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Avanir Pharmaceuticals, Inc (NASDAQ:AVNR)

F4Q12 Earnings Conference Call

December 12, 2012 4:30 PM ET

Executives

Ian Clements - Head, IR

Keith Katkin - President & CEO

Rohan Palekar - CCO

Christine Ocampo - VP, Finance

Dr. Joao Siffert - SVP, Research and Development

Gregory J. Flesher – Chief Business Officer.

Analysts

Whitney Ijem – Canaccord Genuity Inc.

Jason Butler – JMP Securities

Thomas Wei – Jefferies

Carol Werther – Summer Street Research Partners

Operator

Good day ladies and gentlemen and welcome to the fourth quarter 2012 Avanir Pharmaceuticals earnings conference call. My name is Keris and I will be your coordinator for today. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions).

As a reminder today’s call is being recorded for replay purposes. I would now like to turn the call over to your host for today, Mr. Ian Clements, Head of the Investor Relations. Please proceed, sir.

Ian Clements

Thanks, Karis and good afternoon everybody. I’d like to welcome you to our fiscal fourth quarter and year-end conference call.

We once again delivered solid revenue and prescription growth which is a good indicator of our business moment. To discuss this and other topics, including clinical trial updates, I’m joined today by several members in our leadership team. Our President and CEO, Keith Katkin will lead the call today by providing a brief strategic overview of our business. After Keith, our VP of Finance, Christine Ocampo will review our quarterly results and provide guidance for our new fiscal year. Our Chief Commercial Officer, Rohan Palekar will highlight NUEDEXTA performance followed by Dr. Joao Siffert, Chief Scientific Officer who will provide a pipeline update. For the Q&A portion of today’s call we’ll also be joined by Greg Flesher, our Chief Business Officer.

During the course of this conference call we will be making certain forward-looking statements. These statements are subject to numerous risks and uncertainties and reflect our current expectations and judgments. Examples of these forward-looking statements include statements relating to our expectations for NUEDEXTA sales and revenue growth, future expense levels, the timing and success of our future development of AVP923 and AVP786 for other indications, the potential approval of NUEDEXTA in new markets and risks relating to our pending NUEDEXTA patent litigation.

Actual results could vary materially from the results anticipated by these statements. Investors should read the risk factors set forth in Avanir’s Form 10-K for the year ended September 30, 2012 and subsequent periodic reports filed with the Securities and Exchange Commission.

So with that said, I'd now turn the call over to Keith Katkin. Keith?

Keith Katkin

Thank you Ian and good afternoon everyone and thank you for joining our call today. As you may have seen from our results announced earlier today, we have continued to make great progress with both our commercial and research and development activities. Our comments today will focus on our current sales momentum, our research and development programs and several key milestones in the coming 12 to 18 months that we believe can generate clear shareholder value.

In terms of fourth quarter results, we again posted solid net revenue growth through strong commercial execution while focusing on expense management. We’re particularly pleased with the strength we are seeing in our overall business and we continue to deliver record prescriptions, the most recent of which annualized over $70 million in gross sales.

In addition, we’re continuing to advance our pipeline in several key areas of unmet medical need. NUEDEXTA or AVP-923 as it’s known in the clinic, is now in the clinic with programs that explore behavioral disorders in Alzheimer’s disease and autism, neuropathic pain in multiple sclerosis and movement disorders in Parkinson’s. We have also moved Dextromethorphan, now known as AVP-786 into the clinic less than a year from announcing the acquisition of the asset.

Before I turn the call over to Christine to discuss our financials, I’d like to take a moment to thank all of our staff for their dedication and hard work over the past year. We have made significant progress across all aspects of our business during the fiscal year and it’s through their efforts and dedication that we’re able to deliver important new therapies for patients and ultimately deliver value to our shareholders.

With that, let me turn the call over to Christine for the financial review.

Christine Ocampo

Thanks Keith and good afternoon everyone. In addition to the financial results summarized in the press release issued earlier this afternoon, you can find additional information, including full-year information in our upcoming Form 10-K which will be filed by Friday.

This was a strong finish to the fiscal year for us. We reported total net revenue for the fourth fiscal quarter of 2012 of $13.5 million, as compared to $4.8 million for the comparable period in fiscal 2011, a year over year growth of over 180%.

For the fourth fiscal quarter of 2012, we reported a record gross product sales of NUEDEXTA of $15.4 million and record net sales of NUEDEXTA of $12.4 million.

During the quarter ended September 30, 2012, our gross to net discount increased to 19.7%, compared to 17.7% in the prior quarter. The 2% increase in gross to net discount was mostly driven by mandated government rebate. Going forward, we expect the gross to net discount to increase as we continue entering into contracts with managed care entities, enabling increased patient access and reductions in prior authorization requirements. We believe the gross to net discount will stabilize over time somewhere between 20% and 25%, excluding the impact of any future price increases.

Research and development expenses were $6.1 million for the quarter ended September 30, 2012 compared with $5.6 million for the same period in the prior year.

Selling, general and administrative expenses for fiscal 2012 fourth quarter were $17.4 million, compared to $16.9 million for the corresponding period of the prior year.

Total operating expenses for the fiscal 2012 fourth quarter were $24.2 million compared with $22.7 million for the comparable quarter in 2011.

And for the three months ended September 30, 2012 and 2011, the company recorded $1.3 million and $1 million respectively of stock based compensation expense.

Cash used in operations for the quarter ended September 30, 2012 was $12.1 million. Our net loss for the fourth quarter of fiscal 2012 was $11.7 million or $0.09 loss per share, compared with a net loss of $18 million or $0.14 per share for the same quarter in 2011.

As of September 2012, Avanir had total cash, cash equivalents and restricted investments in marketable securities of $72.1 million.

Now turning to guidance for fiscal 2013. We anticipate that our operating expenses will be in the range of $100 million to $110 million. Excluding cost of sales and non-cash expenses such as FAS 123 and depreciation, we also expect that expenses will be more heavily weighted in the first half of the fiscal year. In addition, please note that we have changed our P&L format such that cost of product sales are included in our operating expenses. However, we do not include these numbers in guidance.

R&D expenses will be approximately $24 million to $29 million, including both development programs as well as our medical affairs organizations.

SG&A expense will be approximately $76 million to $81 million.

The increase in operating expenses for fiscal 2013 is primarily due to our R&D program, costs associated with our ongoing ANDA litigation and the full year impact of the expansion of our sales team.

Given we are still in launch phase of our institutional business and have recently expanded our field sales force, we continue to evaluate the appropriate time to provide NUEDEXTA revenue guidance.

And with that summary of our financial results, I’d like to turn the call over to Rohan. Rohan?

Rohan Palekar

Thanks Christine and hello everybody. To build on the comments made by both Christine and Keith, fiscal 2012 was an exceptional year, highlighted by a substantial increase in sales. We achieved $12.4 million in net NUEDEXTA revenue for the fourth quarter and $35.4 million in net NUEDEXTA revenue, excluding the recognition of deferred revenue for the full year.

On the prescription side, we saw continued quarter on quarter growth as prescriptions increased to 31,018. Over the same period, new prescriptions grew to 12,292. This is the seventh consecutive quarter of growth in both total and new prescriptions and reaffirms our belief in the opportunity for NUEDEXTA and PBA.

The three key drivers of our growth have been, first, increased awareness of PBA as our representatives continued to educate healthcare practitioners on the prevalence and burden of the disease. Second, the recognition of the meaningful efficacy provided by NUEDEXTA and finally, significant improvements we have seen in the coverage and reimbursement for NUEDEXTA.

At the channel level, we observed growth in both the retail and institutional settings, with greater growth in the institutional setting. This is being driven by growing coverage of nursing homes as we added representatives and healthcare providers seeing the value NUEDEXTA brought to their residents.

Our institutional business grew 21% this past quarter and now accounts for over 50% of our business. We’re still early in the launch phase of our institutional business and are excited about the recent sales force expansion that will grow coverage of nursing home beds from roughly 40% to over 66% in the coming years.

We believe there is still significant untapped PBA business in the setting and we are uniquely positioned to leverage this opportunity with one of the largest institutional sales forces in the US. At the same time, our retail business is also delivering solid results, especially among psychiatrists as their prescriptions grew 17% this past quarter.

We have recently completed a retargeting exercise that will allow our representatives to focus on physicians that are likely to see a relatively higher number of patients with underlying disorders that predispose them to PBA. In the long term, the retail segment offers significant market potential given the number of potential patients with PBA and will remain a focus of the company.

Finally, we are embarking on a series of initiatives using multiple media to engage and educate patients about PBA and encourage them to talk with their physician. Our market research studies have shown that when patients are educated about PBA, they’re more likely to discuss the symptoms with their physician and as a result could get prescription for NUEDEXTA. We are executing different pilots to access the best media vehicles to reach the broadest number of patients and caregivers.

In closing, the fundamentals in our business remain strong and all of our indicators point towards a successful 2013. We are off to a solid start this quarter and are seeing record prescriptions for the last three non-holiday weeks, achieving a record prescription number of close to 2800 for the week ending November 30.

I will now hand over the call to Joao. Joao?

Dr. Joao Siffert

Thanks Rohan and then hello everyone. We continued to make excellent progress with the continued development of our dual NMDA receptor antagonists and sigma-1 receptor agonists or AVP-923. We’ve also initiated a clinical program for AVP-786 which is formerly known as deuterated dextromethorphan. Combined, we have four clinical programs currently underway.

Let me briefly review each program. First, we’re excited to have enrolled the first patient into a phase 2 trial investigating the use of AVP-923 for the treatment of vegetation in patients with Alzheimer’s disease. The study is off to a good start with 23 sites across the U.S currently recruiting patients. With no approved therapies for agitation associated with Alzheimer’s, managing the symptoms remains quite challenging for clinicians. Dementia related behavioral symptoms, including agitation can be extremely distressing to the individual, their families and the caregivers. This trial is an important initial step in potentially providing a therapy to help address the high unmet need of managing symptoms of vegetation in Alzheimer’s disease. Based on the current enrolment rates, we expect data in the first half of calendar 2014.

Second, the prime study which is a Phase 2 trial of AVP-923 in Central Neuropathic Pain in Multiple Sclerosis. Despite heavy competition for patients in need of meds research arena, we have continued to progress through the enrolment of patients at over 64 sites internationally. With the current recruitment rates, we are expected to have data in the first half of the calendar year 2014 for this program.

Third, and as a neurologist who has worked in the Parkinson’s disease research field previously, I am particularly pleased about the grant the Michael J. Fox Foundation awarded to Avanir. This grant will allow us to evaluate the safety and efficacy of AVP-923 for the treatment of evodopa-induced-dyskinesia in Parkinson's disease. Their support will enable this important study in evodopa-induced-dyskinesia and further validate the rationale for testing AVP-923 and the vast central nervous system disorders of high unmet need. The study will enroll about 20 patients and we anticipate that we will enroll the first patient in the first quarter of calendar 2013, with topline data then expected to be available in the first half of calendar 2014.

Our fourth program involves the development of AVP-786 or deuterium-modified dextromethorphan. We believe the AVP-786 stands to provide therapeutically effective levels of dextromethorphan with the same pharmacology and potentially reduce or eliminate the need for an enzyme inhibitor such as Quinidine.

As part of our portfolio strategy, we intend to explore the utility of AVP-786 in several neurological and psychiatric disorders. We recently announced that we had initiated the first in-human Phase 1 trial to test pharmacokinetics and safety of AVP-786. Approximately 40 subjects will be enrolled in this randomized crossover study to compare multiple dose levels of AVP-786, given either alone or in combination with Quinidine with DM and Q. The study of AVP-786 is expected to be completed in the first calendar quarter of 2013.

I’d like now to briefly turn your attention to the status of our marketing authorization for NUEDEXTA in Europe. We received CHMP Day 180 list of outstanding issues in November of 2012 and are currently working on the responses. Issues identified by the CHMP are generally similar to those previously discussed with the FDA. As you know ultimately the resolution of these issues with the FDA led to the approval of NUEDEXTA in the U.S in October of 2010. The key issues relate to the following areas. First, the clinical meaning of measures of PBA, such as rate of episodes and CNS-LS scores; the management of drug-drug interactions and lastly, the extrapolation of risks and benefit conclusions for PBA beyond patients with underlying ALS and MS. In other words, potentially limiting the label’s indication for PBA to patients with underlying ALS and MS only.

We’ll continue to discuss these issues with the CHMP and we’ll leverage our comprehensive application, the extensive clinical database and rapidly expanding post marketing experience in our discussions. However, if the CHMP ultimately decides to restrict our labeling, limiting use of NUEDEXTA for PBA secondary to small populations such as ALS and MS only, unlike in the U.S, we may need to consider other actions with regard to our application. Nevertheless, and based on the review timelines and discussions, we expect to have a CHMP recommendation late in the first calendar quarter of 2013, with the European Commission decision to follow approximately three months later.

Please not that the CHMP could decide to delay the NUEDEXTA discussion to a later meeting based on their review of our 180 day responses and their current agenda. We look forward to hopefully making NUEDEXTA available to patients with PBA in Europe as quickly as possible.

In summary and I hope you’ll agree, it’s been a very exciting time for Avinir in terms of new clinical data in the horizon. This is the first time in Avinir’s history that we have had four programs planned we’re enrolling concurrently, through the demonstrating of commitment to fully developing AVP-923 and AVP-786.

With that update on the clinical research, I’ll hand it back over to Keith. Keith?

Keith Katkin

Thanks Joao. Throughout fiscal year 2012, we made great progress in both our commercial and research and development activities. Looking back at where we were in the fall of 2011, compared to where we are today in the fall of 2012 is quite remarkable. First on the commercial front, 12 months ago we had an annualized gross sales run rate of less than $25 million. Today, we have an annualized gross sales run rate of over $70 million and growing. 12 months ago we had a sales force of 76 representatives focused primarily on retail neurology offices. Today, we have a diversified sales force of 130 selling to neurologists, psychiatrists and in the institutional setting.

On the clinical front, 12 months ago we had only one early program in pain. Today, we have three programs across pain, agitation and dyskinesia as well as a next-generation asset, AVP-786 in the clinic. In addition, we have seen interest by investigators desiring to explore AVP-923 in other areas such as behavior management in autism and speech and swallowing in ALS.

On the regulatory front, 12 months ago we had only just submitted our marketing authorization application to the European Medicines Agency. Today, we are a month away from an opinion on our application. I’m excited about what 2013 holds in store for Avinir. Our overarching goal for 2013 remains similar to 2012, continue to build the PBA market and grow NUEDEXTA sales, further advance AVP-923 and 786 into new clinical opportunities, advance the European regulatory process for NUEDEXTA and PBA, and actively managing our cash position and expenses.

In closing, we firmly believe that Avinir is on its way to becoming the next midcap specialty biopharmaceutical company. We have a rare combination of an FDA approved product in PBA that can generate meaningful cash flows with a significant number of development opportunities for AVP-923 and we have the commercial and R&D infrastructure that allows us to capitalize on all of these opportunities. I look forward to updating you on our continued progress throughout 2013.

With that summary of our business and financial update, I would now like to open the call up for questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions). And your first question comes from the line of Ritu Baral with Canaccord. Please proceed.

Whitney Ijem – Canaccord Genuity Inc.

Hi guys, this is Whitney on for Ritu. Thanks for taking the question. You mentioned a retargeting exercise on the retail front. Can you give a little bit more color there? Are you changing the types of docs you’re seeing or just changing specific doctors in categories that you’re targeting?

Rohan Palekar

Great question. This is Rohan. So what we’re doing is we’re continuing to call on neurologists, psychiatrists and geriatrists and internal medicine, but when we initially launched we were focused more on the MS and ALS doctor and now we are focusing more on doctors who see patients with dementia and stroke and other underlying neurological disorders which predisposes those patients to PDA. So it’s a more targeted effort against the same specialties.

Whitney Ijem – Canaccord Genuity Inc.

Great. Thanks for taking the question.

Operator

Your next question comes from the line of Jason Butler with JMP Securities. Please proceed.

Jason Butler – JMP Securities

Hi. Thanks for taking the questions. Another question for Rohan. Could you maybe dig into a little bit more about the progress you’ve had so far in the institutional setting? What your selfless reach has been to date and what your expectations are in terms of either continuing to reach the current institutions as well as hitting new institutions?

Rohan Palekar

Sure. Jason, great question. So just to put it in perspective, as you might recollect, we launched with 32 representatives last year fourth quarter which was October of last year. We have now expanded that group and now we have 54 dedicated reps in long term care. But we also have our retail representatives helping out in long term care. So we have roughly about 75 to 80 FT”s in the long term care space. If you look at the past year, we were reaching about 30% to 35% of nursing homes and maybe about 35% of resident beds and that’s a key metric of how many patients do we get to. We anticipate now with the expansions we have done we should get that number up to about two thirds of resident beds we should be able to cover. So we’ve got a significant way to go. The way I look at it we’re still kind of early in the launch of the long term care sales force. We are in the third, we’ve just completed three full quarters and we’ve got a significant runway because today our penetration might be about 7% to 8% of PDA patients in long term care are probably on NUEDEXTA and we think we can increase that number significantly with the expansions we have undertaken.

Jason Butler – JMP Securities

Okay, great. Thanks for taking the question.

Operator

Your next question comes from the line of Thomas Wei with Jefferies. Please proceed.

Thomas Wei – Jefferies

Thanks. I had a couple of questions, the first on the operating expense guidance. I guess listening to what you had to said about the SG&A expenses and the rollout of the institutional sales force and then all of these R&D studies reading out in the first half of 2014, I was a little bit confused about what leads to heavier weighting in the first half versus the second half and is that – should we think of kind of the run rate being more—is the one time-ish nature of this the higher part in the first half or the lower part in the second half?

Keith Katkin

Hi Tom. This is Keith. Thanks for the question. What’s driving the expenses earlier in the year are onetime expenses, primarily commercially related and also related to the deuterated dextromethorphan program. So we’re going to be running a number of initiatives which are variable expenditures on the commercial side of the business aimed at driving continued growth on the commercial side and then also actually our PK study for deuterated dextromethorphan with plans of releasing that data in the first calendar quarter of next year. All those are onetime expense items that we’ll have the first half of the year.

Thomas Wei – Jefferies

And on the retail side of the business, it sounds like this retargeting effort is really about changing the focus of the underlying condition of the patients. Can you talk a little bit about your current retail prescription base and maybe if you look at the ALS, MS versus the dementia/stroke dynamics there? How do those look? Is it that in the overall kind of more flattish curve for retail you’re seeing growth in the dementia and stroke component?

Rohan Palekar

Yeah. So Tom, this is Rohan. So I think there’s two things to consider in this. One is when you look at our retail business, we are seeing a higher percentage of growth coming in areas like dementia and stroke and that’s kind of evidenced by also what you see in the long term care setting where predominantly about 70% of residents in long term care are patients who have a underlying diagnosis of dementia and stroke. So clearly we are seeing some traction there. The second reason for doing this and it’s not to suggest that we would walk away from MS, is just the absolute number of patients. So there are over 5 million patients in the United States with Alzheimer’s dementia. Stroke is a similar number. There’s about 5 million patients and when you look at the prevalence numbers of PBA, they range between 10% and 30% in these groups. So there’s a far larger patient pool of patients who might have those underlying disorders once it’s something like MS and ALS. And so kind of when you put those two together, we felt that given the size of the sales force we can make a bigger impact and generate greater revenues in that setting.

Thomas Wei – Jefferies

Just so that I’m clear there, should we look at the current retail base of prescription as being largely ALS and MS and you see this is as a new market opportunity and you’re going to test that theory? Or are you already seeing traction in the retail setting among dementia and stroke patients you’re looking to build on that?

Rohan Palekar

It’s the latter. We are already seeing a fair bit of our business coming out of in dementia and stroke, but we think the retargeting will even help us get greater momentum on that by focusing on physicians to really focus on those disorders.

Thomas Wei – Jefferies

And that traction is not based off of your long term care success, it’s actually retail usage in dementia and stroke patients?

Rohan Palekar

That is correct.

Thomas Wei – Jefferies

Thank you.

Operator

Your next question comes from the line of Carol Werther with Summer Street. Please proceed.

Carol Werther – Summer Street Research Partners

Thanks for taking my question. I wondered if you would talk a little bit more about how you think the label – well, how you’re expecting to launch in Europe and are you waiting for the final labeling before perhaps partnering the program?

Keith Katkin

Hi Carol. It’s Keith. As we have discussed previously, we are waiting for clarity on approval and on the label in Europe before we proceed further with partnering discussions. As we’ve said in the past there are a lot of companies that have a high level of interest and we believe that we can maximize that interest and also maximize our economics by waiting until we actually have an approval in hand for NUEDEXTA within Europe.

Carol Werther – Summer Street Research Partners

Given that sales right now in the U.S there are no – I think there’s not a lot of sales in the MS community. If you get a label that’s limited to ALS and MS, would you go ahead and launch?

Keith Katkin

Well, that’s a good question and that’s what Joao was addressing in his prepared remarks and in the event that Europe did decide to not follow the FDA’s lead and approve a label that was just limited to ALS and MS, really we’d be given three – we’d be considering three different options. First, obviously the accepting approval of NUEDEXTA within ALS and MS only label. The second would be to appeal the CHMP’s recommendation to limit the label to ALS and MS patients only. And then the third would be to temporarily withdraw the application so that we can supplement it with additional data from other populations, including stroke, dementia and traumatic brain injury patients.

Carol Werther – Summer Street Research Partners

And my last question is, what should we be looking for in fiscal 2013 around the patent litigation? Thanks.

Keith Katkin

We’ve got our Chief Business Officer, Greg Flesher who is also responsible for IP here. So I’ll let him answer the IP question.

Gregory J. Flesher

Hi Carol, it’s Greg. How are you?

Carol Werther – Summer Street Research Partners

Good. Thanks.

Gregory J. Flesher

Good. So we have a scheduled trial as you know in September of this calendar year. My guess would be we probably wouldn’t hear a response from the judge until the early part of 2014.

Carol Werther – Summer Street Research Partners

Okay, thanks.

Operator

At this time there are no further questions in queue and I would now like to hand the call over to Mr. Ian Clements for closing remarks.

Ian Clements

Thanks Charis. In closing I’d like to thank you all for joining us today and your continued interest in Avanir. We look forward to providing updates to you on the progress we continue to make at upcoming conferences and on future calls. If you have any further questions or would like to discuss any portion of the results from today, please feel free to call me on 949-389-6737. Thank you.

Operator

Ladies and gentlemen, that does conclude today’s conference. Thank you for your participation. You may now disconnect. Have a wonderful day.

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