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Auxilium Pharmaceuticals, Inc. (NASDAQ:AUXL)

Q4 2008 Earnings Call

February 18, 2009 10:00 AM ET

Executives

William Q. Sargent Jr. - Vice President of Investor Relations

Armando Anido - President and Chief Executive Officer

Dr. Anthony DelConte - Chief Medical Officer

Roger D. Graham, Jr. - Executive Vice President, Sales & Marketing

James E. Fickenscher - Chief Financial Officer

Analysts

Marshall Urist - Morgan Stanley

Thomas Wei - Piper Jaffray

Salveen Kochnover - Collins Stewart

Joseph Schwartz - Leerink Swann

Eun Yang - Jefferies & Company, Inc.

Eric Schmidt - Cowen & Company

John Newman - Oppenheimer

Greg Gilbert - Banc of America-Merrill Lynch

Andy Schopick - Nutmeg Securities

Operator

Good day, ladies and gentlemen and welcome to the Fourth Quarter 2008 Auxilium Pharmaceuticals Earnings Conference Call. My name is Dan, and I'll be your coordinator for today. At this time all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to your host for today's call, Mr. William Sargent, Vice President of Investor Relations and Corporate Communications. Please proceed, sir.

William Q. Sargent Jr.

Thank you, operator and good morning everyone. With me today are, Armando Anido, Chief Executive Officer and President of Auxilium; Jim Fickenscher, Auxilium's Chief Financial Officer; Roger Graham, Auxilium's Executive Vice President of Sales and Marketing; Dr. Jyrki Mattila, Auxilium's Executive Vice President of the business development, product development and technical operations; Jennifer Evans Stacey, Executive Vice President and General Counsel, Human Resources and Secretary for Auxilium; and Dr. Tony DelConte, Auxilium's Chief Medical Officer.

Before we begin, I would like to remind you that we will make various remarks during this conference call that constitute forward-looking statements for the purposes of Safe Harbor Provisions under the Private Securities Litigation Reform Act of 1995. Forward-looking statements are all statements other than statements of historical fact, and generally may be identified by the words; believe, may, appear, feel, could, would, will, estimate, continue, anticipate, see, intend, should, plan, hope, will, potential and expect, and similar expressions.

Today our forward-looking statements will cover, among other things; our plans and what we believe to be the prospects for the company, including statements regarding Pfizer, about XIAFLEX commercial success. In Europe, the role collaboration with Pfizer and achieving Auxilium strategically of maximizing the marketing opportunity for XIAFLEX, received amounts on payments, royalties from Pfizer, company's ability to achieve profitability to receive some upfront amounts of payments from Pfizer, potential of XIAFLEX to transform the treatment of Dupuytren's contracture, Peyronie's disease and to improve lives of patients with those conditions. The timing of the filing of marketing authorization application for XIAFLEX for Dupuytren's contracture in Europe by Pfizer, timing of filings of biologics application, license application for XIAFLEX for Dupuytren's contracture, and timing of the final update decision on the XIAFLEX filing status, timing of the XIAFLEX safety update following the filing of the biologics license application for XIAFLEX for Dupuytren's contracture; the ability of our Horsham facility to make global launch expectations of XIAFLEX, increase in personnel and funding approval of XIAFLEX BLA filling and other actions to Prepare for the commercial launch of XIAFLEX as a reporting of timing of reporting top line results and the phase IIb study for XIAFLEX for Peyronie's disease, the timing of commencement of the phase 3 clinical program for Peyronie's disease and these appear as a primary end point, the impact to our sales and marketing efforts on the growth of Testim revenues, and the timing of launch of XIAFLEX for Dupuytren's contracture.

Actual results may differ materially from those reflected in these forward-looking statements as a result of further evaluation of clinical data and market research, results of clinical trials, adverse events in our clinical trials, and market research, changes in the regulatory requirements from our industry, as well as the various factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2007 and are clearly reported on Form 10-Q for the period ended September 30, 2008.

Given these risks and uncertainties, you should not rely upon any such factors or on forward-looking statements.

Forward-looking statements provide the company's expectations, plans and forecasts for future events and views as of the date hereof. While the company may elect to update these forward-looking statements at some point in the future, the company specifically disclaims any obligation to do so. Also, today's call may not be reproduced in any form without our express written consent.

I am pleased to turn the call over to our Chief Executive Officer and President, Armando Anido.

Armando Anido

Thank you, Will and good morning to all of you who are joining us this morning. During our call this morning, I will review the remarkable progress that we made as a company in 2008.

I will then turn it over to Tony for a synopsis of XIAFLEX's clinical progress. Roger will provide you with an update on our XIAFLEX pre-commercialization efforts and our Testim performance. Jim will then take you through the financial results for last quarter and I will come back and provide you with guidance for '09. We will conclude by opening up the call for your questions.

Since this summer of '06, the Auxilium team has been highly focused on implementing our corporate strategy; which revolves around maximizing the global value of XIAFLEX and driving Testim to its full potential.

I believe that in '08, we reinforced our track record of repeatedly setting aggressive and appropriate corporate goals that are inline with our corporate strategy and then executing as a coordinated organization to deliver on those expectations and commitments.

The highlights for '08 included; our clinical regulatory and manufacturing teams committed extraordinary time and effort completing our XIAFLEX Phase III program and preparing us to file a BLA in the very near future for Dupuytren's contracture. We are moving forward in the clinic with a phase IIB trial for our second indication for XIAFLEX for Peyronie's disease. We secured a deal with Pfizer, the world's premier pharmaceutical marketing organization, for commercializing XIAFLEX in Europe.

Based on our current business plans, the upfront payments and near term milestones from this transaction should provide us with enough cash to reach profitability.

We advanced our XIAFLEX pre-launch activities last year by taking the steps necessary to prepare for a potential U.S. launch in early 2010 or sooner if we receive priority review. We posted another record year for Testim with annual revenues growing 31% over last year to just over $125 million, the high end of our guidance.

The 968 Patent covering Testim issued and our legal team reacted quickly to the filing of a Paragraph IV challenge to Testim suing Upsher-Smith Laboratories in December.

I would now like to discus in a bit more detail these key accomplishments that have laid the foundation for what we anticipate will be a successful '09 for Auxilium.

With XIAFLEX, we set some aggressive goals for ourselves and we delivered on our commitments. With the release of the Phase III CORD I and CORD II XIAFLEX clinical data in mid '08, we believe the product profile in Dupuytren's contracture has emerged as a revolutionary non-surgical choice that provides the efficacy of surgery in our opinion, a superior tolerability and recovery profile.

With the locking of our clinical data bases for Dupuytren's contracture at the end of last year, we demonstrated the organization's focus and progress toward a key milestone in the compilation and preparation of the XIAFLEX U.S. biologics license application for the treatment of Dupuytren's contracture. We believe that we can now see the light at the end of the tunnel and that we remain on track for a BLA submission to the FDA with a request for a priority review designation in the early part of '09.

After the BLA has been submitted, we expect to hear back from the FDA on priority review designation within approximately 60 days of our filing.

As for XIAFLEX in Peyronie's disease, in the first half of '08, we completed the animal study that was requested by the FDA before moving forward with our phase IIb trial.

We initiated a phase IIb trial in the third quarter of '08. As we announced in early February, we completed enrollment of over 120 patients and we expect to release top line results in the fourth quarter of this year.

In December, we announced that Pfizer would be our exclusive partner for the development, commercialization and supply of XIAFLEX for the treatment of Dupuytren's contracture and Peyronie's disease in Europe. We believe we have joined forces with the worlds most successful and experienced commercialization partner Pfizer, who will now take lead responsibility for XIAFLEX European regulatory and commercialization efforts in Dupuytren's contracture and Peyronie's disease.

Under the terms of the agreement, Pfizer made an upfront payment of $75 million and will make up to $410 million in potential milestone payments, with $150 million tied to regulatory milestones and $260 million based on commercialization milestones.

We will also receive significant increasing tiered, double-digit commercialization payments based on sales of XIAFLEX in Pfizer territories.

We've made significant progress in the last few months jointly planning with Pfizer to meet their goal of filing a marketing authorization application for European approval of XIAFLEX in Dupuytren's contracture in 2010. We have also made significant progress in our U.S. pre-commercialization efforts for XIAFLEX. We staffed internal marketing, reimbursement, sales support and medical affairs functions or put key opinion leaders to understand the risk and benefits of our emerging product profile, advanced our understanding of the reimbursement dynamics for Dupuytren's contracture, and refined our positioning of XIAFLEX as a non-surgical choice for an unmet medical need.

In our opinion, we have the right people in place to prepare for a successful launch of XIAFLEX in the U.S. and look forward to the ultimate submission, approval, and launch of this company transforming product.

With regard to the manufacturing of XIAFLEX, our long-term shareholders will recall that we acquired the Horsham facility in '06 with an aggressive timeline to qualify the site and validate a commercial XIAFLEX manufacturing trend.

We've made tremendous progress in the last 12 months toward this goal and I wanted to recognize our Head of Manufacturing, Mike Cowan, Horsham plant VP, Walter Matzmorr and Head of Quality and Regulatory, Ben Del Tito and their respective teams for their tremendous efforts in meeting our challenging manufacturing timelines for the XIAFLEX BLA and preparing to supply forecasted XIAFLEX commercial production levels.

Based on current forecast, we believe Horsham has sufficient capacity for global launch expectations and we also have the ability to add significant capacity at the site.

Testim continues to be the fastest growing testosterone replacement therapy product in the United States. In the fourth quarter, Testim achieved record net revenues of $34.6 million compared to net revenues of $27.7 million in the fourth quarter of '07, an increase of 25%.

For the full year, Testim net revenues totaled $125.2 million compared to net revenues of $95.7 million for the full year '07, an increase of 31%.

We also secured a new partner for Testim in Europe as Ferring officially assumes marketing responsibility in '09. We are excited to have them as a new partner and look forward to their future contributions with Testim in Europe.

In October '08, we received a notice of an abbreviated new drug application filing by Upsher-Smith Laboratories containing a Paragraph IV certification for testosterone gel. In December, Auxilium and our licensor, CPEX Pharmaceuticals, filed a lawsuit against Upsher-Smith for infringement of CPEX's U.S. Patent No. 7320-968 which covers Testim.

We will continue our efforts to increase Testim U.S. prescriptions and intend to vigorously defend the IP for Testim.

Lastly, in regard to our transmucosal film or TMF products, we successfully completed a phase I trial of the fentanyl TMF product in '08. We have the exclusive worldwide rights to the fentanyl TMF and additional TMF product candidates. As our focus continues to be on XIAFLEX and Testim, we have decided to seek partners to further develop and commercialize our TMF product portfolio.

Looking back at our corporate activities; Auxilium attracted seven new cell-side analysts to commence coverage of Auxilium in '08. Additionally in a very difficult year for the markets and the small mid-cap biopharmaceuticals sector in particular, we feel that ending '08 with a company's market cap intact at $1.25 billion, approximately where we started the year, is quite an accomplishment in itself. Importantly, we were pleased that we were able to increase our cash balance by $43.6 million in '08 without diluting our current shareholders.

Now I will turn call over to Tony for discussions on our clinical accomplishments.

Dr. Anthony DelConte

Thank you Armando and good morning. I believe that 2008 was a banner year for Auxilium's clinical organization. In June, we announced that both the Cord I and II phase III studies for XIAFLEX in Dupuytren's contracture completed their double-blind component and successfully met their primary endpoints with a p-value of less than 0.001.

We believe these strong efficacy data are even more impressive when considering our database of over a thousand Dupuytren's contracture patients, and we believe that the consistent overall safety profile demonstrates a compelling risk benefit profile of XIAFLEX for potential use by surgeons to treat Dupuytren's patients.

With a locking of our trial databases in December, we now have at least 100 Dupuytren's contracture patients with 12 months of data following the first injection of XIAFLEX. Once we submit our BLA, we expect that we should hear whether we have been granted priority review designation within approximately 60 days of our BLA filing. A priority review could entail FDA action on our filing within six months.

Now as Armando mentioned, we significantly advanced our understanding of XIAFLEX in the treatment of Peyronie's disease with results from our in vivo canine study in the early part of 2008. Consequently in the third quarter, we moved XIAFLEX forward in order to validate our proprietary patient reported outcome or PRO in a phase IIb clinical trial of Peyronie's disease. I believe our clinical group made an exceptional effort to facilitate enrollment of the phase IIb trial.

As a result of this effort, coupled with highly motivated investigators and patients, we exceeded our enrollment goal of 120 patients earlier this month and are on track to report top line data in the fourth quarter of 2009.

If validated, we believe the Peyronie's PRO should be the primary endpoint of our phase III clinical program for XIAFLEX in Peyronie's disease and anticipate that we could begin those trials in 2010.

The Medical Affairs Group is planning a XIAFLEX pre-commercialization ramp up in 2009. After acceptance of the BLA by the FDA, we are looking to hire a team of regional medical liaisons or RMLs that would engage national and regional thought leaders in Dupuytren's contracture. We've recently brought on a National Director for the RML group who has biologic launch and years of biopharma RML management experience.

We are also ramping up a call center to handle medical questions and safety reporting from patients and physicians using XIAFLEX.

Finally, we are launching a web-based application for our phase IV programs to include investigator-initiated research grant request, which will advance the medical and scientific information about XIAFLEX and other products.

I will now turn the call over to Roger who will share the specifics of our accomplishments with XIAFLEX and with Testim in the fourth quarter of 2008.

Roger D. Graham, Jr.

Thank you Tony, and good morning everyone. As we mentioned at this time last year, we were engaged in a number of pre-commercialization efforts for XIAFLEX in order to optimize the launch of XIAFLEX and I believe we've made the right investments in 2008 to further our understanding of the market drivers. We plan to continue this effort in 2009 by identifying the appropriate sales force and reimbursements specialist candidates, performing additional pharmaco-economic modeling, typing (ph) advance pricing, reimbursement, distribution and patient market research, facilitating a opinion leader development and refining our XIAFLEX product positioning as part of our plan to be well prepared in advance of our anticipated U.S. launch of XIAFLEX in early 2010 or sooner if we receive priority review.

We believe that the patients who are currently entering hand surgeons' offices for the treatment of Dupuytren's contracture and opt for medical or surgical treatment represent only the tip of the iceberg. In 2009, we believe drilling down to further understand the unmet needs of Dupuytren's patients especially in the watchful waiting (ph) population who'll be beneficial in constructing and optimal XIAFLEX product positioning for launch.

As a result, in 2009 we will prepare for how to best reach all patients who are seeking care via access points other than the hand of orthopedic surgeon's office.

As for our XIAFLEX sales and reimbursement organization, we plan on laying the foundation for our XIAFLEX commercial field force by hiring our sales and reimbursement managers certainly after acceptance of the BLA filing. Once the BLA is approved, we plan to build on the rest of the field-based reimbursement group and U.S. sales representatives, which will allow us to execute a swift ramp up and commercial launch within approximately 60 days after approval.

Moving on to Testim. Our performance in the fourth quarter demonstrated our outstanding ability to grow this brand. Testim's quarterly net revenues were a record $34.6 million, up 25% over the comparable quarter of 2007. According to National Prescription Audit from IMS Health, the approximately 143,500 Testim total prescriptions that were reported in the fourth quarter, represent a highest quarterly level ever, up 24.1% versus the fourth quarter of 2007, while the overall gel market grew 17.5% for the comparable period.

Testim's total prescription market share for the gel market at the end of December was 22.3%, up 80 basis points compared to 21.5% in December of '07.

According to IMS exponent data, we had a market share of approximately 43% in December '08, with the highest prescribing urologists on whom we call compared to 40% at the end of December of '07.

We also continue to make strides with the highest prescribing primary care physicians on whom we call, with Testim market share achieving 31% in December of '08 versus 28.5% in December of last year.

We believe that continuing growth in these areas is a direct result of the exceptional efforts of our Testim commercial team and they will be committed for solidly delivering on expectations.

Looking ahead, we have set aggressive goals for continuous script growth among our targeted specialists in '09 and believe our commercial team is up to the challenge.

With that, I will turn it over to Jim.

James E. Fickenscher

Thanks Roger. I'll be focusing my comments today on the results for the fourth quarter 2008 but I'll be happy to address the year-to-date results in the question-and-answer session.

For the quarter ended December 31, 2008, Auxilium reported net revenues of $34.8 million compared to net revenues of $27.7 million in the fourth quarter of '07. This figure included approximately $100,000 of revenue recognized from the $75 million Pfizer upfront payment.

Shipments of Testim to our ex-U.S. partners in the fourth quarter of 2008, were $0.3 million, which was about $700,000 less than the fourth quarter of 2007.

The net loss for the fourth quarter of '08 was $12.1 million or $0.29 per share, compared to a net loss of 11.9 million or $0.29 per share, reported in the fourth quarter of '07.

Before I move on, just a brief word about how we will recognize the deferred revenue balances from Pfizer and Ipsen.

As you know, we received $75 million from Pfizer as an upfront payment. After deducting legal and advisory fees related to the transaction, we will amortize approximately $71.5 million over a 20-year period. As a result in 2009, we will recognize approximately $3.6 million as revenue.

With respect to the $6.4 million payment that we made to BTC, for their share of the upfront payment we received from Pfizer, just as with future royalty payments to BTC, the amortization of this original payment will be charged to cost of good sold. The $6.4 million that we paid to BTC will also be amortized over the 20-year period and as result in 2009, we will recognize approximately 0.3 million of expense to our cost of good sold.

During 2008, we also terminated our agreement with Ipsen and signed an agreement to have Ferring distribute Testim in Europe. At the time that we terminated the agreement with Ipsen and taking into account the fees that we will pay them to the rights back, we had approximately $6.6 million in deferred revenues remaining on our balance sheet. These revenues will be amortized over the maximum period of time to transfer all marketing authorizations to Ferring, which contractually is two years.

Therefore in 2009, we will recognize into our revenues $3.3 million related to these deferred revenues.

Gross margin on net revenues for the fourth quarter was 76.3%, compared to 73.9% for the comparable period in 2007. Gross margin reflects the cost of products sold as well as royalty payments made to the company's licensor on the sales of Testim. The improvement in gross margin reflects the impact of year-over-year price increases and the decline in low margin international shipments, partially offset by an increase in coupon usage.

Research and development spending for the quarter ended December 31, '08, was 14.6 million compared to 14.5 million in 2007. Although the overall spending was comparable year-over-year, there was a significant reduction in clinical development cost offset by increases in regulatory cost and manufacturing cost incurred in Horsham.

Selling, general and administrative expenses totaled $24.4 million for the fourth quarter, compared with the 18.9 million for the year ago quarter. The increase was primarily due to higher compensation costs associated with FAS 123R, costs incurred in defense of our Testim intellectual property, and investments in preparing for the launch of XIAFLEX.

On December 31, Auxilium had $113.9 million in cash and cash equivalents, compared to $46.4 million on September 30, 2008. We believe at this point that our current cash balance and near term milestone payments from our Pfizer partnership are sufficient for the company to reach profitability.

As of December 31, 2008, we had approximately 42.4 million shares of common stock outstanding, plus outstanding warrants to purchase approximately 1.1 million shares of our common stock and 4.4 million outstanding employee stock options.

Thank you very much for your attention. I'll turn the call back over to Armando.

Armando Anido

Thanks Jim. 2008 was a transformational a year for Auxilium and a huge success. We have Testim, which is a revenue success and remains profitable on its own. XIAFLEX is a potential blockbuster which has no apparent therapeutic competition, exciting product profiles for two unmet needs, a BLA expected in the near term, and a strong European commercialization partner with Pfizer.

As a company, we believe we have enough cash to sustain ourselves through the profitability. What has made me very proud and looking back at 2008, is that we have achieved our successes inline with our strategy and distinguished ourselves not only by setting aggressive realistic goals but also by delivering on them time and time again.

It is our track record we believe, that lends creditability to our discussions of Auxilium's potential growth trajectory and considerable opportunities in 2009 and beyond.

Over the next 12 months we plan to focus on meeting the key milestones for our two key assets XIAFLEX and Testim. For 2009 we anticipate that net revenues will be in the range of 150 to $155 million, an increase of 20 to 24% versus '08. We expect R&D spending will be in the range of 49 to $53 million, which includes approximately four to $5 million in stock-based compensation. We anticipate that selling general and administrative expenses will be in the range of 116 to $121 million, which includes approximately 12 to $14 million in stock-based compensation.

As a result, we anticipate that our net loss for 2009 will be in the range of 50 to $55 million, including stock-based comp expenses in the range of 16 to $19 million.

Looking forward into '09, we expect to deliver on the following strategic priorities for XIAFLEX. One; filing of the XIAFLEX BLA for Dupuytren's contracture in early 2009. Two; preparing our commercial organization for a priority review designation of our BLA filing, which we expect to hear about within approximately 60 days of our filling and could indicate FDA action in six months. And three; completing the XIAFLEX Peyronie's disease phase IIb trial and releasing top line results in the fourth quarter of '09.

In addition, we intend to continue scanning the market for opportunities to in license, acquire, develop and market additional specialty product candidates; that could provide a compelling risk reward profile for unmet medical needs. We also believe that there may be an opportunity discussed partnering XIAFLEX for other non-European and non-North American territories for Dupuytren's and Peyronie's or other potential indications in XIAFLEX's pipeline, to move into advanced clinical development.

Let me thank our shareholders for your continuing support of our efforts. Additionally, I want to give a special thanks to our employees for their untiring energy, spirited enthusiasm and relentless commitments to making Auxilium a success. We're extremely excited about the prospects, opportunities, and potential for a success in front of us, and we'll endeavor to live up to those expectations.

Thank you.

We are now going to open the call for questions. Operator, please review the procedures for questions from the audience.

Question-and-Answer Session

Operator

(Operators Instructions). Your first question comes from the line of Marshall Urist from Morgan Stanley. Please proceed.

Marshall Urist - Morgan Stanley

Yeah, hey guys Good morning. First question is, can you just give us any kind of updates from the ... now that the safety database is locked any, can you give us any new comments on new, any new adverse ... serious adverse events or any kind of updates that you could give us there would be helpful?

Armando Anido

Yeah, I think as you heard Tony talk about the databases were locked back in December and I think that there are no new events to really discuss. We are in the process of finalizing the BLA at this particular point. And you should expect that we will talk about safety at a later point after the BLA is submitted. Right now we don't have an exact timeframe or an exact location where that will be released.

Marshall Urist - Morgan Stanley

Great, thanks. And then on the filing timeline for priority review, is there something that gives you confidence there or are you just planning that that could be the soonest date and so you don't want to be caught flat footed if that does happen?

Armando Anido

Well I think that as we have been talking about, I think preparing for the upside, which would be a ... as a priority review with the six month clock versus a ten months standard review, I think is something that we have to be ready for. I think that we are not a 100% sure that it's going to happen. I think that when you take a look at the requirements for a priority review we hit on two out of the three criteria that the FDA kind of sets for it. The one that we miss on is a life threatening disorder and, but we are not sure what the FDA is going to react to when we submit it. But we will be requesting it.

Marshall Urist - Morgan Stanley

Okay. Great, thanks. I'll jump back in the line.

Armando Anido

Thanks.

Operator

Your next question comes from the line of Thomas Wei from Piper Jaffray. Please proceed.

Thomas Wei - Piper Jaffray

Thanks. With 12 months of follow-up data in hand now, can you share with us any information on what the disease progression rate looks like for patients who were treated with XIAFLEX in the first year?

Dr. Anthony DelConte

Yes, Thomas, at this particular point, we will be talking about the safety profile after the BLA is submitted. So, to give any color at all at this point would be premature.

Thomas Wei - Piper Jaffray

What about the one patient, he was quoted as a serious adverse event of disease progression that you talked about on the last call, any more contacts that you are able to give around that? Do you feel comfortable with that case in the context of the overall disease progression rate?

Dr. Anthony DelConte

Yeah, I think that, in this particular disorder you will see recurrence that will occur, whether it's with surgery or whether it's with XIAFLEX. And I think that that particular case appeared to be a patient that had the disease that progressed overtime. So, I think it's probably in the similar context to what you would expect from this disease.

Thomas Wei - Piper Jaffray

And then just lastly, on a blind (ph) basis in the Peyronie's trial, any serious adverse events or safety issues that have popped up there?

Dr. Anthony DelConte

The study is an ongoing trial. We did just finish the enrollment of it back in at the end of January, beginning of February. We really don't want to comment too much about safety because it is blinded but we do feel good about the study at this particular point.

Thomas Wei - Piper Jaffray

Thanks.

Operator

Your next question comes from the line of Salveen Kochnover from Collins Stewart, please proceed.

Salveen Kochnover - Collins Stewart

Sure, good morning. Thanks for taking my question. Can you elaborate on any feedback you received from work done on the pair side for XIAFLEX ahead of the launch and what your sales force ramp up will entail in terms of, in terms of higher?

Armando Anido

Yeah, let me have Roger address that for us.

Roger Graham, Jr.

Yes, that's work that we have done and work that we will continue to do right up until launch. But I think it's fair to say that we have done a significant amount of work with peers and what we hear is a very favorable environment. Obliviously, we have an orphan drug and so with that we think we go into environment in which we'll achieve reimbursement. Yeah, we're working on a number of things within that environment in terms of pricing and obliviously that won't be announced until we get ready to launch the compound.

On the sales force side, we're managing that very prudently up to and through the, the ultimate approval. We're going to bring on the management team once the BLA has accepted and we think it's prudent so to wait until we get approval to bring the sales force on. But we'll put offers out have those pending for the approval of the compound and then once it's approved, we'll hire and train very quickly and launch within that 60 days that we noted earlier.

Salveen Kochnover - Collins Stewart

Roger, could you just comment on exactly on the type of personnel you are hiring or how many sales reps and may be managers?

Roger Graham, Jr.

Certainly, yeah. On the sales rep side we are look in the neighborhood, it'll be from anywhere from 75 to 100. We are currently going through a lot of exercise right now to size that appropriately. So, we'll manage that. And you can figure for every eight to ten sales reps will have a manager that will oversee them.

And so, we'll have the sales reps in place, we'll reimbursement managers as well that will be field based and that'll be about probably eight to ten of them as well. And, in terms of the type of people that we are looking at, certainly this is a unique space and I think anybody who is been involved with marketing and selling biologics realizes the value that experience can have. And so, we will be looking for people that have been in this space prior to now and have experience selling and marketing biologics.

Salveen Kochnover - Collins Stewart

Thank you.

Roger Graham, Jr.

Thanks.

Operator

Your next question comes from the line of Joseph Schwartz from Leerink Swann. Please proceed.

Joseph Schwartz - Leerink Swann

Hi. Thanks, good morning.

Roger Graham, Jr.

Good morning.

Joseph Schwartz - Leerink Swann

I was wondering, I was wondering you mentioned access points other than hand and orthopedic surgeons, are you anticipating allocating any sales resources to rheumatologists or other physicians when and how are you thinking in general about dividing those resources?

Armando Anido

Yeah, I think that, first and foremost, our focus will be on hand, orthopedic and plastic surgeons, and that's our core. That's kind of the middle all the bull's eye. Roger's comments around looking beyond that is that not everybody that has Dupuytren's contracture today is actually coming in to see the hand and orthopedic and plastic guys that do surgeries. So, I think he and his team are evaluating what the opportunity is there and how you reach them. Roger?

Roger Graham, Jr.

Yeah, and I think we're looking at that and I mean we have some resources obviously today in our Testim field force. We're reaching some primary care physicians that certainly could be a potential avenue that we could access in terms of increasing awareness in referrals from primary care into the orthopedic surgeon audience.

And the other thing that obviously we have to consider is, is where these patients are searching for information and we do know today that there is tremendous effort on the part of these patients to get information off the Internet. So, in terms of the marketing, there is probably a big opportunity there that we see. And that for a public relations relation perspective obviously, is a higher unmet need.

There are a number of patients that we believe are out there as we mentioned. We believe that right now we are only seeing the tip of the iceberg and the key here is accessing those patients within that watchful waiting group that are looking for therapies today, but really don't do surgery as an alternative. So, we are going to find ways to access that broader patient group.

Joseph Schwartz - Leerink Swann

Okay great. And how many distinct physicians have had experience with XIAFLEX now in Dupuytren's and Peyronie's settings?

Armando Anido

I think the, the number at this particular point, the number of sites that we have is in the, probably mid-double digit. So you are looking at 30 to 40 people that have actually had access to the drug at this particular point. And our anticipation is that we obviously have some education that we will need to do to a broader range of these. We think that there are between five and 7,000 physicians in the U.S. that actually do perform these surgeries and that will be the focus of our team to get that accurate.

Joseph Schwartz - Leerink Swann

Okay. And are you planning training programs to help people master the technique?

Armando Anido

Yeah, we'll have a number of different offerings that we'll utilize to help train these physicians. Once the product gets approved, we'll get out in front of that rapidly. And we'll do that through a number of vehicles, via the Internet, DVD, we have the RMLs, that Tony mentioned, that'll be in place that will help us with training. So, we have a number of avenues in which the physicians will be able to access training for administering the product.

Joseph Schwartz - Leerink Swann

Great, thanks again.

Armando Anido

Thanks.

Operator

Your next question comes from the line of Eun Yang from Jefferies. Please proceed.

Eun Yang - Jefferies & Company, Inc.

Thanks very much. Questions on the Peyronie's disease, your phase II study. The primary end point is the patient reported outcome questionnaire (ph) that seems to be a little bit more subjective than secondary end-point which is penile curvature. So I was just wondering whether your phase III trial would be the same end-point. It'd be might have a mention that on the colder (ph) and also can you comment on in-patient reported outcome what we are looking for?

Armando Anido

Yeah, Tony can take that.

Dr. Anthony DelConte

Yeah, I can comment a little bit. One of the things we did here with this PRO is we use some of the same consultants who are involved in designing Viagra's validated PRO, the IIEF, and we've also had some input from the FDA and key opinion leaders. So, even though it is somewhat subjective, there is a scientific process which is a little bit of an iterative process.

We've already gone through several versions that questionnaire and done some early steps in validation upfront. So, we believe that this will have a likelihood of being validated and then it would be the primary outcome in our phase III trails and we also ... I mean we have general concurrence from the group that has been involved in this just like with in Pfizer's IIEF.

Roger Graham, Jr.

So Eun, I think key thing is we did receive feedback from the FDA a while back about the primary end point for the phase III would be a patient reported outcome survey and that we have worked over the past 2.5 to three years in order to develop it. The final step is really validation of that in a live clinical trial and that is what we are doing. We are measuring curvature, we are measuring size of the plaque as well and change in the size of plaque so there are other more objective end points if you will. But the FDA does want to use the PRO as the primary end point.

Eun Yang - Jefferies & Company, Inc.

Yeah, okay. Then another question that I have is that, in relations to allegiant studied clinical smokeline (ph) trials for priority did it with the botox (ph) I am just wondering if you have any comments on that, is that a prospect?

Armando Anido

Yeah, again, we are aware of those trials and we are watching that. These are ... we believe they are small investigator initiated trials and we'll continue to follow that and look at that more carefully.

Eun Yang - Jefferies & Company, Inc.

Thank you.

Dr. Anthony DelConte

And Eun, I think it certainly goes to the fact that physicians and patients alike are really searching for anything that they can do that might have some affect other than surgery.

Eun Yang - Jefferies & Company, Inc.

Thanks very much.

Armando Anido

Thanks.

Operator

Your next question comes from the line of Eric Schmidt with Cowen and Company. Please proceed

Eric Schmidt - Cowen & Company

Good morning. Just looking for some more information and your assumptions behind that 2009 guidance. May be starting with the top line of 150 to 155, we've seen that Testim's exiting 2008 at a run rate of about 150 million, at the low end of the guidance and then you're further expecting to book some revenue from both Pfizer and Ipsen. So, just kind of trying to reconcile that with the guidance, it seems to be a little lower to me.

James Fickenscher

Yeah, I think that we have a taken into a consideration both the run-rate that is occurring in the fourth quarter and the second half of the year coupled with the competitiveness of the marketplace as we see it going forward. You have to realize, fourth quarter is historically a high quarter. Across all the last few years it has really been a quarter where you do see somewhat higher sales then in the first quarter historically, we tend to see somewhat lower. So, I think just to flat line and go, fourth quarter times four will probably give you somewhat high estimate of where it's running at right now.

Eric Schmidt - Cowen & Company

You're not expecting any new competitive entrants or anything like that though on Testim?

Armando Anido

At this particular point, we have not projected any competitive entries in 2009.

Eric Schmidt - Cowen & Company

Okay. And then on the expense side, would the net loss guidance change if XIAFLEX were either granted priority review or were approved before year end?

Armando Anido

Yeah, there is a couple of things. There are no ... other than the amortized sales that we will record in 2009 from the Pfizer deal, there are no XIAFLEX revenues in the US baked into 2009's guidance. If we do get a priority review and we get an approval in 2009, obviously we will have to restate what our guidance would be for revenue, also expenses would change as well because right now our expense line is tied to a standard review.

James Fickenscher

And obviously Erick depending on the exact timing of that approval, you could be in a situation we have both revenue and incremental expenses. We've said that as soon as we know we have approval, we'll bring on a field force and reimbursement force, so you could also envision a scenario where we'd have expense here but not revenue until early next year or a minimal amounts of revenue this year.

So, I think from our point of view, we have basically put the guidance together assuming that we are on the standard review and that we are planning for the early 2010 launch, if we get expedited review and then approval, we will as Armando said, update you on what to expect.

Eric Schmidt - Cowen & Company

Thanks for the clarification.

Operator

Your next question comes from the line of John Newman from Oppenheimer. Please proceed.

John Newman - Oppenheimer

Hi guys, thanks for taking my question. Should we expect to see top line data for the one-year safety follow-up for XIAFLEX or should we expect to see that show up later on at a medical meeting?

Armando Anido

Yeah, I think that right now we are finishing all that up and getting it into the BLA and we will look for some venue to get that information out after the BLA is filed.

John Newman - Oppenheimer

Okay. And one follow-up; does your revenue guidance assume amortization of the upfront in 2009?

James Fickenscher

Yes, it does. As I tried to explain, we've got about $71.5 million from Pfizer that we'd be amortizing over 20 years. So, that works out to about $3.6 million, that's included in that guidance. And then we also have, with the switch from Ipsen to Ferring, we basically take all the deferred revenues from Ipsen plus what we receive from Ferring, less what we have to pay Ipsen to get the rights back, so that we can realize and set to Ferring and that's going to add about another $3.3 million in 2009.

Now that does assume that it takes us a full two years to get all the marketing authorizations transferred if we get all of them done earlier than we would have to recognize the rest of that $3.3 million earlier as well.

So, and overall it's about $6.9 million in our revenue guidance this year based on our current assumptions.

John Newman - Oppenheimer

Hey, great. Thank you.

Operator

Your next question comes from the line of Greg Gilbert from Banc of America-Merrill lynch. Please proceed.

Greg Gilbert - Banc of America-Merrill Lynch

Thank you. Good morning guys. Do you intend to fund the phase III Peyronie's study yourself if the phase III results are positive and how does that tie to your comments about profitability?

Armando Anido

I think that we do plan on funding the phase III studies for Peyronie's disease and is included in our discussions about profitability.

Greg Gilbert - Banc of America-Merrill Lynch

Okay. On Dupuytren's, can you share with us what portion of that market you'd expect to be driven by the Medicare population, perhaps using surgery as a proxy?

Armando Anido

Yeah, I think that while we have talked about at the Medicare population for Dupuytren's probably is somewhere in the neighborhood of around 35 to 40% of the overall opportunity. And that is ... it's actually I think that has people start to getting treated and that's for surgery. As people start getting treated earlier potentially, you may actually see that number come down as a percent of the overall population.

Greg Gilbert - Banc of America-Merrill Lynch

Okay. And just a couple of quick ones. On Testim, first can you offer any metrics on formulary access that you are seeing this year versus last year for Testim?

Armando Anido

Yeah, we don't typically discuss individual formulary status. We have a made a practice to that. Certainly, it's a competitive environment in which we are operating and there are wins and losses as you can well imagine as we go through that process on an annual basis. But we are confident that our guidance today is reflective of formulary status as we had in '09.

Greg Gilbert - Banc of America-Merrill Lynch

And then one last on the competitive environment there. Wondering if you have any thoughts on the new entrant that could show up in 2010 on injectable front from ANDO's (ph) acquisition. I understand injectables are a small part of the market today because ... in part because you need to use them every couple of weeks. What are your thoughts on the potential for a ten week product and whether that really effects thinking or not in terms of your share of the pie?

Armando Anido

Yeah, I think that I guess you're talking about Endeve's (ph) compounded now as and those (ph) compound, and the leader, I think that at the end of the day, it is an injection. It is something that some patients will like. Our point of view on it is that we will have another competitor out there talking about low testosterone and the value of treating with testosterone replacement and in essence we hope to continue to grow the market at a fairly good rate.

We think that we still have a lot of room for opportunity and going head-to-head against AndroGel the market leader. As Roger mentioned earlier, we're at 22.5% market share that still says to me that we ought to be going after and trying to get as much of that market as we possibly can and not worry so much about an injectable andro.

Greg Gilbert - Banc of America-Merrill Lynch

Thank you.

Armando Anido

Great. Thanks Greg.

Operator

Your next question comes from the line of Andy Schopick from Nutmeg Securities. Please proceed.

Andy Schopick - Nutmeg Securities

Thank you and good morning. I wonder if you can estimate at all or perhaps characterize the various pre-launch costs that would be incurred in order to commercialize XIAFLEX, what are the buckets? I don't know if that's a BLA expenses for example are that much, but the various buckets of expenses that would be incurred in terms of a pre-launch activity?

Armando Anido

Yeah Andy, I can talk in some general terms. We don't as a matter of policy, discuss for example, the costs of specific clinical trials or programs that we undertake. We think that's a competitive issue for us. But, I think when you look at the cost of the pre-launch activities that we have, certainly we are spending a significant amount of money on a lot of market research, pricing research etcetera.

We are bringing on the reimbursement specialists, the regional medical liaisons and the management team of the sales force. So, there is pretty significant increase in our SG&A cost overall relative to the pre-launch cost of XIAFLEX.

So, there's a number of different programs that we are developing surrounding reimbursement and training and things like that. So, all that costs a pretty significant chunk of money but we think that we're planning to launch a product that we think can be a blockbuster. We've got a management team that has launched blockbusters before and know the right steps to take. So, given the financial resources we have for doing what we think is the right thing to do for the pre-launch.

Andy Schopick - Nutmeg Securities

Okay, thank you.

Armando Anido

Thanks.

Operator

Your next question is a follow-up from the line of Eun Yang from Jefferies. Please proceed.

Eun Yang - Jefferies & Company, Inc.

Thanks. So, in the past you've mentioned that your European filing for XIAFLEX is about 12 months behind. Is that still the case with the Pfizer partnership?

Armando Anido

Yeah, I think that as we mentioned in the prepared remarks earlier that we are working right now with the Pfizer group in order to get a submission in 2010. So, I think we feel pretty good about the progress that we've made with the Pfizer relationship and there is an awful lot of activity going on in both organizations in order to try to get that filed as quickly as possible.

Eun Yang - Jefferies & Company, Inc.

Thank you. And then a last question is, I don't know if you would disclose this, but your SG&A guidance for this year, could you tell us what percentage of that guidance actually, is it related to the litigation cost for Testim?

James Fickenscher

Similar to the last comment that I made Eun, we won't breakout individual pieces. But again, this is sufficient to say that we have what we think is a top notch legal team and we will vigorously defend our patent protection on Testim and do what we need to do.

Eun Yang - Jefferies & Company, Inc.

Thank you.

Operator

At this time, there are no further questions. Thank you. I would now like to turn the call back over to Mr. Armando Anido for closing remarks.

Armando Anido

Great. Thanks a lot and thanks to our shareholders and our employees. 2008 was a great year for Auxilium and we anticipate that 2009 will be as good if not even better.

Thank you all. Take care.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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Source: Auxilium Pharmaceuticals Q4 2008 Earnings Call Transcript
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