AVANIR Pharmaceuticals F4Q08 (Qtr End 10/31/08) Earnings Call Transcript

| About: Avanir Pharmaceuticals, (AVNR)

AVANIR Pharmaceuticals (NASDAQ:AVNR)

F4Q08 Earnings Call

December 15, 2008 11:00 am ET


Brenna Mullen – Investor Relations

Keith Katkin - President and CEO

Christine G. Ocampo - Vice President - Finance

Randall E. Kaye M.D. - Senior Vice President and Chief Medical Officer


Ron [Shez] – Private Investor

Ross Gordon – Gordon Investment


Good morning, my name is Sierra and I will be your conference operator today. At this time I would like to welcome everyone to the AVANIR Pharmaceuticals Fiscal 2008 Fourth Quarter and Year End Conference Call. (Operator Instructions)

Miss Mullen, you may begin your conference.

Brenna Mullen

Thank you and good morning everyone. Joining me on today’s conference call is Keith Katkin, President and Chief Executive Officer; Dr. Randall Kaye, Chief Medical Officer; and Christine Ocampo, Vice President of Finance.

I will begin the call by addressing our forward-looking statement. Following that I will turn the call over to Keith Katkin.

As a reminder, the statements made on this call represent our judgment as of today, December 15, 2008. Our remarks and responses to questions during this conference call may constitute forward-looking statements including plans, expectations, and financial projections, all of which involve certain assumptions, risks, and uncertainties that are beyond our control and could cause actual results to differ materially from these statements.

These forward-looking statements include, among others, statements about our expectations for the continued development of Zenvia™ and the likelihood of success in obtaining FDA approval as well as statements regarding anticipated expenditure levels, future cash balances and clinical development timelines.

We encourage you to take the time to review our recent filings with the Securities and Exchange Commission which present these matters in more detail as well as related risk factors. AVANIR disclaims any intent to update any forward-looking statements made during this call.

Now I will turn the call over to Keith Katkin.

Keith Katkin

Thank you Brenna, good morning everyone and thank you for joining us on the Fiscal 2008 Fourth Quarter and Year End Earnings Call.

I will begin today’s discussion with a 2008 business review and then a discussion of 2009 objectives before turning the call over to Christine Ocampo, who will discuss our financial results and 2009 cash burn expectations, followed by Dr. Randall Kaye, who will provide an update on the Zenvia clinical development programs.

In 2008 the AVANIR team made significant progress towards our goal of becoming a leading developer and marketer of innovative therapies for central nervous system disorders. We believe that focusing our resources on developing treatment for CNS conditions with high, unmet medical need, low to moderate competitive threshold, and a specialist prescriber base is the right strategy for long-term shareholder value creation.

During fiscal 2008 we made significant progress against our business objectives of advancing the clinical development program of our promising investigational drug candidate Zenvia and effectively managing our cash resources.

Some of our key accomplishments during fiscal year 2008 were as follows:

In October of last year we clarified a regulatory path forward for Zenvia™ in Pseudobulbar Affect, or PBA, by negotiating a Special Protocol Assessment agreement with the FDA covering the design, conduct, and analysis of a single confirmatory Phase III trial for the PBA indication.

In December of last year we enrolled the first PBA patient into our confirmatory Phase III STAR trial only eight weeks after receiving notification of the SPA approval from the FDA.

In April of this year we completed a $40 million equity offering which gave us the financial resources to fund our operations through the anticipated FDA approval decision on the Zenvia™ PBA application in the second half of 2010.

In May, based in part on early enrollment projections, we announced that we were exceeding our early STAR trial patient enrollment goals and that we would expand the trial size by approximately 10% to increase the statistical power and the size of the safety data base without jeopardizing our initial timelines.

Also in May we announced the positive outcome of our large formal pharmacokinetic study that identified two new doses of Zenvia that we expect will provide enhanced safety with similar efficacy in the next Phase III Diabetic Peripheral Neuropathic Pain or DPN pain study compared to the previously tested doses.

In June we obtained a new patent for Zenvia that significantly extends this period of commercial exclusivity in Europe into 2023.

In September we submitted a Special Protocol Assessment to the Anesthesia Division of the FDA with our proposed Phase III study protocol and program questions in support of our DPN pain indication for Zenvia.

Finally, through careful financial management we were able to significantly reduce our projected cash burn from operations for fiscal year 2008 to $19.8 million from the initial estimated range of $25 to $27 million.

In addition to these accomplishments I am pleased to announce that as of today we have enrolled approximately 75% of patients into the STAR trial and we are reaffirming that we expect the last patient to be enrolled by March of 2009, resulting in expected top line data during the third quarter of 2009.

In addition, we received an initial response from the FDA in regards to our Special Protocol Assessment request for Zenvia in DPN pain. We are now engaged in a positive dialogue with the agency regarding the design of the next Phase III study and overall neuropathic pain program requirements.

All of these accomplishments support our strategy of streamlining and focusing our resources on the development of our key asset Zenvia. Looking forward, 2009 is shaping up to be an exciting and transformational year for AVANIR. We expect that we are less than four months from completing enrollment and the STAR trial and that our pivotal Phase III data will be available in ten months or less.

Importantly, we entered fiscal 2009 with over $42 million in cash enough to fund operations through the expected FDA approval decision date for Zenvia in the second half of 2010; therefore, unlike many develop stage biotech companies we are well funded and currently have no need to access the capital markets, a significant advantage in these turbulent times.

We believe that we are poised to create real shareholder value in 2009 as we complete the STAR trial enrollment, release our pivotal data, and prepare to submit our complete response to the FDA’s approvable letter.

Our team is focused on meeting or exceeding on meeting all of our fiscal 2009 objectives and bringing Zenvia to market as swiftly and safely as possible.

Now I would like to turn the call over to Christine Ocampo, who will provide details on our fiscal 2008 financial results.

Christine Ocampo

Good morning everyone. My comments today will cover our financial results for the fourth quarter and 12 months of fiscal 2008 as well as our expected cash burn for fiscal 2009. In addition to the results summarized in the press release issued earlier this morning you can find additional information in our upcoming 2008 annual report on Form 10-K.

As a preliminary note, we have accounted for the August 2007 sale of our FazaClo business as discontinued operation and accordingly have retrospectively adjusted prior periods financial results to reflect this accounting treatment; therefore all numbers discussed on this call will exclude revenue and expenses related to the FazaClo business.

I will begin with a discussion of our quarterly results.

Total net revenues were $1.2 million for the fourth quarter of fiscal 2008 as compared to $2.9 million in the same period over the prior year. Fourth quarter fiscal 2008 revenues consisted of the recognition of deferred revenue of $600,000 and revenue from license agreements of $500,000. Total operating expenses for the fourth quarter of fiscal 2008 were $6.7 million which is a $4 million increase compared to the same period a year ago.

Components of our operating expenses are as follows:

R&D expenses for the fourth quarter of fiscal 2008 were $4 million as compared to $185,000 for the fourth quarter of fiscal 2007. This is a $3.8 million increase primarily attributed to costs associated with our confirmatory Phase III study of Zenvia in PBA. In addition, the fourth quarter fiscal 2007 expenses were impacted by favorable variances in R&D spending.

General and administrative expenses were $2.7 million in the fourth quarter of fiscal 2008, an increase of $1.6 in the fourth quarter of fiscal 2007.

The net loss for the fourth quarter of fiscal 2008 was $5.2 million or $0.07 per share compared to a net profit of $12 million or $0.28 per share for the same period a year ago. The net profit in Q4 of 2007 includes $12 million of income from the discontinued operations of our FazaClo business.

Now I will be moving on to results for the 2008 fiscal year.

Total net revenues were $6.9 million for the fiscal 2008 year compared to $9.2 million in the prior year. Total net revenues for fiscal 2008 consisted primarily of a recognition of deferred revenue of $2.6 million; FazaClo royalties of $70,000; royalties from abreva of $934,000; licensing revenue of $2.2 million and government grant reimbursement revenue.

Total operating expenses from continuing operations for fiscal 2008 were $24.7 million, a $9.1 million reduction compared to the same period a year ago.

Components of the operating expenses are as follows:

R&D expenses for fiscal 2008 were $14.1 million as compared to $13.1 million in fiscal 2007. This is a $1 million increase that is primarily attributed to costs associated with the STAR trial in PBA.

G&A expenses were $10.6 million in fiscal 2008 as compared to $21.4 million in fiscal 2007. This decrease of $10.8 million is primarily attributed to pre-launch costs that were incurred in the early part of 2007 associated with the planned launch of Zenvia. In addition, the decrease is also attributed to a decrease in overall G&A expenses as a result of restructuring and organizational changes in fiscal 2007.

The net loss from continuing operations for fiscal 2008 was $15.9 million or $0.27 per share compared to a net loss of $28.4 million or $0.72 per share in the prior year.

In April 2008 we raised $40 million in gross proceeds in a registered offering to a select group of institutional investors. On September 30th we had total cash of $42.2 million. Our cash burn from operations was $19.8 million versus our original estimates of $25 to $27 million for fiscal year 2008. We were able to keep our cash burn at a moderate level in fiscal 2008 as a result of our managing expenses and negotiating favorable payment terms with our vendors.

Based on our performance in 2008 and our ability to closely manage our expenses and contain costs we anticipate that our cash burn in fiscal 2009 will be between $24 to $27 million. We expect that our cash on hand will be adequate to fund continuing operations and the clinical development of Zenvia through the anticipated date of the FDA approval decision on the PB application in the second half of calendar year 2010.

Now I will turn the call over to Dr. Randall Kaye, who will provide an update on the progress of our Zenvia clinical program.

Randall Kaye M.D.

Thanks Christine and good morning everyone. During the past fiscal year our clinical development team has been focusing on exceeding expectations as we continue to make significant progress with our Zenvia clinical programs. Our efforts have been centered primarily on our single confirmatory Phase III STAR trial of Zenvia for the treatment of patients with PBA as well as the planning for the development of Zenvia for patients with neuropathic pain. The current STAR trial protocol calls for enrolling approximately 300 patients with multiple sclerosis or amyotrophic lateral sclerosis, also known as ALS, who exhibit signs and symptoms of PBA.

I am pleased to announce that enrollment is approximately 75% complete and we have significant momentum as we enter into the New Year. We are able to reaffirm guidance, the patient enrollment is expected to be completed by March of 2009, and top line data is expected by September 2009.

While investigators are blinded to individual study treatment, looking at the entire study cohort we see several early positive indicators. First, the rate of patient enrollment has exceeded our initial projections. Second, patients study discontinuations are very favorable compared to previous AVANIR studies conducted with patients with underlying ALS and MS. Finally, we have seen that over 80% of eligible patients are rolling into the open label study or the follow-on study.

Now moving on to the neuropathic pain program, in May of 2008 we completed a large formal pharmacokinetic study where two Zenvia dosing regimens, designed to provide an improved cardiac safety profile and enhance tolerability were selected for the next Phase III study. In September we submitted a Zenvia Phase III study protocol and related program questions to the FDA under the SPA process in DPN pain, which is a form of neuropathic pain. I am pleased to announce we received an initial response regarding the proposed study protocol in November. We are currently engaged in positive discussions with the FDA regarding the design of the next Phase III study as well as overall neuropathic pain program requirements.

In summary, we continue to make considerable progress with our Zenvia development programs. 2009 will be an important year of key clinical development milestones necessary to seek regulatory approval for Zenvia in PBA. We remain committed to making Zenvia available to patients as quickly and as safely as possible.

Thanks for your attention. I would like to turn the call back to Keith now.

Keith Katkin

Thanks Randall. In closing, we are proud of the excellent progress we made with our Zenvia clinical development programs and corporate initiatives in fiscal 2008. We are excited about the opportunity to make 2009 a critical inflection point as we accelerate our strategy of transforming AVANIR into a leading developer and marketer of innovative therapies in the CNS therapeutic area.

Operator, I would now like to open the call for questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Ron [Shez] a private investor.

Ron [Shez] – Private Investor

I missed her, the line cut out when your CFO was talking. You talked about the cash burn for ’09 was $24 to what number?

Keith Katkin

Our projected cash burn for fiscal year 2009 is $24 to $27 million.

Ron [Shez] – Private Investor

Do you expect that that’s a number that you have a capability to beat?

Keith Katkin

I think if you look at our track record and what we’ve done before, we have put out enrollment projections as well as financial projections that we are very confident with and then as the year moves forward we refined those projections, so it is our hope that we would be able to do a similar refinement as the year moves on and beat those numbers, but this early on in the year and looking at the significant clinical development expenses that we have for the upcoming year, that $24 to $27 million is our best estimate as of right now. But, as we did last year, each quarter we will update and refine and hopefully you will see those numbers going down over the year.

Ron [Shez] – Private Investor

That would be good. Dr. Kaye talked about some early indications with regard to PBA or the STAR trial. Do you have any other color that you would like to provide and how significant is what you are seeing or just any other qualitative observations.

Keith Katkin

I will turn that one over to Randall. Randall?

Randall Kaye M.D.

I think overall the investigators are very, very positive. We have launched a study in the US as well as Latin America. They are excited. They have a number of patients that are enrolled in the open label study, so certainly at that point they know that all patients were on study drug, and they continue to enroll additional patients in the study as well. All of those are very, very positive indicators.

We are still blinded to the results, so it is hard to get into more detail on that.

Ron [Shez] – Private Investor

But you are pleased so far.

Randall Kaye M.D.

Yes, we are pleased.

Ron [Shez] – Private Investor

Okay. We just talked about cash burn, so you’re going to be sitting with some place between $14 and some odd million at the end of this coming year, which doesn’t leave you a lot to get to what you hope for with regard to approval; so do you have any interim plans you are pursuing, any deals? Can you talk about that?

Keith Katkin

That is a good question Ron. I think on the business development front it is reasonable to say that there has been a fair bit of interest and that should not be surprising. If you think about a Phase III asset like Zenvia focused on multiple CNS disorders that has got significant commercial opportunity and a number of potential indications, there are not a lot of products that are out there right now that fit that profile. So there are certainly people that are interested in the asset.

That said we have stated, probably for a number of years now, that it is our intent to commercialize Zenvia for the PBA indication ourselves and that is still our primary objective.

That said if someone came to the table and put significant economics that were in the shareholders best interest in order to promote both PBA as well as other indications we would have to seriously consider that option.

Ron [Shez] – Private Investor

If you can comment, are you pursuing people or are people in this environment coming to you?

Keith Katkin

As it relates to outside of the US we have had a stated goal on XUS and that we have been actively been pursuing people because we think that that is an important market that can generate additional revenue for Zenvia as well as help with some milestone revenue for AVANIR and maybe help with that funding situation that you referenced at the beginning.

For the United States we have not done any proactive outreach, with the expectation that as we solidify the next step in the DPN pain program with our Special Protocol Assessment that combined with positive PBA data will be a significant catalyst for the stock as well as for Zenvia. So with those two things in hand, positive data which we are expecting, as well as the SPA for DPN pain that we think of the time when we would start to outreach because we would need to partner the DPN pain indication given you’re competing with the very large pharmaceutical companies with hundreds of sales representatives out there.

But, even despite the fact that we have not proactively reached out, there are a fair number of companies that have reached out to us, again for all the reasons that I said at the outset. There is not a lot of Phase III assets like Zenvia that are out there right now in the marketplace.

Ron [Shez] – Private Investor

I just have one more question. Can you talk about what you see as the competitive landscape with regards to PBA and DPN?

Keith Katkin

Sure. For PBA there are no other products that are approved for PBA by the FDA and to the best of our knowledge there are no products currently in development for PBA. So we really think that, especially in today’s healthcare environment, that really positions Zenvia and our company quite well, because we will be focused on market development activities, helping physicians diagnose patients, helping find the patients out there which is really a great thing to be a part of. I have done it in the past and you are really helping change these peoples lives.

We would expect that as we demonstrate significant amount of success in PBA that other people may take an interest, but we think that would probably take a couple of years post approval before that starts to happen.

In terms of DPN pain, that is a highly competitive market. You have got, as I mentioned, big Pharma like Lilly and Pfizer and a number of established products.

That said there are no products with a mechanism of action similar to Zenvia that are currently available on the marketplace. So when you consider that of the products that are currently available about half of the patients don’t respond or have an inadequate response to those products, in our discussions with physicians they would welcome a new product with a new mechanism of action that they can either use in combination with the current available therapies or as a stand alone therapy itself; therefore, we think we are very well positioned for both markets.

Ron [Shez] – Private Investor

Just one more thing on PBA, do you have any comment about what you think the size of the market is?

Keith Katkin

We like to think about the market in terms of the number of patients that we think are candidates for therapy and then let people do their own modeling in terms of putting up a revenue forecast. So, for PBA we estimate that there are approximately 1.8 million patients that have moderate to severe PBA: that is exclusive of anyone that we would define as mild PBA. If you take the 1.8 million patients that have moderate to severe PBA and put that through whatever revenue model you would like it starts to generate very significant revenue potential.

On the DPN pain front there is about 3.5 million patients within that marketplace, so clearly the numbers in DPN pain add up quickly and if you look at the therapies that are already out there and are already selling into that market you are talking about billions of dollars of existing sales at the current time. Again, both are very attractive commercial market opportunities.

Ron [Shez] – Private Investor

Good luck for getting this done and I think make a deal and improve your cash position.


Your next question comes from Ross Gordon with Gordon Investment.

Ross Gordon – Gordon Investment

My question about the market was just asked. I would like to get some sense of how you intend to commercialize it yourself if you cannot do a partnership.

Keith Katkin

Sure and I appreciate the question. I know you have followed the story for quite some time, Ross, but others on line may not have. For those people that haven’t followed AVANIR for a number of years, if you think back to October of 2006 when we received the approvable letter for Zenvia in PBA, at that point in time we were 100% prepared to launch Zenvia. We had done all of the requisite market research, all of the market development activities, all of the marketing activities and even at that time we had hired a sales force and were out promoting an atypical antipsychotic called Fasaclo.

As we restructured the company and built it around Zenvia we kept the key people who were involved in the commercialization success of Fasaclo as well as the initial commercialization efforts for Zenvia. A majority of those people are still here at the company. They have got all of the knowledge that we learned as we prepared to launch Zenvia the first time and really once we get the data and submit the complete response to the approvable letter we think that we are in great shape to take the material that we had before, refresh the messages, so to say, to make sure that they still work for physicians and are still helpful for physicians and then move forward with launching Zenvia ourselves.

We have talked previously about the expected sales force size. We think that 75 sales representatives will be enough to call on a majority of the physicians treating patients that have PBA and really generate significant economic value for the company.

Ross Gordon – Gordon Investment

If we do it our self, you are expecting approval in mid-2010. Are we going to have enough cash to actually go commercial? You are going to be running out of cash at that time.

Keith Katkin

Yes, that is a good question Ross. I think if you look at the way that we did our last financing and our cash expectations we intentionally raised enough cash so that we could get through the expected FDA approval decision date in the second half of 2010. At that point in time we are hoping that in advance of that with positive data and with a number of catalysts that the stock price would run up and that would give us the opportunity to either do an equity financing that could commercialize the launch or if we wait until approval then we could go after a number of different instruments, everything from convertible debt and the likes, in order to fund the commercial operations without diluting our existing shareholders.

In addition, there is certainly still the XUS partnership possibility that is out there and that could generate significant cash. As I said at the onset, interest in the entire program is picking up and if somebody puts an offer that is too good for us to refuse for our shareholders then that is something that we would have to seriously consider at this time.

Ross Gordon – Gordon Investment

Would potential buyers for PBA be the same buyers as for DMC?

Keith Katkin

Typically yes. If you look at how companies look at their franchises they really look at it as central nervous system franchises and both PBA as well as DPN pain fit into the central nervous system franchise.


At this time there are no further questions.

Keith Katkin

I would like to thank everyone for attending the conference call and we look forward to updating you through out fiscal year 2009 as we continue to make progress on the Zenvia clinical development programs. Thank you very much.


Thank you for participating in the AVANIR Pharmaceuticals Fiscal 2008 Fourth Quarter and Year End Conference Call.

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