Transcept Pharmaceuticals Management Discusses Q4 2012 Results - Earnings Call Transcript

Transcept Pharmaceuticals (TSPT) Q4 2012 Earnings Call February 27, 2013 4:30 PM ET

Executives

Thomas P. Soloway - Chief Operating Officer and Executive Vice President

Glenn A. Oclassen - Chief Executive Officer, President and Director

Leone D. Patterson - Chief Financial Officer and Vice President

Analysts

Christopher W. Kuehnle - Leerink Swann LLC, Research Division

Jason N. Butler - JMP Securities LLC, Research Division

Charles C. Duncan - Piper Jaffray Companies, Research Division

William Tanner - Lazard Capital Markets LLC, Research Division

Ed Arce - MLV & Co LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Transcept Pharmaceuticals Fourth Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to you host, Mr. Thomas Soloway. You may begin.

Thomas P. Soloway

Good afternoon and thanks for joining us today to discuss the Transcept Pharmaceuticals 2012 fourth quarter results. My name is Thomas Soloway, Executive Vice President and Chief Operating Officer of Transcept. Joining me on the call today are Glenn Oclassen, President and Chief Executive Officer; and Leone Patterson, Vice President and Chief Financial Officer.

After market close this afternoon, we released financial results for the quarter and year ended December 31, 2012. A copy of this press release is available on our website. We remind you that this conference will contain forward-looking statements that are intended to be covered under the Safe Harbor provided by the Private Securities Litigation Reform Act. Examples of such statements include, but are not limited to, our beliefs regarding the timing, size and nature of commercial opportunities for Intermezzo, including managed care placement, as well as physician and patient acceptance; our beliefs regarding the key challenges facing the market acceptance of Intermezzo, including what we believe to be the factors affecting Purdue's ability to effectively address such challenges; our expectations regarding the trajectory of prescriptions for Intermezzo and the timing of such projections; our expectations regarding the nature, timing, impact and benefit of the ongoing Intermezzo direct-to-consumer advertising campaign; our beliefs regarding the effects of the recent FDA requirements and recommendations regarding reduced zolpidem dosing, including its importance for produced commercialization efforts for Intermezzo; our beliefs regarding intellectual property and product exclusivity for Intermezzo, and its importance and duration, including plans and results relating to ANDA proceedings or litigation; our beliefs regarding the accounting treatment and adjustment of royalties on net sales of Intermezzo generated by Purdue; our expectations regarding the period over which we offset against revenue, the $10 million contribution relating to the direct-to-consumer advertising campaign led by Purdue; our beliefs regarding our ability to use prescription data over the next few months as an indicator of the commercial potential for Intermezzo; and our plans, strategies and ability to identify and finance additional product candidates for in-licensing or acquisition, the nature of such products and the ability of those products to be accretive to our earnings.

These statements are based on information that is available to us today. We may not actually achieve our goals, carry out our plans or intentions, or meet the expectations or projections disclosed in our forward-looking statements. And you should not place undue reliance on these statements. Our forward-looking statements do not reflect the potential impact of any in-licensing agreements, acquisitions, mergers, dispositions, joint ventures or investments that we may enter into or terminate. Actual results or events could differ materially, and we assume no obligation to update these statements as circumstances change, except as required by law.

For additional information concerning the factors that could cause actual results to differ materially, please see the Forward-Looking Statements section in today's press release and the Risk Factors section of our quarterly report on Form 10-Q for the quarter ended September 30, 2012, and the 10-K we plan to file on or about March 12, 2013 for the year ended December 31, 2012.

I will now turn the call over to Glenn Oclassen.

Glenn A. Oclassen

Good afternoon and thanks for joining our quarterly call today. As I think you probably know, Intermezzo, our lead product, is the first and only prescription sleep aid approved for use as needed for the treatment of insomnia, when a middle-of-the-night awakening is followed by difficulty returning to sleep. In the past, prescription sleep aids, including oral zolpidem doses of anywhere from 5 milligrams to 12.5 milligrams, have been designed to be used at bedtime, and it required 7 to 8 hours of remaining time in bed. Unlike these bedtime sleep aids, Intermezzo, which is a sublingual tablet containing 1.75 milligrams to 3.5 milligrams of zolpidem, was specially formulated to be taken in the middle of the night at the time that an insomnia patient awakens and has difficulty returning to sleep. And Intermezzo is the first drug ever approved by the FDA for this indication.

Intermezzo was launched in April 2012 by our marketing partner, Purdue Pharma. While the initial 2012 launch generated steady month-to-month growth in Intermezzo prescriptions, the overall sales results have not met our original expectations. We attribute this to 3 key marketing and selling challenges. These include building physician and patient awareness of Intermezzo as the right treatment option for middle-of-the-night awakenings, motivating physicians to identify such awakenings as an important manifestation of insomnia and further expanding managed care access for Intermezzo.

On November 26, 2012, we announced that Purdue planned to implement new marketing strategies to address these challenges. These strategies included $29 million joint investment by Purdue and Transcept in a direct-to-consumer advertising campaign, with $19 million invested by Purdue and $10 million by Transcept. The DTC campaign presents the Intermezzo selling message to consumers across a broad range of media channels. And it began with print and Internet promotion in November 2012, and then extended to television advertising in early January 2013. The 90-second TV ad has appeared on major broadcast and cable networks on a regular basis, typically in a strategic time slots during post-primetime, overnight and during the early morning. We believe that the $29 million advertising program, which will be primarily executed during the first 6 months of 2013, constitutes a substantial direct-to-consumer campaign with the potential to increase patient and physician awareness of Intermezzo and drive prescription growth. In conjunction with the DTC campaign, Purdue has expanded their selling effort to now include a total of 615 sales representatives. One of the driving forces behind Purdue's successful commercialization track record has been their experienced analgesic sales force, which now includes approximately 525 sales professionals. Beginning January 18, 2013, Purdue newly deployed this sales team as part of the expanded Intermezzo commercialization effort. These 525 reps will present Intermezzo to physicians in their territories, as well as on their calls on retail pharmacies.

As investors may recall, for the initial launch in April 2012, Intermezzo was being presented to physicians by a contract sales team of 275 representatives dedicated exclusively to Intermezzo. To build out the balance of the new Intermezzo sales effort, Purdue has selected the top 90 of these reps who remain devoted exclusively to the presentation of Intermezzo to high prescribing physicians. The sales force expansion and TV advertising launch coincided purely by chance with the announcement by the FDA in January of new requirements to reduce the recommended dosage of zolpidem-based products that are administered at bedtime. These dosage reductions have been mandated for products such as Ambien, Ambien CR and their related generics, but not Intermezzo. Based on findings that women take longer to metabolize zolpidem than men, the FDA expressed the concern that women may be exposed to zolpidem blood levels, which could result in impaired driving 8 hours after bedtime administration. As a result, the FDA has lowered the recommended bedtime dose for women from 10 milligrams to 5 milligrams for immediate release zolpidem products such as Ambien, and from 12.5 milligrams to 6.25 milligrams for extended release zolpidem products such as Ambien CR. The new FDA guidance also requires revised labeling that recommends that prescribers consider prescribing these lower doses to men as well. The recommended doses of Intermezzo, the first sleep aid-approved for middle-of-the-night administration and the first sleep aid-approved with gender-specific dosing remain unchanged under the new FDA requirements. The Intermezzo doses of 1.75 milligrams for women and for the elderly, and 3.5 milligrams for men under the age of 65 were selected in part on the basis of a controlled highway driving study that was reviewed by the FDA and findings from this study are detailed in the Intermezzo package inserts. We believe that this FDA action has stimulated new interest by the medical community and zolpidem dosing strategies and may serve as a gateway for conversation between the newly deployed Purdue sales force and the prescribers they call on. We also believe that the new FDA requirements and recommendations for reduced zolpidem dosing will be an important tool as Purdue continues to work with insurers and managed care organizations to expand patient access.

On February 15, 2013, weekly prescriptions reached about 2,100 as opposed by Symphony Healthcare Analytics. While we remain optimistic about Intermezzo prescription growth, it is still too early to predict where this trend line is headed. But over the next few months, we will be -- expect to be able to make useful conclusions about the commercial potential of Intermezzo as driven by the new DTC program and the greatly enlarged Purdue sales team.

Now I'd like to briefly comment on our efforts to develop our product pipeline. In December of 2012, we announced that a Phase II clinical trial of TO-2061, an investigational product for adjunctive therapy in patients with obsessive-compulsive disorder did not meet its primary endpoint. Based on these results, we have discontinued the clinical development of TO-2061. Currently, our entire senior management team is fully engaged in an active business development process. We are targeting product candidates, which could leverage our psychiatry focus and our neuroscience development capabilities. We are considering a range of opportunities that are consistent with our intention to prudently manage our cash resources and to build shareholder value.

I will now turn the call over to Leone Patterson to review our financial performance for the period, after which, we'll open the call for questions.

Leone D. Patterson

Thanks, Glenn. In December 2012, Transcept contributed $10 million to Purdue's Intermezzo direct-to-consumer advertising campaign. Rather than treat this as an expense item, U.S. GAAP accounting requires us to recognize this as an offset against revenue, which we plan to do over an estimated 7-month period from December 2012 through June 2013, as advertising costs are incurred. This accounting treatment resulted in a $1.4 million offset to revenue in 2012.

For the fourth quarter, Transcept recorded $93,000 of royalty revenue on Intermezzo net sales generated by Purdue, and the previously mentioned $1.4 million offset related to the Intermezzo DTC campaign. This resulted in negative net revenue for the fourth quarter of $1.3 million. Net revenue for the fourth quarter 2011 was $12.8 million. The decrease between periods was primarily due to the 2011 $10 million patent-related milestone payment from Purdue, $2.4 million of other 2011 revenue received from Purdue, including the reimbursement of certain manufacturing-related costs and the previously discussed $1.4 million revenue offset in 2012. Research and development expense for the quarter ended December 31, 2012, was $2.9 million, compared to $3.4 million for the same period in 2011. Research and development expense in both periods was primarily related to expense associated with our Phase II study for the TO-2061 program.

General and administrative expense for the quarter ended December 31, 2012, was $2.3 million, compared to $4.1 million for the same period in 2011. The decrease was primarily related to stock compensation expense and the vesting of performance-based stock options in 2011. Net loss for the quarter ended December 31, 2012, was $6.6 million or $0.35 per basic and diluted share, compared to net income of approximately $5.3 million or $0.39 per basic share, and $0.37 per diluted share for the quarter ended December 31, 2011.

On December 31, 2012, Transcept had $85.3 million of cash, cash equivalents and marketable securities. During the quarter ended December 31, 2012, Transcept spent, on average, approximately $1.5 million per month, which does not include such items as cash inflows from stock option exercises, revenue received from Purdue, or the $10 million payment made to Purdue at the end of 2012 to support the Intermezzo DTC campaign. At December 31, 2012, there were 18.7 million shares of common stock outstanding and 3 million shares of common stock related to outstanding options and warrants.

That concludes our prepared remarks for this afternoon. We will now open the call to your questions. Operator, you may now review the instructions for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Jason Gerberry of Leerink Swann.

Christopher W. Kuehnle - Leerink Swann LLC, Research Division

Chris Kuehnle in for Jason. Just a quick question on Intermezzo. So when I look at the royalty, on a 15% rate, that would seem to imply total sales around $600,000. Trying to reconcile that with what's implied by the IMS script data, which would be about $3.3 million. Is that something that's due to heavy sampling or how should I be thinking about that?

Glenn A. Oclassen

This is Glenn. I think it has less do with sampling than it does with working off launch year inventory, things of that sort. Sampling is not a major factor in suppressing tablet sales. It's probably taking a little longer for the actual monthly revenues to true up with the prescriptions with Intermezzo than might otherwise be the case, frankly because the first 8 months of launch were a little bit slower than anticipated. I do think you can assume that over time, that those numbers will come increasingly into line with each other. At this point in time, I think the best guide for what's going on out there in the marketplace is still the prescription line.

Christopher W. Kuehnle - Leerink Swann LLC, Research Division

Got you. Okay. And then just a quick one on patent litigation. When do you guys expect to incur the bulk of that? And if you could just remind us, are those cost evenly split with Purdue?

Glenn A. Oclassen

No. The costs to Transcept are not largely material costs. We split with Purdue the patent cost 60-40. Transcept picking up 40%, Purdue picking up 60%, with a cap for Transcept of $1 million a year, and $4 million of the aggregate. So we would expect that we'll have some substantial portion of that $1 million each year for the next several years, but that shouldn't be a gigantic factor in our cash flows.

Operator

Your next question comes from Jason Butler of JMP Securities.

Jason N. Butler - JMP Securities LLC, Research Division

Just acknowledging it's still early since you launched the DTC campaign and realigned the sales force, can you give us your initial impressions of how those renewed efforts are going and the feedback you're getting from the field?

Glenn A. Oclassen

Well, we're making progress. I don't think you've begun to see the real impact of these 2 substantial changes. Obviously, one is the DTC campaign, which has now become fairly obvious to anybody who certainly watches TV. And the other is the rather dramatic increase in the number of sales reps presenting the product, but both of those new factors only came into play in the last 4 to 6 weeks. So this is going to be a developing picture over time. I mean, it's, ultimately, it's in the eye of the beholder, I think, to look at each week's data and decide what you think that means to you. But certainly, over the next month or 2, we would expect that the traction generated by this new campaign would begin to be shown in a substantial way.

Jason N. Butler - JMP Securities LLC, Research Division

Okay. Great. And then just a housekeeping question on expenses. You said in the press release that you'd still expect some wind down costs from your development programs to be there and the cost for one -- for the first half of 2013. Are you suggesting there that your development costs, R&D costs, could come down in the second half of the year?

Leone D. Patterson

Yes. I think that's a fair comment to make. I think, as we've previously shared, that we -- anticipating there will be some wind down costs in the first half as we finish up that trial and close it down. And then, obviously assuming there were no other developments going on for us, that we would see that cost come down.

Glenn A. Oclassen

Our goal, however, most certainly is to see the second half costs go up and the rationale being that we intend to bring on additional products. So we want very much to begin spending money rationally, of course, on new product projects. We don't have those in the bag as yet, so we can't predict what that might generate, but it is certainly a goal here to begin bringing other projects into the development program and have that run by the team that's here at Transcept.

Operator

Our next question comes from Charles Duncan of Piper Jaffray.

Charles C. Duncan - Piper Jaffray Companies, Research Division

A couple of them, the first one being identification of patients with middle-of-the-night insomnia, we've heard some things from physicians about their difficulty in doing that. I'm just wondering what initiatives do you have in place or Purdue does to help physicians better identify patients that are having insomnia mostly during middle-of-the-night versus induction?

Glenn A. Oclassen

Charles, I think, a key to that -- first of all, you're absolutely right that for years, physicians have never thought about differentiating one kind of insomnia from another. They never had any motivation to ask the patient. So okay, you tell me you're having trouble sleeping, do you mean you're having trouble going to sleep at bedtime or are you waking up in the middle of the night? There was never any incentive to do that because the therapeutic approach for everybody was to write a prescription for a sleep drug that was administered at bedtime. A key change in the way in which Purdue approaches this now is to begin the interaction with the physician with a discussion of the patient rather than with a discussion of the project -- of the product, excuse me. And I think we'll see the effects of that played out over time. The other key change, quite honestly, is that with the 525 Purdue reps, they're calling upon people with whom they have an existing relationship over time. The average tenure of the Purdue rep is well over 5 years, so they know the prescribers they're calling on and engaging in that kind of a discussion about the nature of this patient as a much more straightforward thing rather than worrying about developing a relationship in the first place. So we expect all of that to have a significant impact over time.

Charles C. Duncan - Piper Jaffray Companies, Research Division

Okay. And then let me turn the next question to guidance. And I appreciate that it's early in the launch, but I guess I'm kind of wondering what types of metrics you'd be looking at to deciding when it'd be appropriate to give guidance?

Glenn A. Oclassen

I think that is at the point that we begin to feel we understand the slope of the curve, if you will, that we'll be in a better position to begin predicting the future a bit in a public manner. Now that's always, to some extent, complicated by the fact that we're working with a private company. They're the marketer, they're the ones booking the sales, they're the ones making estimates for discounts and returns. All of that we simply receive. We don't actually conduct that kind of analysis, we just get a number at the end of each quarter. So all of these factors will play into the issue of guidance but we're not there yet. We recognize that over time, the market will come to expect that of us. We're still convinced that what you need to watch right now is the prescription trend line and it is by far the most clear and unambiguous measure of the success of this relaunch effort.

Charles C. Duncan - Piper Jaffray Companies, Research Division

Glenn, when you say that you're looking for ways to better understand that curve, but I understand that as well as the kind of mathematical transformations as to scripts versus revenue but I guess I'm wondering if you have a goal of trying to have that understanding by a certain amount of time, say 12 months in the market, or is it a certain level of prescribing pattern that you're counting on? When do you think that we can start to expect to be able to understand that curve as well?

Glenn A. Oclassen

Yes, it's going to take a little more time. We're dealing with a kind of an elastic process. As you know, whether it's DTC advertising or promotion by a sales rep, in each case, it takes multiple exposures to create action on the part of a prescriber or a patient, but I don't know that we're in a position, frankly, to predict the particular point in time when we expect to be able to say, okay, we think that we're going to, in the next quarter, generate x number of prescriptions. That's -- what we clearly know is we're not there yet, but we're certainly seeking every week to understand what the prescriptions are telling us and to begin developing a sense of where this product is headed. We haven't gotten to that point yet.

Charles C. Duncan - Piper Jaffray Companies, Research Division

Okay. Final question is regarding the goal that you mentioned to the previous questions, or to Jason's questions regarding an additional product. I know you have a goal, but could you give us a little bit more color as to the process and if we could expect to see something yet this year?

Glenn A. Oclassen

The answer to that question, Charles, to be completely honest with you, is no. I can't offer you such prediction. I've seen friends of mines over the years say, boy, by God, we're going to have a deal by the end of the year and lived to deeply, deeply regret that. We are going flat out here to bring aboard one or more product opportunities that are consistent with the proven development capabilities of the team we have here and the development program. The cost of that is consistent with the financial resources that we currently have available and we want to make that happen as soon as possible but I am not going to make a prediction as to when that might be.

Charles C. Duncan - Piper Jaffray Companies, Research Division

But I certainly appreciate the risk and particularly if you're partnering out a product or some kind of collaboration because it depends on decision by another party as does this one. But this one, you're kind of in the different position in that you're identifying and making a bid. Is the challenge for identification of these products or making a bid with your capital constraints?

Glenn A. Oclassen

I'd say identification is part of the challenge. The real work, however, comes between the time you identify something and the time that you come to a consensus among the internal team as to whether or not you're going to go forward. The due diligence effort absorbs an enormous amount of energy and it's a full-time job for nearly all of the team here right now. There are far more opportunities that come by us than we have the ability to take advantage of. The key is finding the right one and putting together a coherent strategy for where we go from here. We obviously want to take advantage of our intended focus on psychiatry, of the co-promote option that exists with Intermezzo, and with the proven capability of this group to get a drug, not only to the FDA, but more importantly, through the FDA. And all of that comes into play. But right now, the real energy is going into the due diligence process and most of that energy results in saying no. And we've said no to a whole bunch of things so far, but we have a number on the table in which we're very interested and taking a hard look.

Charles C. Duncan - Piper Jaffray Companies, Research Division

It's a little bit like being a biotech stock picker trying to find the winners. That said, I am confident that you and the team can make it happen and we'll look forward to that news flow over the course of this year.

Operator

Our next question comes from Bill Tanner of Lazard Capital Markets.

William Tanner - Lazard Capital Markets LLC, Research Division

Glenn, just what's the expectation of the activity at APSS. I know you guys were there last year probably maybe with a limited impact given that you didn't really have your marketing materials out. So just curious as to -- is there going to be much of a presence there? Do you think that's going to -- how important do you think that's actually going to be?

Glenn A. Oclassen

It will be moderate. Frankly, that meeting is not anywhere near as important to us as the calls on individual prescribers because the APSS is not -- it's attended by experts in the field but it's not necessarily attended by the highest prescribing physicians because the sleep experts are seeing far fewer people than a really busy GP and awful lot of folks in the sleep field these days are focused elsewhere other than insomnia. They're looking at apnea and other related conditions. So what is far more important to us is, in developing Intermezzo, is the -- are the calls and the interactions that are taking place on an everyday basis. Certainly, at the SLEEP meeting, there will be additional papers and posters presented and -- but it's not a key to the development of the product, to the marketing and sales development of the product.

William Tanner - Lazard Capital Markets LLC, Research Division

Got it. And as it related to -- what's the anecdotal feedback that has been gained, I guess, with -- I think you've made a comment in the past that with a lower dose, maybe it's actually done better than one might think. Just being curious, what kind dissatisfaction there has been with the product in general?

Glenn A. Oclassen

The feedback that we get, if I'm understanding your question correctly, the feedback that we get on the performance of Intermezzo for individual users is more positive than any product I've ever been involved with in my entire career of, whatever the hell, 45 years or something. This drug works. It puts people back to sleep. It does so quickly. They wake up the next morning and they feel fine. And that is a consistent set of feedback. The challenge is in getting physicians to recognize the existence of this condition to identify it in individual patients and then to realize that they're offering a patient a genuine service by prescribing Intermezzo.

William Tanner - Lazard Capital Markets LLC, Research Division

And then maybe the last question. I know you mentioned couple of times that you feel like the prescription trend over the next few months will be indicative of what the long-term is. I mean, is there any contemplation to reload on a -- at some point in time, on another tranche of DTC effort or do you think this initial bolus is going to kind of do what it's going to do and that's it?

Glenn A. Oclassen

It very much depends on what the outcome is quite honestly. If we start really seeing energy behind the product that's created by this campaign, my guess is that Purdue is going to be interested in following up on that. They are, above all, very smart business people and they're going to invest their money where they see it producing productive results.

Operator

Our next question comes from Ed Arce of MLV & Co.

Ed Arce - MLV & Co LLC, Research Division

Just have one question. So looking at the weekly scripts, if you exclude the last week of data which is basically flat, go back 5 or 6 weeks, whatever it was, to when you got your new size of sales force and media, DTC campaign was underway. Somewhere around 15% weekly growth or a little bit above that on average, I'm just wondering, one, what do you see continuing in the near term? And two, when you think this actual material increase once you start to get some momentum going after a number of uses of the DTC campaign [indiscernible]

Glenn A. Oclassen

[indiscernible] because of the background noise but [indiscernible] every Sunday night rolls around and I have a little [indiscernible] and I'm going to give it the proper amount of attention, which is modest. What counts is not what each week looks like but what the aggregate of a number of weeks and months add up to. And we're still early in the game. One can argue the last few weeks have looked good, but to be honest with you, at this point, I do not know what that means. But we will know what it means as we move forward over the next few weeks and few months.

Ed Arce - MLV & Co LLC, Research Division

So I guess, to put it another way, if you were to continue to see, in aggregate, over an average of, say, 2 or 3 months now, a high teens level of growth week over week, would that be positive in your view?

Glenn A. Oclassen

Yes.

Operator

I'm showing no further questions in the queue at this time. I'll hand the call back to management for closing remarks.

Glenn A. Oclassen

Well, thank you. Very much appreciate your attention and participation and we look forward to watching those numbers along with you and seeing that slope start to head in the direction that it needs to go. And we'll also look forward to being able to, as the situation permits, to be able to talk to you further about our business development activities once we've completed product -- or excuse me, business development deals going into the future. So thanks for your attention.

Operator

Thank you. Ladies and gentlemen, this concludes the conference for today, you may all disconnect and have a wonderful day.

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