Inspire Pharmaceuticals, Inc. F4Q and Full Year 2008 Earnings Call Transcript

Inspire Pharmaceuticals, Inc. (NASDAQ:ISPH)

F4Q and Full Year 2008 Earnings Call

March 3, 2009 10:00 am ET


Jenny Kobin - Vice President of Investor Relations and Corporate Communications

Christy L. Shaffer Ph.D. - President, Chief Executive Officer, Director

Thomas R. Staab II - Chief Financial Officer, Treasurer

Benjamin R. Yerxa Ph.D. - Executive Vice President - Strategic Operations, Chief Scientific Officer

R. Kim Brazzell Ph.D. - Senior Vice President - Ophthalmic Research and Development


Liana Moussatos - Wedbush Morgan

Jon Stephenson - Summer Street Research Partners

David Steinberg -Deutsche Bank

Ian Sanderson - Cowen & Co.

Eric Varma - Leerink Swann & Company


Good morning, my name is Christy and I will be your conference operator today. At this time I would like to welcome everyone to the Inspire Pharmaceuticals Fourth Quarter and Full Year 2008 Earnings Results Conference Call. (Operator Instructions) I would now like to introduce Miss Jenny Kobin, Vice President of Investor Relations and Corporate communications. Miss Kobin, you may begin your conference.

Jenny Kobin

Thank you. Good morning and thank you for joining Inspire Pharmaceuticals Fourth Quarter and Full Year 2008 Financial Results Conference Call.

I will begin by reminding you that the forward-looking statements in this conference call are based on preliminary information and management assumptions. These forward-looking statements are subject to a wide range of risks and uncertainties that could cause results to differ in material respects, including those relating to product commercialization, product development, revenue, expense, earnings, and cash utilization expectations, competitive products, adverse litigation and regulatory development, results of clinical trials, the need for additional research and testing, funding, and the timing and content of decisions made by regulatory authorities, including the US Food and Drug Administration.

Further information regarding factors that could affect our results is included in our press releases and filings with the Securities and Exchange Commission, including our most recent

10-K, 10-Q, and 8-K: we under no obligation to publicly release the results of any revisions to these forward-looking statements.

On today’s conference call we have President and CEO Dr. Christy Shaffer, CFO and Treasurer Tom Staab, Executive Vice President and Chief of Research and Development Dr. Ben Yerxa and Executive Vice President and head of the Ophthalmology Business Dr. Kim Brazzell.

For today’s call Christy will begin with a corporate overview and denufosol program update. Ben and Kim will provide additional information on the Prolacria, glaucoma, and AzaSite clinical development program. Tom will conclude with a review of the 2008 fourth quarter and full year financial results and our 2009 financial guidance.

I would now like to turn the call over to Christy.

Christy Shaffer Ph.D.

Thank you, Jenny, and good morning. We have a very full agenda for this morning’s call, so I will open with a few comments about 2008 and 2009 and then we will move quickly in to program updates and finish with the financial review and outlook.

First, the bottom line for 2008 is that we delivered on our financial guidance and our key clinical milestones. From a financial perspective we recorded 45% annual revenue growth and we kept our expense growth under 5%, both well within our financial guidance issues in February of last year. And, we ended the year with $73 million in cash and investments.

From a clinical development perspective, we made excellent progress in our late stage innovative programs. First, announcing positive Phase 3 data for denufosol for cystic fibrosis and second finalizing plans for an additional Prolacria Phase 3 trial for dry eye disease. We also expanded our scientific knowledge on AzaSite that is helping to guide our future plans for additional indication for this particular product.

As we begin 2009 we see many opportunities for future value creation including four potential product approvals and launches in the next several years in the United States and Japan. Those include Prolacria™ for dry eye in the United States, the same molecule referred to by Santen as DEO-89 for dry eye in Japan, denufosol for cystic fibrosis in the United States and AzaSite for blepharitis in the United States. These opportunities are driving our near-term plans for 2009 and also our three-year longer-term outlook.

Given the current challenging economic and capital raising environment, we are prioritizing and focusing our resources on our late-stage clinical development programs and revenue generating market products. As a result, in the near term we will not be funding early pre clinical discovery research. We are now redeploying some of our scientists in to new positions to support these late- stage programs with an overall head count reduction of 20 employees. This change in strategy was prompted by the current environment and focuses our resources on those programs that we believe could generate near-term value. We certainly acknowledge and appreciate the important contribution of our scientists and other staff who have helped lay the foundation of the clinical pipeline that we have today.

During 2009 our teams will be focused on the following activities: first, continuing our double-digit revenue growth; second, completing enrollment in the TIGER-2 CF trial for denufosol; third enrolling in our pivotal Prolacria trial for dry eye; and fourth pursuing a new indication for AzaSite for blepharitis by initiating a Phase 2 program in the next few months. This is an exciting opportunity that Kim will be elaborating on shortly.

At this time I would now like to move into our clinical pipeline update starting with denufosol.

The CF program is going very well. We are pleased with the progress the clinical sites have been making with the enrollment of patients into TIGER-2, our second Phase # trial with denufosol for the treatment of CF lung disease. At the end of February we had enrolled 229 patients, which is more than 50% of our targeted total of 450 patients. We have had an excellent retention rate in this 48-week trial and TIGER-2 will be one of the largest CF trials that is being conducted today, with patients enrolled from the United States, Canada, and Australia and new sites coming on board in these countries as well as New Zealand. We are very grateful for the dedicated efforts of these sites, the research coordinators, and investigators who are working with their patients and with our team to participate in TIGER-2. And, we are pleased that we are on track to complete enrollment in this pivotal trial this year.

Also, there are several patients who have recently completed TIGER-2 and all of those patients have now elected to participate in a separate protocol, or follow on study, which is an open label denufosol only 48-week trial that we are offering to all patients who have successfully completed ITGER-2.

It is important to note that this trial does not require foreign ADA submission, but we feel it offers two advantages to our overall development program: First, we expect its open label trial to encourage patient enrollment in TIGER-2 which is a placebo controlled 48-week trial. Second, it will give us an opportunity to collect safety and lung function data for two years of continuous denufosol treatment.

Following our June announcement of positive top line results from TIGER-1 and the detailed data presentation at the NACF conference in October, our team has been continuing to work with key opinion leaders to further present and publish additional TIGER-1 data to educate a broad group of US and International physicians interested in denufosol. The TIGER-1 data will be presented at the ATS meeting or the American Thoracic Society meeting in San Diego this May and we have also submitted several abstracts for the European CF Society conference in France this June. We are also working closely with the PI of TIGER-1, Dr. Frank [Ocurso] in preparing a manuscript of the TIGER-1 data for top peer review journals.

In addition, we are pleased with the progress we are continuing to make in our partnering discussions for the development and commercialization of denufosol out side of North America. We are continuing substantial conversations with potential partners that importantly we believe have the expertise, the infrastructure, and the financial resources to maximize the potential value of denufosol, as well as addressing strong commitment to the CF community in general. We will be providing more details when our partnership has been executed.

Now we will move onto an update of our ophthalmic clinical pipeline. Ben Yerxa and Kim Brazzell who are jointly responsible for driving the strategy and execution of our ophthalmic R&D programs will give you an update on the value potential associated with these programs. Ben will update you on Prolacria in glaucoma and Kim will provide an overview on our new clinical program for AzaSite for the treatment of blepharitis.

I will not turn the call over to Ben.

Ben Yerxa Ph.D.

Thank you, Christy. This morning I will address our rational and plans for conducting an additional Phase 3 trial with Prolacria for the treatment of dry eye as announced in January. Our ultimate goal remains the same, to provide a new, safe and efficacious treatment for patients suffering from dry eye disease for which there is still a substantial under served patient population. The dry eye market is large and growing with only on prescription product on the market. Given the financial opportunity in this market, we believe that the cost of this trial is reasonable and represents a good investment.

As we have discussed before there is no formal guidance by the FDA on the design of clinical trials for dry eye. To find clinical endpoints is difficult, because the objective measures are quite variable as they require a subjective assessment by the investigator and the symptoms of dry eye are diverse and do not necessarily correlate with the signs of the disease at any given time. We are trying to reduce the variability in our trial to a rigorous, continuous, training program for the investigators. Through out our development of Prolacria we have worked to identify clinical trial endpoints that are a representative indication of efficacy for Prolacria and which the FDA agrees are clinically meaningful.

When we look at the totality of data from our environmental trial we see that Prolacria consistently shows a reduction in corneal staining scores, particularly in the central region of the cornea. As a result we set out to study and validate a new endpoint. We analyzed data from our previous environmental clinical trial and worked with the FDA and the dry eye community to demonstrate that reduction in central corneal staining scores is correlated with visual outcomes in dry eye symptom. Through the special protocol assessment process we were able to reach an agreement with the FDA that a trial design using an endpoint of reduction of central cornea staining scores to zero from a baseline score of 3 is clinically relevant and acceptable in additional pivotal trials.

We have summarized the key historical clinical data and post talk analysis related to this endpoint in a PowerPoint presentation that is posted on our website in the Investor Relations section.

We are conducting a placebo controlled environmental clinical trial in approximately 450 subjects with dry eye. We have a foreseen stain score of 3 in the central region of the cornea as baseline using the NEI scale of 0-3. Subject to [inaudible] to Prolacria or placebo administered as eye drops four times daily for six weeks at approximately 60 US and Canadian sites. The agreed upon primary efficacy endpoint is a responder analysis that is a proportion of subjects receiving Prolacria that achieved clearing of fluorescein staining of the central region of the study year with a score of zero on the eye scale at the six-week trial endpoint compared to those receiving placebo.

We initiated the trial in January of this year and have been making good progress. At the end of February there were approximately 47 patients enrolled and randomized in the trial in more than 2/3 of the targeted 60 clinical sites able to enroll patients. It is still too early to project when enrollment in this trial will be complete, but we plan to provide quarterly enrollment updates that will help guide this timeframe.

As a reminder, if Prolacria is approved, our partner Allergan is then responsible for all commercial costs including manufacturing, distribution, managed care, and marketing. We would earn an attractive undisclosed royalty rate on net revenues that would essentially go straight to our bottom line with our only expense being allocating a portion of the cost of our existing US sales force.

Allergan is also responsible for all other development and regulatory activities outside of the US except in Asia where we are partnered with Santen Pharmaceutical. Santen filed an application for marketing approval of the molecule, which it refers to ad DE-089, with Japanese regulators last spring and they have stated they expect to launch this potential product in its fiscal year 2010 which is between April 2010 and March 2011.

To summarize, we are pleased to have made progress in our dry eye program by identifying a passable word to potential US regulatory approval of Prolacria. We remain committed to providing physicians and their patients with an additional treatment option for dry eye disease.

I will conclude my remarks today with a brief update on our glaucoma program. We currently have two separate compounds in the clinic. We are conducting Phase 1 proof of concept clinical trials, testing each compound in glaucoma patients to evaluate safety, tolerability, and intraocular pressure lowering effects. We expect to have results from both the these trials this year.,

I would now like to turn the call over to Kim.

Kim Brazzell Ph.D

Thank you, Ben. This morning I will address our rationale and plans for pursuing a potential indication for AzaSite for the treatment of blepharitis.

As you may be aware blepharitis is a common ocular condition characterized by inflammation of the eye lids and associated signs and symptoms which are often secondary to infection. The disease can involve significant patient discomfort and often leads to associated ocular surface inflammation, chronic ocular irritation and unstable tear film and damage to the ocular surface.

Following the launch of AzaSite we received anecdotal feedback from a number of eye care specialists that AzaSite showed promising results in the management of blepharitis. Last year we conducted a series of Phase 4 trials to evaluate the safety and efficacy of AzaSite in patients with blepharitis. All of the trials were relatively small and were not placebo controlled. The results indicted significant treatment benefit.

This Phase 4 data and other research related to AzaSite is starting to be published and presented in various scientific forums This spring there will be more than 10 posters presented at the annual meetings at RVO and the American Society of Cataract and Refractive Surgery.

The positive results with AzaSite in the treatment of blepharitis are likely the result of the products unique combination of anti-infective and anti-inflammatory properties, as well as propensity for Azithromycin to achieve very high concentrations in ocular tissue, including the eye lids and conjunctiva.

Our research indicates that blepharitis is an under diagnosed and under treated condition representing an attractive financial opportunity for efficacious treatment. According to our own market research and input from eye care specialists’ blepharitis is a very common disease which may be as prevalent as dry eye. There are limited treatments options and there are no prescription pharmaceutical products that are indicated for the treatment of this disease.

In order to determine how to best leverage this opportunity we sought input from numerous medical experts and evaluated the Phase 4 data along with market research on the prevalence and awareness of the disease and the potential commercial opportunity. In addition, we had preliminary discussions with the FDA on potential regulatory pathways. Based on the information we have gathered we have decided to pursue a Phase 2 program towards a potential blepharitis indication. Our plan is to initiate two Phase 2 placebo controlled trials in the second quarter of this year and expect to have data available in early 2010 in order to determine the best course forward. We will provide more detail on the design of these trials as we initiate them.

In summary, we believe that obtaining indication for blepharitis could offer significant upside potential for AzaSite which justifies the near-term investment.

I will now turn the call over to Tom for the financial review.

Tom Staab

Thank you, Kim and good morning everyone. I am pleased to provide you with an over view of our fourth quarter 2008 financial results as well as to provide some additional detail regarding our 2009 operating guidance. As you have heard, we have accomplished a number of significant development and commercial milestones and expect to have an eventful 2009.

I would like to take a moment to touch on some financial highlights which I think are important when evaluating our company, as well as other companies, in today’s challenging economic environment. Those highlights are:

We had significant revenue growth. Inspire continues to have double-digit revenue growth year-over- year. Specifically we increased revenue 36% in the fourth quarter and 45% for the full year 2008 as compared to 2007. We closed 2008 within our projected revenue range and finished the year with strong fourth quarter AzaSite revenue. Looking forward we once again expect aggregate double-digit revenue growth in 2009.

We have tight control over operating expenses. We accomplished a great deal in 2008 and were able to remain comfortably within our operating expense guidance. We will continue this mindset in 2009 with an even sharper and restricted focus on resourcing AzaSite and Elestat commercial activities and our late stage development programs and maintain a strong balance sheet and conserve cash.

We closed 2008 with over a years worth of cash and investments on hand without giving consideration to any cash inflows from business development initiatives or capital raising activities.

We have modified our operations to limit development activities to those late-stage programs that can result in an NDA submission in the next three years in the programs that can provide t near-term and significant stockholder return. This focus allows us to fund our operations with existing cash in investments through the first quarter of 2010 and eliminates development expenses that total approximately $8 million in 2008.

We have been prudent in our historical use of cash, but with the cost of capital increasing by more than 50% for smaller market cap companies in our industry, we have taken stronger steps to extend our future liquidity through additional cost cutting measures.

For the quarter ended December 31. 2008 we incurred a net loss of $9.7 million or roughly half of the $18.1 million net loss for the fourth quarter of 2007. When comparing 2008 results to our fourth quarter 2007 results I will remind you that Inspire recorded a non-cash deemed dividend of $8.3 million in the fourth quarter of 2007 associated with the exchange of all outstanding shares of Series A preferred stock issued to our [inaudible]. This non-cash dividend did not reoccur in 2008.

When breaking down revenue into its individual performance AzaSite had strong quarterly performance with revenues increasing 54% and prescriptions increasing 29% when compared to third quarter 2008 levels.

Let me provide you a little more color as to AzaSite’s success in the fourth quarter.

Part of the large increase in the fourth quarter 2008 revenue is associated with increased prescription demand, which we expect to continue. In addition, we entered into an agreement with CVS Caremark whereby CVS began stocking AzaSite in each of its approximately 6,400 member pharmacies. This agreement resulted in increased inventory amounts and explains the difference between prescription growth and revenue growth for the quarter. More importantly, however, this agreement enhances patient access to AzaSite and thereby allows patients to fill their AzaSite prescriptions more easily. We believe this additional access will ultimately translate into future prescription growth over time.

During the fourth quarter of 2008 we recorded $7.3 million in AzaSite revenue as compared to $2 million in the fourth quarter of 2007. Based upon IMS data for the week ending December 26, 2008 approximately 300,000 AzaSite prescriptions were filled last year. In addition we have successfully increased our market share from approximately 1% to 7% in eye care specialists who are ophthalmologists and optometrists representing our primary call audience.

From a managed care perspective, as of December 31, 2008 we are pleased to report that AzaSite has reimbursed without restrictions on over 70% of all commercial Medicare Part D and fee-for-service Medicaid lives. We will continue our market initiatives in 2009 and will pursue cost advantageous opportunities to further enhance AzaSite reimbursement.

In summary, we are pleased with AzaSite’s recent success and remain excited about AzaSite’s commercial potential.

Transitioning to a discussion of co-promotion revenue, our aggregate co-promotion revenue remained relatively consistent whereby we reported $11.6 million in the fourth quarter of 2008 as compared to $11.9 million in the fourth quarter of 2007. We recorded $8.6 million of co-promotion revenue from sales of Restasis and $3 million of co-promotion from sales of Elestat in the fourth quarter of 2008.

We were pleased with Restasis revenue growth with both prescriptions and revenue continuing to grow quarter-over-quarter. Restasis is a significant revenue stream for us representing approximately 45% of our total fourth quarter revenue and full year 2008 revenue. Based upon Allergan’s previously issued 2009 Restasis revenue guidance of $490 to $510 million, Restasis will remain a significant revenue stream for Inspire in 2009.

At the end of the fourth quarter Allergan and Inspire jointly agreed that Inspire sales representatives would no longer detail Restasis. This change enables us to focus our commercial resources on AzaSite and Elestat without impacting the royalty rate we currently receive from sales of Restasis.

Moving on, Elestat remains a great alternative for allergic conjunctivitis sufferers and we are hopeful our enhanced focus on this brand will result in increased prescriptions and revenues. Recently we have reported that several ANDA filings for a generic version of epinastine were filed with the FDA. I would like to spend a moment discussing this situation in more detail.

Upon completing an evaluation of the situation Boehringer Ingelheim, the owner of the Elestat patent decided not to pursue or file suit against the companies currently seeking approval of a generic epinastine product. Based upon BI’s decision, we expect that a generic product will most likely be available in the next one to two years and at that point our Elestat revenue would be significantly reduced. Based upon historical timelines and our understanding of the FDA review cycle, we do not expect a generic epinastine product to launch in 2009. Until a generic epinastine is launched, we will continue to vigorously co-promote Elestat.

Now let move down the income statement for a discussion of our operating expenses.

In the fourth quarter of 2008 operating expenses decreased to $27.8 million as compared to $32.6 million incurred in the fourth quarter of 2007. This decrease is largely associated with a 30% decrease in R&D expenses and a 13% decrease in sales and marketing costs, somewhat offset by a doubling of AzaSite cost of goods sold corresponding with the increase in AzaSite revenue.

Drilling down further the decrease in spending is somewhat project timing related, but also reflects our intent to reduce our overall cost structure through program prioritization. When I discuss our 2009 shortly you will note a general reduction in our commercial costs by at least 8% and the potential of a modest increase in R&D costs associated with funding our two Phase 3 programs, Prolacria and denufosol, and our Phase 2 AzaSite blepharitis program.

We expect 2009 to be a continuation of 2008 whereby we are striking an appropriate balance between aggressively advancing our commercial and development programs while conserving our cash in what is becoming an increasingly challenging economic and regulatory environment.

Moving on to our balance sheet, we ended this year with $73 million in cash and investments and working capital of approximately $53 million. Specifically, our cash and investment balances decreased approximately $6 million in the fourth quarter and approximately $67 million from December 31, 2007.

We implemented cash conservation measures early in 2008, which has been successful in decreasing our cash burn through out 2008 and specifically in the fourth quarter. Our cash burn for the fourth quarter represented a 60% to 80% decrease from the preceding 2008 quarters. These conservation measures, accompanied by our focus on late-stage programs, and the decision to reduce head count and operations associated with early stage programs are expected to provide us liquidity through the first quarter of 2010.

Once again, this liquidity timeline is without consideration given to any business development or other capital raising transactions, which are likely to occur in 2009.

We are fortunate to enter 2009 with a balance sheet, financial position, and product pipeline stronger than the majority of our peers, which puts us at an advantage to attract capital from a number of parties wishing to invest in Inspire either from a pure capital investment perspective or from a business development perspective linked to our denufosol and glaucoma programs.

Now I would like to provide some additional detail on our 2009 financial outlook as outlined in the press release issued earlier this morning.

Our 2009 results will be highly dependant on revenues derived from AzaSite and Elestat as well as the royalties received from sales of Restasis®. Based upon recent AzaSite, Elestat, and Restasis trends, and considering the current economic climate and its potential negative impact on product revenue, we expect aggregate revenue to be in the range of $80 to $90 million and aggregate operating expense to be in the range of $120 to $135 million. Our operating expenses take into account the funding of our three late stage programs, at least an 8% reduction in our commercial costs as compared to 2008 and the Q1 2009 restructuring charge associated with the decision to no longer fund early stage programs and related operations.

This outlook does not incorporate any business development or capital raising activities which could occur in 2009.

Breaking down our operating expense guidance into the various components we expect operating expenses to be in the following ranges: cost of sales $8 to $13 million; R&D expenses $50 to $60 million; sales and marketing expenses $45 to $50 million; and G&A expense $14 to $18 million.

In addition, we estimate that we will incur approximately $5 million of non-cash equity based compensation which is factored into the various expense categories and is based upon the company’s current stock price and stock based compensation strategy.

In addition, we expect our cash utilization for 2009 to be in the range of $60 to $65 million which will include approximately $18 million in principle repayment on our outstanding debt.

In addition, although we do not give quarterly guidance, I would like to alert you to the fact that we expect to defer all Elestat revenue in the first quarter of 2009 similar to the first quarter of 2008.

In addition, we do not expect to recognize all of 2009 deferred Elestat revenue until the fourth quarter of 2009, given the contractual 2009 minimum, and our 2009 budgeted Elestat sales.

I hope that my remarks give you a representative picture of the fourth quarter of 2008 and a view into what we believe to be exciting opportunities for Inspire in the next 12 months and continuing for the next several years.

Now Christy, we would like to open the call to questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Liana Moussatos of Wedbush Morgan.

Liana Moussatos - Wedbush Morgan

Could you repeat the quarter-over-quarter AzaSite sales and prescription growth and then what was the stock based compensation amount? Also, how many potential partners are in discussion for x North America commercialization of denufosol and then finally could you go into a little more detail on what we can expect from Restasis and Elestat longer-term from like 2010 on?

Tom Staab

As far as AzaSite performance revenues increased 54% and prescriptions increased 29% when you compare them to Q3 levels. Then I did not get all of your questions.

Liana Moussatos - Wedbush Morgan

What was the fourth quarter stock based compensation amount?

Tom Staab

I don’t have that number off the top of my head, but total stock based comp for 2008 was between $4 and $5 million. It is roughly the same between the quarters.

Liana Moussatos - Wedbush Morgan

Okay and how many potential partners are you currently in discussion with for the commercialization of denufosol outside of North America?

Tom Staab

I would prefer not to comment about the number of partners. I can tell you that we are pleased with the way things have gone and that we hope to update everybody on partnering discussions in the future.

Liana Moussatos - Wedbush Morgan

Is there more than one?

Tom Staab

I can’t comment on that, I’m sorry.

Liana Moussatos - Wedbush Morgan

Okay and then my last question is can you kind of describe to us what you would expect from Restasis and Elestat especially from 2010 on? Do we just take Elestat out of our models?

Tom Staab

Well what I can tell you and we have only provided 2009 guidance because obviously there is lot of information that could come down the pike in 2009, so we’d like to limit guidance that we feel most comfortable and so we just limit it to 2009.

I can tell you from an Elestat prospective we have spent a considerable amount of time looking at that situation and the best guidance I can give you is that we think that it’s unlikely that a generic epinastine product will be launched in 2009. I looked at the timeline; the most likely timeline is one to two years from now.

Liana Moussatos - Wedbush Morgan

Would you consider selling Elestat as a generic?

Christy Shaffer Ph.D.

We don’t have the rights to do so.


Your next question comes from Jon Stephenson of Summer Street Research Partners.

Jon Stephenson - Summer Street Research Partners

Did you imply in the comments that not all the centers for the TIGER-2 had actually started enrolling?

Christy Shaffer Ph.D.

That is correct.

Jon Stephenson - Summer Street Research Partners

And how many centers still need to enroll? I mean still need to get signed up?

Christy Shaffer Ph.D.

I think there are at least 20 or 30. We had the majority up and running in the United States and in Canada and we just had an investigator meeting in Australia and we expect to be getting New Zealand on board as well. We are hoping that in the next month or so we will begin to see, certainly, an increase in enrollment from places outside the United States.

Jon Stephenson - Summer Street Research Partners

Do you think that will actually lead to an acceleration, a continuation, or in terms of enrollment or what are you expecting?

Christy Shaffer Ph.D.

Well we have an internal goal for when we want to complete the study. All we are willing to say publicly is that we certainly feel we’re on track to have the study enrolled this year. We’re certainly hoping that Australia will contribute a significant number of patients to the remainder that need to be enrolled, but we are just giving you quarterly updates is the best way we can do it, given it is very difficult to project accurately.

Jon Stephenson - Summer Street Research Partners

All right. On the licensing negotiations, how has the current environment impacted the negotiations?

Tom Staab

Well I think that as you look at the environment on any capital rising or licensing perspective obviously the economic environment could potentially have a radical impact on and a negative impact on that. I can tell you that when there are a number of interested parties in the molecule than that off sets some of that negative impact, but the general economy does have a bearing on licensing conservations.


Your next question comes from David Steinberg of Deutsche Bank.

David Steinberg -Deutsche Bank

With regard to the new indication of blepharitis for AzaSite, I think you had said, previously, that there were no other drugs approved for this indication. Is there any off label use for AzaSite and since you are developing with Insight Vision, does you contractual obligations to them differ from the current product? And if other companies have tried to develop drugs with this indication, what are some of the pitfalls that have occurred that led them to not get approval?

Christy Shaffer Ph.D.

Let me just address one of those questions which is around the contractual obligation to Insight Vision, there is no changes to any contractual obligations regarding going after this new indication. Obviously Insight Vision would enjoy any royalties that we would be gaining by increasing sales of the product.

Tom would you address the other questions regarding the other companies that have pursued blepharitis, what are the challenges etc…?

Tom Staab

We have not been aware of other companies actively pursuing blepharitis indication at this time. I think that may be one of the pitfalls is developing a road map to approval, but we have had some preliminary discussions with the FDA.

In regards to your first question there has been some use of the product in blepharitis and we’ve gotten some good feedback. We haven’t been able to quantitate how much and we won’t be giving that guidance, but because it is a large market and really, I think, an unmet need in this area, we think it’s prudent to move forward and going through a Phase 2 program will put us in a position to really be able to sit down with the agency and lay out a development program once we get the results from those trials.

Christy Shaffer Ph.D.

I would also encourage you to take a look at the RVO abstracts when they come out, because we have about ten abstracts at various meetings coming up. Some of those are focused on, for example, emphasizing the new properties that we’ve uncovered the anti-inflammatory effect and its affect on lipids etc…

David Steinberg -Deutsche Bank

Okay, could you just repeat the patient population you think that has the indications for what the peak sales in dollars might be? Secondly, as far as your sales force goes now that you’re moving some reps off of Restasis onto Elestat, do you still think it’s that the reps are right sized for you revenue opportunities? Could you just remind us how many sales reps you have right now?

Tom Staab

We have 92 sales reps in the field plus support in the management area and we think that’s pretty optimal for promoting both AzaSite and Elestat. In terms of the market size we’re still working. There hasn’t been a lot of work done on the number of patients with blepharitis and we’ve been doing some work on that. Actually there will be a publication on the Ocular Surgeons based on some of that work, I think in April. Based on what we’ve learned from physicians and some of our research, we see it’s quite a large number of patients, it could be as large as those that have dry eye, but there is still a lot of work to do on understanding the prevalence of this disease and we’re actively involved in that.


Your next question comes from Ian Sanderson of Cowen & Co.

Ian Sanderson - Cowen & Co.

Tom, can you talk a little bit about the net cash covenants that are included in the debt agreement and given your anticipated burn for this year whether those might be triggered? Secondly, what are the most likely business development sources of cash coming up this year? Finally, you may have referenced this in the discussion, but was there AzaSite trade stocking for the CVS agreement in Q4?

Tom Staab

In regards to the debt question there is a cash covenant and the high level overview is we will not trip that covenant in 2009 and that should be reinforced by a clean opinion from our public accounting firm, because if we would in fact trip that then that would cause a going concern opinion. Hopefully that addresses that question.

From a business development perspective, currently the most effort is on out licensing the North American rights for denufosol and we spent a considerable amount of time over the last six months or so and like I said, that is to out license X North American rights to a potential partner and maximize the potential of that asset.

Then remind me again of your last question?

Ian Sanderson - Cowen & Co.

Just on the AzaSite sales in Q4, did that include some trade inventory stocking related to the CVS agreement and therefore might we see some destocking in the first half of 2009?

Tom Staab

What my comments were to infer was because obviously we had a pretty decent increase in the retail pharmacies with that agreement. So you will see an increase. I will remind you that as you compare Q2, Q3 and Q4 obviously inventory values went up from Q3 to Q4 not only on the wholesale but also the retail levels. The retail primarily associated with the CVS stocking, however they were at a low level in Q3 and so really what you see is just keeping up with the increased prescriptions on the wholesale level, getting it back to essentially where we are in Q2.

So, I really don’t think there is going to be any type of inventory change as you get to Q1.

Christy Shaffer Ph.D.

I would like to make one other comment around business development activities and that is that we do have interest in our glaucoma and program and we may explore X North American partners for glaucoma after we have the Phase 1 proof of concept study results from both of these molecules that Kim mentioned.

As you probably know, the prostaglandin products are going off patent in a couple of years and so there is interest in a novel mechanism of action product like the ones that we have for glaucoma.

Ian Sanderson - Cowen & Co.

Would that likely be a package deal that you license both or one or the other?

Christy Shaffer Ph.D.

I think we would be focused on an overall glaucoma program, because we actually have two molecules in the clinic and we have a whole series of back up molecules. Both of them are focused on an overall mechanism of action to affect the [trevecular] mesh work.


Your next question comes from Eric Varma of Leerink Swann & Company.

Eric Varma of Leerink Swann & Company

I have two questions on Prolacria and then two questions on denufosol so I will start out with the Prolacria question. I was wondering if you could remind us how the situation compares between Prolacria and Restasis and if you could give us an update on the efficacy development of Prolacria and its timeline.

Ben Yerxa Ph.D.

In terms of patents for Prolacria we have both composition matter and method of use patents that go until 2017. We will also be exploring an extension based on time of use and development. In regards to Restasis maybe Tom can talk about that.

Christy Shaffer Ph.D.

I just want to clarify one question. You had a question on the patent situation on Prolacria versus Restasis, wasn’t that the question?

Eric Varma of Leerink Swann & Company

Yes I just wanted you to compare the path life to give us how long Restasis has composition of matter of patent licensure?

Christy Shaffer Ph.D.

Okay, there is not a composition of matter patent for Restasis, unlike Prolacria and there is actually a series of patents for Prolacria including C2Y [inaudible] for dry eye, so there is some broad patents on Prolacria.

In the case of Restasis we have a method of use patent that will potentially expire, I think later in 2009, however we also have a very nice formulation patent which goes out until 2014 and also recently Restasis has been placed in the orange book, just to make you aware of that. So their patents are quite different from the Prolacria patents which are a combination of patents, but certainly composition of matter and we certainly feel that we will get a couple years of patent restoration for Prolacria.

So again, it has a long half-life with a very nice IP coverage for Prolacria and the same goes for denufosol as well.

Eric Varma of Leerink Swann & Company

Then can you remind us on the X US development for Prolacria or give us an update and maybe a time line there?

Tom Staab

Yes, as I mentioned earlier for Santen, they have filed their Japanese equivalent of an NDA and they have a fairly long review process in Japan so they have stated publicly that they expect to launch diquafosol in Japan I their fiscal year 2010, which is somewhere between April 2010 and March 2011.

Eric Varma of Leerink Swann & Company

Could you remind us of the geographical footprint of enrollment for TIGER-1 Versus TIGER-2?

Then Christine, in your opening statement you said that the X US denufosol partner it might be someone with a commitment to the CF community, so I was wondering if that might be someone who has an existing product in CF.

Christy Shaffer Ph.D.

In terms of geography for TIGER-1 that was largely a US trial. We did enroll several Canadian sites, but they did not enroll a large number of patients, so I would say 90% of the patients in TIGER-1 were in fact US patient.

The contract on TIGER-2, which we certainly have a large majority of US sites and of the 229 patients enrolled today, all but 17 are in the US, however that balance will shift a little bit with Australia getting on board and we would expect a lot more Canadian patients because the PI of TIGER-2 is actually Dr. Felix Ratjen who is at Sick Children’s Hospital in Toronto.

In terms of my comment about talking to X North American partners and sort of the color of their commitment to cystic fibrosis, they are companies that have committed to the space that have products existing and their companies have committed to the space because of the strong interest in cystic fibrosis, but they may not have a product on the market at this time.


Your next question is a follow up from Jon Stephenson of Summer Street Research Partners.

Jon Stephenson - Summer Street Research Partners

On the cost side, in terms of the reduction of the head count of the 20 personnel, I seem to remember you saying it was about $8 million in expenses for 2008 and I was just curious if you could quantify the amount of expense that is in the ’09 budget pertaining to those employees in terms of Q1 expenses as well as any severance and other charges that are in the ’09 budget pertaining to those people?

Kim Brazzell Ph.D

What I said is that between the head count and the early stage development operations e had we spent about $8 million in ’08. As we look to Q9 we’ll book a restructuring charge associated with that in the first quarter and we’ll be able to give you a better idea there. So you won’t see an entire benefit in’09 because of that restructuring charge and sort of the phase out. So, you start seeing the complete benefit in 2010. You’ll see some of it in 2009.

Jon Stephenson - Summer Street Research Partners

Okay and then in terms of the R&D line could you kind of give us a little bit of details in terms of the key factors driving the $10 million ranges that is obviously a larger range than is given for some of the other lines.

Tom Staab

Yes, I think that obviously when you are talking about $10 million within a range of $50 or $60 it’s not a huge range, but as we go through things it’s largely based on patient enrollment both on diquafosol and denufosol as well as potentially any other spending that we may do on the glaucoma program.

Jon Stephenson - Summer Street Research Partners

So basically if you’re successful in enrolling patients the cost goes up if it’s lower than run rate?

Tom Staab

Right and the other thing I’ll mention also is, one of the things we put in our operating expense is cost of sales, so some variable in there depending on how successful we are with AzaSite in 2009 as well, that will drive your cost of goods sold.

Jon Stephenson - Summer Street Research Partners

Okay and my last question, you mentioned the handful of patients that actually completed the TIGER-2 trial. Can you quantify the number of patients who completed the blinded portion of the trial?

Christy Shaffer Ph.D.

It’s a very small number. It’s a handful of patients, but I all of them, so far, have opted to go into this open label protocol. We will expect a lot more in the coming months.


There are no further questions at this time. I will now turn the conference back over to Dr. Christy Shaffer.

Christy Shaffer Ph.D.

Thank you very much for your continued interest in the company. We certainly see many opportunities for future value creation, including the four potential product approvals and launches that we highlighted this morning and we look forward to updating all of you on our progress through out the year. Have a great week. Thank you.


This concludes today’s conference call.

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