MiddleBrook Pharmaceuticals, Inc. Q3 2008 Earnings Call Transcript

MiddleBrook Pharmaceuticals, Inc. (MBRK) Q3 2008 Earnings Call November 13, 2008 9:00 AM ET

Executives

Faith Pomeroy-Ward - Executive Director, IR and Corporate Communications

John Thievon - President and CEO

Dave Becker - EVP and CFO

Analysts

Greg Wade - Pacific Growth

Operator

Good morning. My name is Laurie and I will be your conference operator today. At this time I would like to welcome everyone to the MiddleBrook Pharmaceuticals, 2008 third quarter financial results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. (Operator Instructions).

I would now like to turn the call over to Faith Pomeroy-Ward. Faith, please go ahead.

Faith Pomeroy-Ward

Thank you, Laurie and good morning everyone. Before we begin our call, I would like to remind you that some of the statements made during the call may be considered forward-looking statements. The company's SEC filings including the 8-K filed this morning, identifies certain factors that could cause the company's actual results to differ materially from those projected in any forward-looking statements made today. The company's SEC filings as well as our earnings release are available on our website at middlebrookpharma.com.

I am joined on today's call by President and CEO, John Thievon; and our Executive Vice President and CFO, Dave Becker. Today's call will take about 20 minutes, plus Q&A. I will now turn the call over to John.

John Thievon

Thanks, Faith. Good morning, everyone, and thank you for joining us. We are pleased to communicate our third quarter financial results and to discuss in greater detail our plans for the upcoming launch of MOXATAG. I would like to start off by saying that we are very pleased with how things are proceeding and I think we have made excellent progress in the past two months.

We will conduct the call as follows. First, Dave will report our third quarter financial results. After that, I will discuss our progress from September 5th through today, and provide you with our current plans as they relate to the launch of MOXATAG. Dave will then provide some details on our business outlook for 2009. After that we will open up the call for questions. With that I will now turn the call over to Dave.

Dave Becker

Thanks John, and good morning to everyone. Net sales of our Keflex products totaled $2.3 million for the current quarter, an $878,000 decrease or 28% when compared to the 2007 third quarter results. As you may recall, during 2007, the company reduced the size of its contract sales force from 75 to 30 representatives. This has clearly had an impact on sales, but as you would expect, it has also reduced expenses. I will discuss the expense side of this in a moment.

With respect to prescription data, for the current quarter, total prescriptions were about 63,200 compared to 91,600 for the same quarter last year. This is a 31% decline; and again, we believe this is a result of the reduction in the size of the contract sales force.

Gross margin on sales was $1.9 million or 84.6% of net sales for the current quarter. During the prior year quarter the gross margin was about $2 million or 62.4% of net sales as a result of a $684,000 charge for obsolete inventory and labeling changes that were expensed to cost of goods sold.

Research and development expenses were $6.9 million for the current quarter, compared to $5.5 million for the same quarter last year. The increase in expense is due to an approximate $4 million non-cash charge, a million of which relates to a loss on R&D equipment that was sold during the quarter and $3 million relating to the impairment of leasehold improvements associated with laboratory space at our Maryland facilities.

This space is no longer being utilized and is currently being marketed by a commercial real estate broker to assist us with subleasing the space. As a result, we have written down the remaining net book value of the improvements in that facility. This non-cash expense more than offsets the general reductions in R&D expenses that were realized as a result of the company's actions to scale back headcount and project activity due to budgetary constraints.

Selling, general and administrative expense or SG&A for the current quarter was $7 million versus $6.5 million in the prior year quarter. The $526,000 dollar increase is driven by approximately $2.1 million of severance expense incurred during the third quarter related to management changes stemming from the September 4th, $100 million financing transaction.

This severance expense more than offset the savings that were achieved through a general reduction in headcount, including the contract sales force and other cost reduction efforts that were put in place last year. Other expense includes a $954,000 expense related to the true-up of the Deerfield warrant liability, which was redeemed in connection with the $100 million financing transaction.

The final result is a net loss for the current quarter of $12.5 million or $0.19 per common share. This compares to a net loss of $10.1 million or $0.22 per common share during the prior year quarter.

Keep in mind that as a result of the $100 million EGI financing transaction, an additional 30.3 million shares were issued. Those new shares were only outstanding for about one-third of the quarter resulting in a weighted average shares outstanding of 64.6 million shares for the third quarter. In subsequent quarters, we expect that the weighted average shares outstanding will increase to approximately 87 million.

Now let's move on to the balance sheet and here you will note four major changes when compared to the quarter ended June 30th. Those major changes are evidenced in cash, property, plant and equipment; intangible assets and the warrant liability. Let's take a look at each of these individually.

We started the third quarter with combined cash and marketable securities balance of $12.6 million, and on September 4th, we closed the $100 million dollar financing transaction. From the $100 million proceeds, we immediately paid out approximately $20 million for the Deerfield warrants and the repurchase of the Keflex intellectual property and approximately $4 million in transaction related costs. We ended the current quarter with cash and marketable securities totaling $83.3 million.

With respect to our net property, plant and equipment; you will note a decrease compared to the June 30, 2008 quarter of $5.7 million. The decrease is primarily related to the sale of the R&D equipment and the write down of the leasehold improvements that I mentioned a few minutes ago.

You will also note an increase in the intellectual property or intangible asset account on the balance sheet. With a portion of the proceeds from the $100 million EGI financing transaction, we repurchased the Keflex trademark from Deerfield. Thus the intangible asset balance totals $11.7 million as of September 30th, versus a balance of $6.6 million at June 30th.

Finally you will see the elimination of the warrant liability from the balance sheet. As a condition to the $100 million financing, approximately $8.8 million was paid out to Deerfield to redeem that warrant liability.

That concludes my review of the third quarter financial results. I will now turn the call back over to John to discuss our plan with respect to MOXATAG.

John Thievon

Thanks, Steve. I would like to start by giving you an update on what we have accomplished during the first 60 days at MiddleBrook, as we execute against the company's strategic focus to successfully launch MOXATAG. We have made progress on multiple fronts with new hires in sales, trade and managed care, in addition to moving forward in marketing and manufacturing.

As you may have seen from our recent press release, we have recruited for some key leadership positions. Some of those new hires were for existing positions on the G&A side of the business and therefore in most cases, do not represent incremental spending on the G&A line.

With respect to sales organization most of the hires are for new positions needed as we prepare for the launch of MOXATAG. These positions include the senior leadership team for the sales force, as well as trade and managed care positions. Those senior level people are now working on the following key fronts.

First, the sales force leadership is currently in a final interviewing stage for our district managers. On average we want to employ one district manager for approximately every 10 sales reps.

We plan to bring on the first wave of district managers on December 1st, the second and final group of district managers will likely be hired in early January. Those DM's will immediately begin the process of working with our previously announced professional field force recruiting partner Talent Tactics, to interview for the sales forces positions.

Our current plan is to launch MOXATAG with approximately 270 field sales representatives. We believe that with that number of reps we can detail the physicians responsible for about 40% of the oral solid antibiotics written for pharyngitis.

Our plan is to have all 270 sales reps hired and trained by the end of March 2009. This means that professional promotion will likely start at the beginning of Q2 2009, possibly even as early as late first quarter.

Our trade sales management team is working diligently to secure distribution at the major wholesalers and retailers. We are very early in this process and therefore there is nothing to report, except that we believe we will successfully achieve national distribution for MOXATAG.

Our in-house managed care executive is working closely with BCG and Associates, an outside managed care consulting group. The goal in managed care is to achieve national coverage at the third tier co-pay level, which would mean a $30 or to $50 cost to the patient.

Next I would just like to reaffirm our plans with respect to pricing. We intend to price MOXATAG at $75 a prescription on a gross ex-factory basis. After discounts and allowances, we believe this will result in net sales to MiddleBrook of approximately $60 a prescription. We have conducted extensive research on this topic using two highly respected firms, Medical Marketing Economics and LEK Consulting.

Research included current pricing analysis for antibiotics and historical data review and interviews with healthcare practitioners, managed care providers and pharmacy benefit managers. Accordingly we are confident that we are well within the range of appropriate pricing for MOXATAG.

If you look, you will see that most of the extended release of branded antibiotics are priced between $60 and $100 a prescription. Most of those antibiotics are also covered at the third tier co-pay level. Third tier co-pay levels generally range from $30 to $50 a prescription under the majority of managed care plans.

Now I would like to discuss some of the marketing tactics that we will use. Extensive market research has been conducted to identify, which MOXATAG benefits will be most valued by healthcare practitioners. MOXATAG will be dosed at 775 milligram once a day versus the most commonly prescribed amoxicillin regimen for pharyngitis, which is 500 milligrams three times per day.

So it is no surprise that effective, safe and efficient bacteria killing at a lower overall dose, has emerged as a valuable benefit, along with patient convenience, which has the propensity to improve compliance rates.

Our marking team is taking the market research results and creating clear and compelling sales adds to help drive prescriptions for MOXATAG in the physician office. We also intend to be one of the few organizations to sample antibiotics to the physician. Additionally, we intend to launch a print media campaign to communicate the fact that MOXATAG is the first and only FDA-approved once-daily amoxicillin.

MOXATAG will be manufactured by STADA, in Ireland. We are currently in the validation phase of our preparations for commercial production of MOXATAG and all is going well on that front. Our plan is to launch to trade, both wholesale and retail in the first quarter of 2009, with professional promotion beginning in the first quarter or second quarter of 2009. That concludes my overview on the MOXATAG launch.

We recently received some other good MOXATAG news. Three MOXATAG patents were listed in FDA's Orange Book on October 24th 2008, under Section 4 of Public Law 110-379, which was enacted on October 8th 2008. The Orange Book listing means that, any generic filer would have to certify against our Orange Book listed patents. It essentially prevents a company from launching at risks. If we were to receive a Paragraph IV certification from an ANDA Sponsor and we determine that we had grounds to bring suit against them for patent infringement.

Our suit would trigger up to a 30-month stay on their ability to bring their competing product to market. As you may know, we have multiple MOXATAG specific patents issued with lead patents enforced through October 2020. We believe our pipeline products, Keflex, PULSYS and Amoxicillin pediatric Sprinkle once approved, will also benefit from this legislation.

Finally, I wanted you to know, we are also working on business development opportunities and we will actively pursue inbound co-promotion opportunities for prescription products, on either a fee per detail or on a revenue sharing basis to maximize our sales force, until our product pipeline candidates receive FDA approval. That said, we have a laser focus on the successful launch of MOXATAG, and everything else is a taking a back seat to that, as the launch nears.

At this point, I will turn the call back to Dave, who will provide our business outlook.

Dave Becker

As John just indicated, everything in this business is secondary to the successful launch of MOXATAG. It is with that mindset that we intend to manage our spending for 2009. With that as a backdrop, here is what our current 2009 plan currently indicates.

First, we believe we will start calendar 2009 with a cash position in excess of $70 million. As a point of reference, I indicated previously, that our September 30, 2008 cash position was $83.3 million. Keep in mind that when I say cash position, I am also including marketable securities for purposes of this discussion.

During the fourth quarter ending December 31st, we expect to increase our spending as a result of new hires, as we prepare for the MOXATAG launch, as well as begin to take possession of MOXATAG commercial inventory and physician samples.

Importantly, our longer range plan suggests that, we could achieve operating profitability during 2010. The point being here is that we believe that our current liquidity provides with us the potential of seeing our way to profitability, without raising additional equity funding. With that in mind, let me briefly discuss some of the specifics of our 2009 plan.

First, the approximate 270 person field sales force is expected to cost about $190,000 per representative on an annualized basis. That is a fully burdened number that includes all expenses incurred in the field, as well as the cost of sales management and physician samples.

Second, our product development plan suggests that we will spend sufficient enough to advance our Keflex, PULSYS project to be prepared for patient enrollment into Phase III clinical trials during 2010. As you would expect, there is upfront work and headcount required for this to occur and it is dependent upon the successful launch of MOXATAG.

Finally, with respect to factory revenues, our current plan indicates combined MOXATAG and Keflex product sales will be in excess of $40 million. This assumes no generic impact on our Keflex 750 product next year and the successful launch of MOXATAG in the first quarter of 2009.

As John stated previously, our 270 person sales force will be deployed in the territories designed to maximize prescription generation for MOXATAG. I believe that this gives you the necessary information to build your models and to track our progress in a meaningful way.

At this point, I will open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). We will take our first question from [Menshem Memon] with Interlake Research.

Unidentified Analyst

I came in late, you said the cash position at the end of the quarter how much was it, was it $75 million?

Dave Becker

This is Dave. At the end of the current quarter, the September 30 quarter we just reported on, was $83.3 million, that is combined cash and marketable securities balance. So, on the balance sheet you would have to add the two together.

Unidentified Analyst

Right. I believe you said on the presentation that it is going to be would be crossing annually $95 million per year?

Dave Becker

You are referring to, the 95 million I am assuming you are referring to expense?

Unidentified Analyst

Right.

Dave Becker

That would be closer to an annualized run rate when everything was up and running.

Unidentified Analyst

Right. Then you would not expect it for 2009, you mean to say?

Dave Becker

I am not sure I am understanding the question, but.

Unidentified Analyst

2009 will the annual rate be $95 million in expenses?

Dave Becker

I would believe it would be probably a little bit less than that, given the fact that, the sales force, as John indicated is going to come on in a couple ways here in January and February. So you are not going to have the full impact of the expense during 2009.

Unidentified Analyst

You are expecting MOXATAG for 2009 to be sales like $30 million way I am putting things together?

Dave Becker

Well, what we said here and as you know, key to what we have said here is that the combined sales for Keflex and MOXATAG would be in excess of $40 million.

Unidentified Analyst

Well Keflex is $10 million that would be like $30 million.

Dave Becker

Well, I understand your math. We are not getting into that level of detail.

Unidentified Analyst

Okay. Appreciate it.

Operator

(Operator Instructions). We will go next to Greg Wade with Pacific Growth.

Greg Wade - Pacific Growth

Good morning and thanks for taking my questions this morning. John, I was wondering if you would rewind for us what you anticipate the level of inventory will need to be at the end of Q1, in order to sufficiently the channel and also you are expected cost of goods? Then lastly, based upon your projections, what percentage of the scripts for the dose form and strength, you need to achieve to get to breakeven? Thanks.

John Thievon

Hey, Greg, it is John. I think the first part of that is the inventory. We are going to launch this to both wholesale and retail in first quarter. It remains to be seen exactly how many bottles will reach the pharmacy shelf and be in the wholesaler. We have a feeling of the number of bottles necessary to effectively launch this product. Keeping in mind that the initial selling of the product will be significantly ahead of the prescription generation pull through.

So, we are not prepared to comment on the number of prescriptions necessary to get to the sales number, because we will obviously have an initial loading of product into the channel. As we get further into the launch, we certainly have a lot more visibility on the number of prescriptions necessary to pull through the inventory for reorders to start.

Greg Wade - Pacific Growth

Great.

Dave Becker

I will take the question on the gross margin. With respect to MOXATAG, we would see they are currently coming in low 90% range.

Greg Wade - Pacific Growth

Okay. Then just circling back on inventory spend. It is obviously, going be a substantial utilization of your cash resources to build enough products. I think some of us are at a bit of a disadvantage in order to understand how much actually that represents in order to cover off the marketplaces in which, you plan to have product on the shelf. I take it you have done those calculations. If you would give us a ballpark figure, perhaps that would be of some assistance? Thanks.

Dave Becker

Yes. I mean just keeping in mind, as I said the gross margin would be in the low 90% range. So the cost of goods or the inventory costs would be most likely less than 10%. So the actually investment from a cost standpoint in inventory may not be as large as you are thinking. In preparation for the launch, I spoke a little bit about this on the cash position for the end of the year, you are talking about a couple million dollars, and that would include samples as well.

Greg Wade - Pacific Growth

Great, thanks for taking my question.

Operator

(Operator Instructions) We will take our next question from Paul Adel with RBC.

Unidentified Analyst

Hi how are you doing?

John Thievon

Good, how are you?

Unidentified Analyst

Good, thanks. Just two questions. The first question is, would you describe whether the -- from the sources you have discussed, what you think the current market size opportunity is at this particular time? I know you had given some numbers a few months back. Are you seeing that increasing or decreasing?

You have a new administration coming in, and they obviously might put pressure on the pharmaceuticals to keep their prices at bay. Do you expect that to occur to you? Thank you.

John Thievon

Well, thanks for the question. It is in two parts with the first part about the marketplace. When you look at adult prescriptions for pharyngitis, you talk about $1 billion market opportunity at a $60 net factory price. There are 7.5 million prescriptions written for amoxicillin for pharyngitis. So that is 7.5 million times that 60, gives you about a $0.50 billion opportunity amoxicillin for amoxicillin.

If you add in the other antibiotics that are prescribed for pharyngitis it is an additional 7.5 million prescriptions or $1 billion market opportunity, and that is the opportunity for pharyngitis that we will start upon the launch of MOXATAG. That is the marketplace. Also over the last 10 years it is been an extremely stable market. We will continue to monitor that market as we launch into it, but it is a very stable marketplace with 50 to 60 million prescriptions for amoxicillin filled over the last 10 years on an annual basis.

Now, as far as the new administration, we are not probably prepared to comment on exactly what is going to happen, other than the fact that we do have an acute product here. We have a product that patients are going to go see their physicians. They are going to leave the office, and they are sick patients and if we can get the doctors to prescribe MOXATAG, when you go to the pharmacy, the market research shows that there is very little pushback at the pharmacy in terms of the patient walking away.

So we think that as long as we sell the features and benefits for the physician, we have the product at the pharmacy level, and it is on the third tier co-pay. We think we have a pretty good opportunity for that prescription to be filled. The economic situation remains to be seen, and we will monitor that. That is our strategy as of today.

Unidentified Analyst

Okay, thank you.

Operator

At this time there are no further questions. I would like to turn the conference back over to our presenters for any additional or closing comments.

John Thievon

I would just like to make a few final comments. Here the milestones are moving towards and in terms of the MOXTAG launch in 2009. First, manufacturing validation should be complete by the end of December.

We are planning to launch MOXATAG to trade in the first quarter of 2009. Professional promotions should start in the first or second quarter of 2009 with about 270 sales representatives. We are actively seeking in-bound co-promotion opportunities to maximize our sales force. Finally, we are focused on controlling expenses and building shareholder value.

I want to thank you for joining today's call, and have a good day.

Operator

Thank you very much, ladies and gentlemen, for joining today's conference call. This concludes your conference. You may now disconnect.

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