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Auxilium Pharmaceuticals Inc. (NASDAQ:AUXL)

Lazard Capital Markets Healthcare Conference Transcript

November 14, 2012 8:00 AM ET

Executives

Jim Fickenscher - Chief Financial Officer

Analysts

Meredith Cheng - Lazard Capital Markets

Meredith Cheng - Lazard Capital Markets

Good morning. I think we’re going to go ahead and get started. My name is Meredith Cheng. I’m part of the Biopharma team at Lizard Capital Markets. And we are pleased to have Auxilium here this morning and I’d like to introduce the CFO, Jim Fickenscher.

Jim Fickenscher

Thank you, Meredith, and good morning, everyone. Auxilium is a company that we think has a really exciting future in front of it. I’m going to make some forward-looking statements this morning, so I encourage all of you to take a look at our risk factors included in our 10-Ks and 10-Qs you can find on our website.

So if we look at Auxilium, we have four strategic goals that that we want to accomplish this year. First is to maximize the value of XIAFLEX and Testim, two marketed products.

XIAFLEX currently marketed for Dupuytren's contracture in the United Stated and Europe, Testim for the replacement of testosterone products in men who are Hypogonadal.

And then, the second thing we need to do is we need to deliver on our current pipeline. We have a number of different indications for XIAFLEX, currently in research various stages from 1a all the way through to Peyronie's disease, where we just recently filed our sBLA here in United States.

The third objective is to build on our pipeline in specialty therapeutic areas, that’s really looking at how do we continue the momentum and build a successful company into the future, by looking at corporate development and licensing opportunities, both within our current therapeutic areas and other specialty therapeutic areas as well.

But as a foundation, we have to continue to show financial and fiscal discipline. And we think as we do that, that we have a very good opportunity to increase and develop shareholder value in the future.

So, I’d like to start with an overview of our third quarter results and some of the recent events. Third quarter was a very busy quarter for our research and development team in particular.

As I mentioned, we submitted the sBLA to the U.S. Food and Drug Administration just day before our quarterly earnings announcement that is for the potential treatment of Peyronie's disease, the second indication for XIAFLEX.

We completed enrollment in our Frozen Shoulder Phase IIa trial, our cellulite Phase Ib trial and our Dupuytren’s retreatment Phase IV trial this quarter as well. And we began enrollment into multicord Phase IV study that we think is going to potentially, if we are success will give us an extended label in the different contracture area.

And we’ve also commenced a Registry trial to [check] garner some additional information, not only about XIAFLEX but in particularly how it performance in comparison to the two current alternative treatment therapies in aponeurotomy and surgery.

From a financial point of view in the third quarter our revenues were $71 million that’s a 6% increase over the third quarter of 2011 and our net loss was $10.5 million higher than what we have last year, but that was primarily due to decision to invest in direct-to-consumer advertising for XIAFLEX in the quarter.

We ended the third quarter in a strong cash position of $173.5 million and we have no debt at this point time. So we think that we are extremely well poised to take advantage of opportunities going into the future from a financial point of view.

Commercially if I did dive in briefly on product information, the third quarter for Testim, the revenues were $55.4 million that’s a 3% increased over the last year. Frankly, we were disappointed by our results for Testim in the third quarter and I’m going to talk a little bit more about some of the reasons for that and what steps we are taking to get things back on track and ensure that we make a revise guidance for Testim this year.

XIAFLEX we did $55.7 million in world-wide numbers and within the United States was it’s about $13.2 million, that represents a 29% increase over the last quarter and as important I think quarter-over-quarter growth of about 11% and a quarter that is typically pretty flat from a total number of procedures done in the Dupuytren’s space. We’ve also began a disease awareness campaign in the United States for XIAFLEX in Peyronie’s disease.

From our corporate development and licensing standpoint Health Canada granted a Notice of Compliance effectively approval for XIAFLEX for adults with Dupuytren's contracture that is our product that we’ve licensed to Actelion in Canada. So they are now going through pricing reimbursement decisions and we hope they’ll launch product some time next year.

We also began co-promotion with GSK in the second -- in the third quarter for Testim in the United States, and we also announced on our earnings call that we have mutual terminated the agreement that we have with Pfizer for a collaboration on XIAFLEX and Dupuytren and Peyronie’s disease in European, and I’ll talk a little bit more about that as well in just few minutes.

So let’s focus and first on Testim, third quarter performance, as I said, the overall testosterone replacement therapy market has been very strong. In the third quarter total prescriptions grew by 30% versus the third quarter of 2011. This market has seen tremendous growth over the past eight years certainly since I’ll been here, I think compound annual growth rate over that time has been excess of 25% and I don’t know about, those of you sitting in the room, but for me, it’s hard for me to drive from home to -- to house without hearing some type of commercial for testosterone and then the benefits of testosterone, most of those being supplements that are FDA approved.

I think awareness of testosterone is certainly increasing in United States and we think that something that is driving this market because, frankly, while those add some great, they don’t feel really good job of getting testosterone levels up but the description product do.

When we look at the Testim results in the third quarter, our prescriptions grew by about 1% over last year. We knew that the back half of 2012 was going to be difficult from a growth point of view and that’s because last year, we got aggressive for a couple of different managed care plans where we had significant wins and high-control plans, and as a result we saw significant increase in our revenues in the third and fourth quarter of last year.

But as I said, that growth is something that we need to address moving forward during the back half of this year. Our revenues were $54.6 million, up 3% over third quarter last year and our net revenues for Testim overall through the first three quarters were $175 million, up 18% over the same period in 2011.

So, let’s talk about some of the challenges that we had and some of the opportunities that we have for the balance of the year. I think the number one thing that we realized today is that we had a greater disruption than we estimated with the commencement of the GSK co-promotion.

So there were things that needed to be done. We had originally expected that we are going to start co-promotion sometime towards the end of the third quarter. The parties worked hard to get representatives out in middle of July.

But frankly, we had some issues. We are trying to get some of our marketing materials out on time and as a result, we had a significant portion of the quarter where we may not have the materials that our sales reps needed to do an effective job.

We also look at some of the targeting that was done and I think we realized that coming out of the gate. We probably had a suboptimal targeting between the two companies and we try to rectify that now by focusing some of the GSK efforts on some of the higher level, primary care physician.

So regionally when they first came out, they were focused on lot of some of the decile wins and twos and we’ve asked them to try to get to the mid tier of the three to five, three to sixes and we focused a lot more of our time on the highest decile, prescribers both primary care and neurologist.

We’ve also actually decided that we are going to have GSK promote to some of the neurologist, the high-value neurologist that we are promoting as well to increase both our reach and frequency in some of those physician market, so.

In the third quarter, we also had some additional pressure from managed care. I mentioned last year that we had some wins. They are very nice and will reach higher frame. We had some others in early year. Unfortunately, as the case in any given quarter, you are going to win some managed care plans and lose managed care plans. We had a plan that we lost some significant volume in the third quarter. And as a result going forward, we believe that we’ve seen those due to the loss of that, but it was a plan that we lost in the third quarter that caused us to come up from a short form where would like to have been with our revenue.

At the same time kind of the perfect storm coming together, I don’t want to call it super storm but a perfect storm. We also said that that market, which have been growing extremely rapidly through the first half of the year slow down like that in the third quarter as well.

So all those things came together to have us present a quarter that was definitely below our expectations. But if we look forward into the fourth quarter and more importantly beyond, I think number one is that I believe that the GSK Partnership is the right thing is on wavering,

When you look at the reason that we did that, we were in a position where we did not have the ability to get to a significant portion of the prescribers of testosterone replacement products of the primary care physicians. They make up about 60% to 65% of all prescriptions that are written. We had a field force of 150 sales representatives and so we believe that the tenants on, which we struck the deal with GSK made a lot of sense and they continued to make a lot of sense.

The way the transaction is structured, GSK only gets paid if they are able to move revenues above at a, pre-established base lines. So GSK is highly motivated to make sure that they are going to be able to increase overall revenues. And we are actually very encouraged by some of the most recent data that we’ve seen, in particular with share of voice, which is typically a leading indicator and that moves onto prescriptions with a certain period of lag time.

We’ve also seen since early September that our total prescription and new prescription trends where we had been consistent, like kind of in a market share decline position is actually starting to flattened out for the first six or seven data points in the fourth quarter. So we think all the leading indicators are moving in the right direction and that gives us confidence that we are going to be able to achieve our fourth quarter goals that we have for the product.

This is a chart that shows three different share of voice in three different physician segments. You can see on the far left, the primary care. Testim is the yellow line -- orange line. So you can see that starting and particular in late August and September timeframe, we are really starting to see increase share of voice both in the primary care, the neurology and the endocrinology space. So we believe that is something that is very important for us and that should result in increase prescriptions going forward.

So, let me turn my attention now to XIAFLEX. The third quarter financial performance for XIAFLEX, we had net revenues of $13.2 million, 29% growth over the third quarter of last year. Year-to-date, our revenues were $37.7 million, which is a 31% growth over last year.

And importantly, I want to draw your attention to the chart at the bottom. What this chart shows is that quarter-over-quarter, Dupuytren’s contracture procedures, the percentage change from one quarter to another and this is basically from 2003 to 2012. So nine years worth of history going back and looking at it, because there is a definite seasonality in this market.

What you see is that the first quarter of each year compared to the fourth quarter is essentially flat. This shows 1% down, but it can range slightly positive, slightly negative year-on-year. But in average over the last nine years, it’s been about 1% down in procedures.

The second quarter, as we start to get into the nicer weather and people are saying, are not ready to have surgery, I don’t want to have a procedure on my hand and I want to be outside, I want to be active. You typically see about a 19% drop in procedures. And then it stays fairly flat in the third quarter and the fourth quarter as people get towards the end of the year and their co-pays are paid and they are thinking about trying to get their hands fixed for the future, they’ll get back in and have a lot of procedures done. So, we typically see about 34% increase in the fourth quarter.

So, couple of things I would like to mention, the first is, we are encouraged, we’ve had a number of changes. Obviously, we brought in a new CEO in December of last year. He has revamped the sales and marketing team within the XIAFLEX product and I think we are starting to really see some benefit from some of the basics of blocking and tackling with the sales group.

And one of the things, I would like to point out is that where procedures typically are flat in the third quarter versus a second quarter, our growth in that quarter was 11% in the number of units that we sold. So, we look at the fourth quarter 34% increase in procedures that’s about the number that we need to show increase in our unit growth in order to achieve our guidance -- squarely in the middle of our guidance. So we feel very comfortable that we will be able to get on that as well.

So adoption is XIAFLEX is start shows unique sites haven’t rolled in a physicians that have enrolled and unique sites have actually order to XIAFLEX and where you can see as a very nice continuation of doctors being interested signing up for the pull through our REMS program to be able to get access to it. Sites actually also registering and most importantly sites using the drug.

So I think that our view is XIAFLEX is on a good path right now. It’s got a good steady growth ahead of it and that’s what we are going to see. We don’t necessarily see an inflection point but we think there is still plenty of good growth to go.

And in particular, when we look at this and this is one of the first time we shown this chart is that we talked about XIAFLEX being standard of care in Dupuytren's Contracture. And it’s frankly than lot more difficult than we expect to convince physicians to put the scaffold fall down and user drug.

But you can see is these shows overall procedures and percentage of procedures in the market the red line reflects surgery. You can see that since the launch of XIAFLEX, there has been steady decline in percentage of procedures being done through surgery. The orange line is needle aponeurotomy so again you can see that the percentage needle aponeurotomy so certainly declining.

While, the green line represents XIAFLEX and there we see that we are continuing a study march. Our expectation is in some point, we will cross the red and green lines and we will have truly the standard of care within Dupuytren’s Contracture treatment.

Last thing, I want to talk about with Dupuytren’s is that we have refresh our targeting. So this is a first time that we refreshed our physician targeting since we launched the product in the second quarter of 2010. What we’ve done as we have increased the total number of physician that we are going to target by about 14% of about 7,400 and we are increasing our focus on hand surgeries, orthopedics and rheumatology, while backing office and plastic surgeons.

We think that those numbers -- they don’t look like I pick the shift, but even within the orthopedics and hand surgeon there is a fair amount of insurance well, so those physicians who have been in our targeting that haven’t been ready to adopt the physician -- that the product at the this point in time. We’re looking at trying to find some new targets to go out and focused our efforts on to increase sales.

So, let’s talk about Europe. On November 7th, we announced that Pfizer and Auxilium will mutually terminate our collaboration in the European Union. We did that and the date for the finalization of the collaboration will be April 24, 2013 prior to that time both parties will continue to perform of their obligations within the contract and in particular with that means is Pfizer has the obligation to continue to sell the product through April 24th, and to spend money on promotion of the product.

They then have the right to sell product for additional six months out of there inventory following termination. So we feel comfortable that patients who have access to drug for the perceivable future. And the six month period basically give us time to decide what we are going to do going forward with product. And I think at this point in time all of our strategic options are available to us with that.

We look at whether is our -- there is a cost effective way for us to have some direct involvement in European market. We are not going to go out and build huge sales forces and infrastructure. But if there is away through of distribution arrangement, we might be able to do that. We will investigate that and we will also look partnering with another company.

So, when we look at that we already had significant number of enquiries about XIAFLEX after announcing termination. I think that the opportunity for us is find the partner who product the size of XIAFLEX for then would be significant enough that they are going to have the insurance really push it forward.

So, we look at it. We think that Pfizer gave it a good try. Obviously both sides of the parties were -- third- parties were unhappy with the actual results. So, we’re happy actually to come to this mutual resolution where we now have all the rights to Europe and important market back in our own hands without any financial cost to retreat those rights at this point in time.

Today, we’ve received the $135 million in cash from Pfizer and that has about $103 million of that is still sitting in our balance sheet is deferred revenues. We have about $9 million of deferred costs which represents payments that we made BioSpecifics Technologies, so that those amounts will have to get amortized into the P&L between now and April 23rd.

So we’ve already talked about this in the interest of time, I’ll skip on. When I look at the overall third quarter financial results, we talked about the revenues. Expenses were up -- particularly on the SG&A side where we invested in some direct consumer advertising for XIAFLEX and you can see the loss of $10.5 million.

We also revise our financial guidance. We revise that for couple of different reasons. First is obviously to reflect what will happen in the fourth quarter, which is recognition of $94 million in revenue and $85 million in profit as a result of the deferred revenue and deferred cost that we recognized to the Pfizer termination.

So that’s what you see in the middle column. On the far right side, we stripped out the revenue and cost that we have from the Pfizer termination. So you can try to see on an apples-to-apples basis, what’s happened to our guidance.

And overall, what we’ve done is we have brought our global test and revenues down by $10 million range to current expectation of $235 million to $245 million. With respect to XIAFLEX in U.S. we have tighten the range in lower to bottom end of the range. So that our revised guidance right now is $50 million to $60 million and obviously, on the ex-U.S., we had stripped out what would have been the normal milestone amortization associated with the Pfizer. So that reduces up to $7 to and $9 million.

However, importantly, we’ve also had a commitment to be profitable this year. And we have looked at and have contingency plans that we’ve in place to -- that we’re now putting into place to make sure that we can reduce our expenses and still have a profitable year. So we still expect that we will have somewhere between break-even $5 million of profit in 2012.

I’ll talk briefly about the pipeline. We talk XIAFLEX being a pipeline and the product. It’s currently in five different indications, Peyronie’s, Frozen Shoulder, canine and human lipoma, and cellulite. So talking about Peyronie’s disease, this is again where the collagen deposits form on the shaft to the penis. It cause a deformity curvature upon erection.

A really devastating disorder for patients who have this product. We have two pivotal phase III trials that were completed that we announced results earlier this year. And we show statistically significant improvement in both co-primary and co-primary endpoints being the reduction in penile curvature deformity about 38% and 31% in each of the trials.

There is also an improvement in a patient-directed questionnaire that showed statistical significance that we improved the bother associated with that. That’s a very difficult end point to hit. We were thrilled that we’re able to hit that end point. It was endpoint that the FDA announced it worked very hard together to develop this PDQ. And we feel confident that as a result of hitting both these, so we have a very good shot at the approval this year.

Product is well tolerated. No serious adverse events that we’re concerned about. And if approved this would become the first FDA approved biological treatment of Peyronie’s disease. So sometimes, it’s a little difficult to understand what a 37% to 38% improvement in penile curvature looks like.

So the next photo shows a typical patient. This patient started with a curvature deformity of 45 degrees. That’s about average for the patients that we had in the trial. And at the end of the study, he had a deformity of 28 degrees, which represents a 38% improvement.

So this is truly somebody who is pretty representative of what our study looked at and so when I show you in pictures, what that means to a patient. I think that all those can look at it and say there is a huge difference between the before and after picture. And so we think that is something that patients and physicians will really respond well to because at the end of the day, it’s about getting back to the ability to engage in sexual intercourse with your partner.

And we’re starting some pre-launch activities. We have some publications and presentations ongoing disease awareness. We’re preparing for an FDA advisory panel. We don’t know if we’ll have it or not but we’re certainly preparing for that. We’re designing our sales force sizing and structure. We do not know whether we need to increase the size of our sales force and we are engaging with KOLs and the Urology associations for the product.

With respect to some market research we’ve done. Patient’s overall there is a high unmet need. Patients want to get treated and they don’t get treated today because frankly the only really good alternative is surgery and that is something that people want to avoid at any cost.

From the physician point of view, they are also very frustrated with inability to have a good therapy for patients. And so we think this will be extremely well received by urologist as well.

Look at the size of the market opportunity, we believe there is about 65,000 to 120,000 diagnosed in 2010. And I want to focus you on the left hand side of this chart where we believe that there is about 1,500 to 2,000 surgeons and 3,500 to 4,500 invasive non-surgical techniques, things like injections or Verapamil. Those 5,000 to 6,500 will be the focus of our efforts upon launch.

And importantly when we look at it, there is a about a 1,000 urologist who treat Peyronie's Disease invasively and of that, about 400 of those urologist account for 90% of all surgery. So it is a very focused patient -- physician group and we think that we can be very successful with a very focused approach to the market.

With respect to other clinical development milestones, I’ll just talk the effect that we have, number of things coming up, be on Peyronie's and Dupuytren’s we talked about, we are looking to initiate Frozen Shoulder Phase 2 trials in the back half of next year as well as cellulite Phase 2 trials at the end of next year and we are initiating some work on testing for franchise development as well.

So I think we’re able to hit on each of these strategic goals. We do believe that there will be significant opportunity to increase our shareholder value. And I’m sorry, it looks like we’re out of time and so I don’t know if we have remaining questions, time for questions. But I’ll be happy to take some questions in the Hallway for anybody.

Question-and-Answer Session

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