it was that in the roughly 60% of patients and this is in both of these two studies, roughly 60% of patients, who showed a meaningful response. That response had a million of about 45% improvement. That is a big improvement that means that some of those patients are actually getting out of their homes, for the first time and perhaps in many years.

So we’re-- For, if Intermezzo succeeds, we think it’s going to show a rather substantial therapeutic effect. But what you need for approval is the ability to differentiate from placebo and the meaningful differentiation seems to come when you’re getting at least the 25% improvement.

Jason Butler - JMP Securities

Okay. Great. Thanks for taking the questions.

Glenn Oclassen

Welcome

Operator

Thank you. And I’m showing no further questions at this time, I will like to hand the conference back over to Mr. Glenn Oclassen. Actually, we do have Mr. Bill Tanner who has just queued up. Your line is open, sir.

Bill Tanner - Lazard Capital Markets

Thanks. Glenn, I had one question on clarification in Leone’s prepared remarks that the prescription data or the best measure of near -- the best near-term message of Intermezzo’s success. Can you give maybe a little clarification there because it sounds like the recent prescription trends would suggest that the success of the drug is going to be more modest than expected?

Glenn Oclassen

It certainly suggests that it’s more modest than we expect at this point. Now, what that means long-term is another issue entirely. We remain believers in this product and believers that having drug that you can use in the middle of the night, when you wake up and can’t get back to sleep -- put you back to sleep quickly and enables you to wake up four hours later and not have any residual effects. But that has a meaningful future.

But the revenue numbers now are all subject to essentially human judgment as to what I’m dealing with in terms of inventory and potential returns. And what represents real volume that is being created by patients, actually consuming the product versus stocking inventory and so on and so forth.

So that’s going to take several months, a number of months to sort out and until then we think that a proper estimate of how well the product is doing best determined from looking at the prescription line. And Bill, you’re absolutely right that that line at the moment looks fairly soft. We’re looking along with Purdue, obviously to do the things that will improve that.

Bill Tanner - Lazard Capital Markets

But what I get in fairness to Transcept and acknowledging the unmet medical need. But t seem like the -- it seems like the prescription run rate is a function, more so of a matter of the efforts that’s being put behind it and not necessarily so much what the end user and the ultimate end potential could be?

Glenn Oclassen

It’s certainly a measure of the success of the effort that’s been put behind it so far, without question. And so far that effort has succeeded less than either Purdue or we anticipated and we are collectively trying to do the things that will turn that around.

Bill Tanner - Lazard Capital Markets

Yeah. Fair enough. Okay. Thank you.

Glenn Oclassen

Thanks, Bill.

Operator

Thank you. And our next question comes from Jason Gerberry from Leerink Swann.

Jason Gerberry - Leerink Swann

Follow-up and maybe looking at this quarter’s number on the, sort of, OpEx is and more specifically to G&A. I mean, obviously you got some clinical programs still but on the G&A front, there is sort of reflective of, you guys are around $10 million, we’re giving you about $10 million run rate per year on G&A spend.

Leone Patterson

That will be little high. I think relatively it’s a little bit high but I think it’s close to that number, 17.

Jason Gerberry - Leerink Swann

Okay. Thanks.

Operator

And I’m showing no further questions at this time. I will like to hand the conference over to Mr. Glenn Oclassen for closing remarks.

Glenn Oclassen

Yeah. Thanks for participating and we appreciate the continuing interest. We haven’t solved the equation to this one yet but we’re working very hard on it and looking forward to building this drug to be the kind of success that we all believe should be. We will further update you as we have additional information on the Intermezzo launch. And then particularly looking forward to announcing the results from our phase 2 study of TO-2061 during the first quarter of next year? Thank you.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This concludes our program. You may all disconnect and have a wonderful day.

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