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AVANIR Pharmaceuticals (NASDAQ:AVNR)

F1Q09 (Qtr End 12/31/08) Earnings Call

February 17, 2009 11:00 AM ET

Executives

Brenna Mullen - Investor Relations

Keith A. Katkin - President and Chief Executive Officer

Christine G. Ocampo - Vice President, Finance

Randall E. Kaye, M.D. - Senior Vice President Clinical Research and Medical Affairs, Chief Medical Officer

Analysts

Jim McKennitt - American Healthcare Fund

Ross Gordon - Gordon Capital

Ronald L. Chez - Chicago Investor

Operator

Good morning. My name is Joshua and I will be your conference operator today. At this time, I would like to welcome everyone to the AVANIR Pharmaceuticals Fiscal 2009 First Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions).

Thank you. Ms. 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 statements. 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, February 17, 2009. 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 the expected results expressed in our forward-looking 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 A. Katkin

Thank you, Brenna and good morning everyone. Thank you for joining us on the AVANIR fiscal 2009 first quarter earnings call.

I will begin today's discussion with a brief business update before turning the call over to Christine Ocampo, who will review our financial results and then followed by Dr. Randall Kaye, who will discuss the Zenvia clinical development programs.

As AVANIR enters our calendar year 2009, we are extremely excited by the year ahead of us. I believe that 2009 will be a transformational year for our company as we move toward key milestones and take critical first steps to turn AVANIR into a leading neuroscience company.

For the past two years, our organization has undergone considerable change in order to lay the foundation of our future success. Over the past two years, we turned the regulatory path forward with the FDA that included a commitment to reformulate a lower dose of Zenvia and conduct a confirmatory Phase III study in patients with PBA, to demonstrate that the safety and tolerability are enhanced and that the efficacy remains clinically and statistically significant.

We initiated the largest international study of PBA ever conducted with over 50 investigator sites in the United States and Latin America. We exceeded our initial enrollment estimates and as a result, we were able to expand the size of the study to increase the statistical power and enlarge the safety database without jeopardizing our timeline. We also advanced our Zenvia development program in neuropathic pain by conducting a large formal PK study to identify a new lower-dose formulation for the next Phase III study in DPN pain.

Now as we enter fiscal year 2009, we find ourselves nearing the completion of the clinical development of Zenvia for the PBA indication. Next month, we expect an overlap of approximately 300 PBA patients into our confirmatory Phase III trial and plan to have the pivotal top-line data available by September. With those data expected in the near term, we are now taking the initial steps to prepare our full response to the FDA's approvable letter and to seek marketing approval for Zenvia in the treatment of PBA.

This year, we also hope to gain alignment with the FDA regarding the next steps for our Zenvia neuropathic pain program by obtaining an SPA agreement which we are currently working on with the agency. With pivotal PBA data in hand and regulatory clarity in neuropathic pain, we expect to be well positioned for future success.

There are very few small biopharmaceutical companies these days they have late-stage pipeline assets, adequate financial resources and near-term milestones. These are truly exciting times at AVANIR and I want to thank all of our shareholders for their support over the past few years.

With that, I will now turn the call over to Christine Ocampo for a discussion of the first quarter financial results.

Christine G. Ocampo

Thanks Keith and good morning everyone. My comments today will cover our financial results for the first quarter of fiscal 2009, as well as our expected cash burn for the fiscal year.

In addition to the results summarized in the press release we issued earlier this morning, you can find additional information in our 2008 annual report on Form 10-K and our most recent Form 10-Q. I will begin with a discussion of our results for the first quarter.

Total net revenues were $1.8 million for the first quarter of fiscal 2009, as compared to $2.1 million in the same period of the prior year. The decrease in revenue is primarily attributed to a decrease in grant revenue resulting from the completion of the government-funded anthrax antibody program. First quarter fiscal 2009 revenues consisted of the recognition of deferred revenue of $750,000 and revenue generated from our license agreement with GlaxoSmithKline for sales of Abreva in the amount of $1 million.

Total operating expenses for the first quarter of fiscal 2009 were $7 million, compared to $6.6 million in the same period of the prior year. Our first quarter 2009 operating expenses consisted of research and development expenses of $4.7 million, compared to $3.4 million in the same quarter in the prior year, and general and administrative expenses of $2.3 million, compared to $3.1 million in the same quarter in the prior year.

The increase in research and development expenses is attributed to the confirmatory Phase III STAR trial as well as other supportive studies for the full response to the approvable letter. The decrease in general and administrative expenses is attributed to our streamline organization as compared to the same quarter in the previous year. The net loss for the first quarter of fiscal 2009 was $5.2 million or $0.07 per share, compared to a net loss of $5.5 million or $0.13 per share for the same period a year ago.

We ended the first quarter with total cash of $36.5 million and cash used in operations of $5.7 million. We continue to expect our total cash burn in fiscal 2009 to be in a range of $24 million to $27 million. We expect that our current cash on-hand will be adequate to fund continuing operations and the clinical development of Zenvia through the anticipated FDA approval decision date on our PBA application, which is expected in the second half of calendar 2010.

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

Randall E. Kaye, M.D.

Thanks Christine and good morning. During the past quarter, our clinical development team continued to make significant progress with the 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, completion of our preclinical commitments as well as 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, which is also known as ALS, who exhibit signs and symptoms of PBA. We are nearing the important milestone of last-patient-in or LPI with enrollment as of last Friday, February 13th, of 269 of the approximately 300 PBA patients that are targeted for enrollment.

In looking at the entire patient population in the study, the number of patient discontinuations appear to be favorable compared to previous studies of the higher dose formulation of Zenvia. In addition, the rates of the most common adverse events, such as those attributed to the central nervous system and gastrointestinal symptom, appear to be lower than reported in previous studies.

While these data are preliminary and they do not necessarily predict the final database, this does give us good confidence in the overall study conduct. Finally, we continue to have a large portion of our eligible patients rollover into the open label follow-on study which is an important long-term safety database that was requested by FDA.

Next, as part of our discussions with the FDA post-receipt of the approvable letter, we agreed to complete certain preclinical studies as part of our full response to the approvable letter. I'm pleased to announce today that we've completed those studies. The preclinical commitments include non-rodent chronic toxicology, reproductive toxicology, in-vitro pharmacology and a two-year carcinogenicity study. Overall, the data are consistent with our expectations and we had no unanticipated findings. We're assembling this data to include in our eventual full response to the FDA approvable letter.

In addition to the agreed upon preclinical studies, AVANIR also embarked on additional preclinical and clinical work to further clarify the potential for cardiovascular risk. While these studies were not requested by the FDA, we felt that proactively developing a larger database would be an important component for eventual labeling discussions. The cardiovascular work included an investigation of preclinical data using a rabbit ventricular vet model. The preclinical vet data indicate that as expected the cardiovascular risk of Zenvia decreases as quinidine exposure in lowered.

In addition to the vet study, we are conducting a clinically Advanced Cardiac Safety Study or ACSS to determine the effects of the new lower dose formulation of Zenvia on the QTC interval. This crossover study of 50 subjects was to designed to exclude an upper bound of the 95% one-sided confidence interval of 10 milliseconds which according to FDA guidance provides reasonable assurance that the mean effect of the study drug on QT interval is not greater than around 5 milliseconds.

By way of comparison, a previous study conducted to evaluate the cardiovascular effects of Zenvia in the 30-30 formulation, a three-fold higher quinidine exposure than the new formulation, demonstrated an upper bound of the 95% confidence interval of approximately 15 milliseconds.

The Advanced Cardiac Safety Study is being conducted in accordance with FDA regulatory guidance to industry, and we anticipate releasing the results early in the second calendar quarter of this year. We expect to incorporate these preclinical and clinical data plus the cardiovascular data generated from our ongoing STAR trial, into our plan complete response to the approvable letter and subsequent labeling discussions with FDA.

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 enhanced tolerability were selected for the next Phase III study.

In September, we submitted a Zenvia Phase III study protocol and related program questions to FDA under the SPA process in DPN pain, which is a form of neuropathic pain. And in November, we received our initial response regarding the proposed study protocol. We continue to be engaged in positive discussions with FDA regarding the design of the next Phase III study, as well as the overall neuropathic pain program requirements.

In addition to DPN pain, MS pain represents an attractive neuropathic pain development opportunity. In a previous Phase III study in MS patients with PBA, where MS pain was evaluated as the secondary endpoint, Zenvia demonstrated a statistically significant reduction in MS pain. Based on these results and the pending data from the STAR trial, we are also considering further development to Zenvia for MS-related pain.

In summary, we continue to make considerable progress with our Zenvia clinical programs. 2009 will be an important year of key clinical development milestones that are necessary to seek regulatory approvals for Zenvia and 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 over to Keith.

Keith A. Katkin

Thank you, Randall. In closing, I would like to say that we are extremely excited for the coming months and the key milestones we expect to accomplish in the near term. We look forward to keeping you appraised of our progress during this transformational year at AVANIR as we continue on our mission to dramatically improve the lives of patients with the CNS disorders.

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

Operator

(Operator Instructions).

Keith A. Katkin

Great. While we take this pause to compile questions, I would like to remind everyone that we have our annual meeting of shareholders this Thursday, February, 19th in Newport Beach, California. By now, you should have received your proxy materials and I encourage you to vote if you've not already done so. Operator, do we have any questions?

Question-and-Answer Session

Operator

Your first question comes from the line of Jim McKennitt with American Healthcare Fund.

Jim McKennitt - American Healthcare Fund

Hi Keith. Thank you. In your ongoing discussions in looking for a European partner; has the financial turmoil made a difference for people holding back till they see what's going to happen in the larger world?

Keith Katkin

It's a good question Jim . I think that the current financial turmoil has affected everyone really throughout the globe. I think, as it relates to Zenvia though at least the Euro is still strong, which bodes well. But, as I think people have asked previously about our overall business development interest, I can say that on the business development front interest remains high, either for a global partner or partners within certain parts of the globe.

That said, a lot of people are very interested to see the results of the Phase III study. And I think that upon completion of the Phase III study in September when we address the new profile and hopefully demonstrate the efficacy is still there with an approved safety profile, I think at that time the dynamic should change dramatically because then we will move from essentially a product right now which people believe and hope will be successful to one that has actually demonstrated sure success.

Jim McKennitt - American Healthcare Fund

Do you have a preference for a single partner for the world or separate partners in the U.S. and in Europe and Asia?

Keith Katkin

Our stated objective as it relates to partnership has been that we believe that we can commercialize PBA ourselves in the United States. So our first I guess preference would be to partner the Zenvia just outside of the U.S. And then we'll be open to doing that regionally.

That said, I can say that as we've had continual discussions with a number of people and they start to look at the asset on a global basis, but then they also start to look at all of the indications. So as we engage in the discussions, it may be more difficult to just pull out PBA separately and we may potentially be looking at some type of global arrangement.

Jim McKennitt - American Healthcare Fund

Well, thank you Keith.

Keith Katkin

Thanks Jim .

Operator

And your next question comes from the line of Ross Gordon with Gordon Capital.

Keith Katkin

Good morning, Ross.

Ross Gordon - Gordon Capital

Could you give us some idea of what the market is for Zenvia for PBA?

Keith Katkin

Sure. And may be the best way to address that question, because you know Ross, we haven't given out specific revenue guidance. But let me talk about the market size, potential price points and then maybe I can allude to what some of the covering analysts projected going back to before we received the initial approvable letter.

Ross Gordon - Gordon Capital

Okay.

Keith Katkin

So first as it relates to the number of patients out there, as a reminder for all those listening, we've spent a considerable amount of time and effort really understanding and quantifying the market potential for Zenvia and as part of that exercise, we conducted a very large market research project with the patients who have the underlying neurologic conditions that PBA may be associated with. And in doing that, we sampled about 2500 patients that suffered from MS, ALS, dramatic brain injury, stroke, dementia and the likes and we asked them to take the tests that the doctor would typically give them to determine whether not the patients had PBA.

In conducting that study, we found that approximately 10% of the patients had moderate-to-severe PBA. So if you take that and extrapolate it to the population of those patients that have underlying neurologic damage or injury,, that's about 20 million patients in the U.S. that have the trigger conditions for PBA. And our survey suggested that approximately about 10% of those have moderate-to-severe PBA, that's PBA significant enough where they are going to the doctor and discussing the symptoms. So that leaves about 2 million patients that have moderate-to-severe PBA and we believe that that is the true target and addressable population for Zenvia when we launch.

So that's, first to give you a sense of the number of patients that are out there. In terms of price point; originally when we had contemplated or were getting ready to launch Zenvia, we were really looking at it for across all indications. So both in PBA as well as in neuropathic pain; and neuropathic pain was putting somewhat of a cap on our potential pricing models, and neuropathic pain drugs like Lyrica and Cymbalta are about $6 to $7 a day. So you could easily annualize those numbers.

As we starting to go through the process again and preparing for commercialization, we're really challenging those assumptions. And we're also very interested and intrigued to watch Acorda Therapeutics, that's got a drug and development for MS spasticity. And there have been reports that they plan on pricing their product in excess of $5000 a year for the treatment of MS spasticity. So I think it will be interesting to watch what adoption looks like if they do choose that price point and what kind of uptake they get. But I think if you want to conservatively build your models, you can use the upper bounds of the pain price point which is 6 to $7 a day and then if ultimately if the price is higher that will just represent upside to your models.

So hope that will give you enough of the sense that you can build out your own revenue assumptions. By way of comparison back, before we receive the approvable letter, we had about half a dozen or more covering analysts. Those analysts gave revenue projections on the low end, which is roughly three years out or three years post-launch. On the low end, they were I think just shy of $100 million. On the high end, they were in excess of $400 million three years out. So hope that will give you a sense of what some of the people were putting together by doing their own market research and their own modeling.

Ross Gordon - Gordon Capital

Is this the worldwide market or just the domestic?

Keith Katkin

Sorry. Thank you for clarifying. No, that's just the U.S. market.

Ross Gordon - Gordon Capital

What is the world market likely to be outside U.S.?

Keith Katkin

From the perspective of PBA, we have done research in different parts of the globe. We think the European prevalence rate as a percentage of the patients that have similar underlying neurologic disorders is very similar to U.S. Interestingly in Japan and Asia and the likes, in our preliminary market research we found that it's less accepted to have these emotional outbursts, to not be able to control your emotional displays. So we think it probably be a pretty large treatment barrier just to overcome cultural concerns there. So for that region, we're particularly focusing on our neuropathic pain, but also obviously within the U.S. and Europe as well.

Ross Gordon - Gordon Capital

With respect to neuropathic pain, would the same partner are likely to be selling both for PBA and DNP or would those be different companies? Same medication right?

Keith Katkin

Yeah, likely. I mean there are some examples where the agency has given different brand names to products with different indications, but the FDA has started to move away from that. So I don't know that's realistic possibility in these times. Our ideal goal as I mentioned for would be to commercialize PBA in the U.S. by ourselves. It's a concentrated enough market. There's not a large number of doctors again to be called on order to access the majority of the patients.

That said, as we have more and more conversations regarding the potential for Zenvia, the conversations generally do move to an-all indication type of conversation, just because of the potential barriers associated with carving out each of the different indications. So everything is still on a table. Our preference would be for PBA-only outcome. But given the market dynamics, it is conceivable that it could be something that comes to all indications.

Ross Gordon - Gordon Capital

When are you likely to be able to bring DNP to market?

Keith Katkin

I'll better be able to answer that question after we resolve the special protocol assessment process with the FDA now. So it would be great if either in the next quarter of if it takes a little bit longer, we will be able to give specific guidence on exactly how long we think the development program will take for DPN pain. Obviously, it's somewhat related to resources. DPN pain studies are not inexpensive to do. So the first limiting factor is to have excess capital that will allow us to fund the program.

Ross Gordon - Gordon Capital

Great. Thank you. One last question; did I hear you say you have enough cash on hand to bring it to market for PBA?

Keith Katkin

We, at the current time based on our burden, we have enough cash to get to and through the FDA's anticipated action date for Zenvia. So that gives us flexibility in terms of future capital raising options. I should be clear though, the cash on-hand does not give us enough money to fully commercialize Zenvia, but we hope there will be a number of options either for licensing arrangements and the likes or with positive PBA data for additional capital raising that could give us the money that we need to fund the ultimate commercialization of Zenvia.

Ross Gordon - Gordon Capital

Great. Thank you.

Keith Katkin

Thanks.

Operator

(Operator Instructions) And your next question comes from the line of Ron Chez, Investor.

Ronald Chez - Investor

Good morning.

Keith Katkin

Good morning, Ron.

Ronald Chez - Investor

What is the significance of the rollover link into the open-label study?

Keith Katkin

I will turn that question over to Randall.

Randall Kaye, M.D.

Hi Ron. The significance is that it was one of the requests of the FDA. They asked specifically to have a large number of patients with rollover. This predominantly yields some additional time to provide additional safety data. So what it does in essence is it gives six months of exposure data. That's the kind of data the FDA would like to see in order to be able to have a sense of what are the potential longer term effects of patients that are taking medication chronically.

Ronald Chez - Chicago Investor

And is there some significance qualitatively to the fact that a large number of patients are going into the open-label extension study. I mean is it indicative of prospective success or not?

Randall Kaye, M.D.

It's really... Ron that's really hard to say. I will tell you that if trial of substituent stays for 15 years, it's generally looked at as a positive. It's further positive from two standpoints. Number one, you have patients that are willing to continue to be involved in the study that have a belief that products may be providing them with some benefits. But on top of that, you have investigators that are seeing lots of patients that are involved in studies that are still interested and motivated. And that's a real driving factor for me is the trial is when I see the investigators that are continuing to encourage patients to complete the formal part of the study and then move into the open label. It's very hard to make conjectures about efficacy if it's quite, but it's clearly a positive where the people are moving into it.

Keith Katkin

If you think about it Ron, two-thirds of the patients in the clinical study is blinded, obviously but two-thirds of them are on study drug given there is two active arms and one placebo arm. So I think the hypothesis that Randall's potentially speaking to you is if 67% of the patients are on active drug and I didn't think that they were getting a benefit, why will they rollover into the open-label studies. So I think that's why some people look at the conversion rate as a sign. I think Randall have provided good caution in that and have been involved in a number of clinical studies. You never know what the data is going to say until it's unblinded. But certainly we'd like to look at some of these factors that gives us some increased confidence.

Ronald Chez - Chicago Investor

Okay, thank you.

Keith Katkin

Okay, thanks Ron. Any other questions?

Operator

(Operator Instructions) And there are no further questions at this time.

Keith Katkin

Great. Well thank you everyone for joining us on the first quarter conference call. And we look forward to keeping you update on key milestones for this year.

Operator

Thank you. This concludes today's teleconference. You may now disconnect.

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