MiddleBrook Pharmaceuticals, Inc. Q4 2008 Earnings Call Transcript

MiddleBrook Pharmaceuticals, Inc. (MBRK) Q4 2008 Earnings Call Transcript March 5, 2009 9:00 AM ET

Executives

Faith Pomeroy-Ward – Executive Director, IR & Corporate Communications

John Thievon – President and CEO

Dave Becker – EVP and CFO

Analysts

Greg Wade – Wedbush Morgan

Operator

Good morning. My name is Leslie, and I will be your conference operator today. I would like to welcome everyone to the MiddleBrook 2008 fourth quarter and full year results conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator instructions)

Thank you. Ms. Faith Pomeroy-Ward. You may begin your conference.

Faith Pomeroy-Ward

Thank you, Leslie, and good morning everyone. Before we begin our call, I would like to remind you that some of the statements made during the call may be considered forward-looking statements. The company's SEC filings including the 8-K filed this morning, identifies certain factors that could cause the company's actual results to differ materially from those projected in any forward-looking statements made today. The company's SEC filings as well as our press release detailing the financial and operational results discussed on today’s call are available on our Web site at middlebrookpharma.com.

I am joined on today's call by President and CEO, John Thievon; and our Executive Vice President and CFO, Dave Becker. We expect today's call to last no more than 30 minutes, including Q&A. I will now turn the call over to John.

John Thievon

Thank you, Faith and good morning everyone. Welcome to our call. 2008 was a pivotal year for MiddleBrook beginning with the FDA approval of MOXATAG, the first and only FDA-approved once-daily amoxicillin. As many of you know, shortly after MOXATAG’s approval the company initiated a strategic review process to determine the best method to commercialize MOXATAG. Dave and I were contacted during that process by Equity Group Investments. We work together with EGI on a $100 million equity financing proposal to bring on the necessary commercial expertise at MiddleBrook and successfully launch MOXATAG. Our proposal was accepted and culminated in $100 million private offering, which closed September 4, 2008. At that time, we set aggressive goals to enable us to launch MOXATAG is the first half of 2009.

One of the most attractive things about the MiddleBrook opportunity was its proprietary platform technology PULSYS, developed by MiddleBrook’s talented scientific team. When Dave and I joined the company, the science team immediately began working diligently to ensure we successfully completed manufacturing validation, met quality assurance criteria for product release, made the appropriate regulatory filings, and provided clinical data as necessary to create clear, scientifically based, and compelling promotional materials.

Since September, we have built the commercial side of our operation, hiring key sales, marketing, trade, and managed care executives with a history of success in bringing over 300 people into the sales organization. Our field sales force is comprised of about 30 district managers and approximately 271 sales reps. This will allow us to detail physicians responsible for just over 40% of the oral solid respiratory antibiotic market. Most of our district managers joined the company in December and they all have a strong background in the pharmaceutical industry. These district managers in turn hired our 271 sales reps. Our sales reps all bring a history of sales success to MiddleBrook and more than half have direct experience in pharmaceutical sales.

We completed manufacturing validation for MOXATAG in December, and we began shipping products to customers in early January. Since then, we successfully secured national retail distribution for MOXATAG across the food, drug and mass channels, including independent and chain retailers. We have also made progress in securing third tier formulary coverage in managed care, and we expect to continue to expand distribution and increased managed care coverage over the next several months.

About half of our sales reps completed training in February. These reps are already in the field detailing healthcare professionals about the benefits of our Keflex 750 mg product and educating pharmacists about MOXATAG and its availability. The balance of the sales reps are finishing their training now and the entire field sales force will have completed our comprehensive training program next week.

Launch-appropriate inventory levels of MOXATAG product and MOXATAG patient starter samples are now at our third-party warehouse. Once we launch MOXATAG, our 271 sales reps will detail both MOXATAG and Keflex 750 and they will have patient starter samples of both products. Our field force detailing effort will be supported by a nationwide marketing campaign targeted at healthcare professionals and trade and the campaign will reach 90% of all primary care physicians at least once a month during 2009.

In October, we announced a significant development regarding MOXATAG. Three MOXATAG patents were listed in FDA's Orange Book on October 24, 2008, under Public Law 110-379. This means that any generic filer would have to certify against our Orange Book listed patents for MOXATAG. This essentially prevents a competitor from launching at-risk. If we were to receive a paragraph IV certification from an ANDA sponsor and we determine that we had grounds to bring suit against them for patent infringement, our suit would trigger up to a 30 month stay on their ability to bring the competing product to market.

As you may know, we have multiple MOXATAG-related patents issued, with lead patents enforced through October 2020. We believe our pipeline product candidates, Keflex PULSYS and our amoxicillin pediatric sprinkle if and when approved by the FDA, would also benefit from this legislation.

An analysis of IMS health data for the past several years reveals that approximately 60% of the prescriptions for our defined antibiotic markets are filled between October and March with the remaining 40% filled April through September. We believe that seasonality combined with increased product awareness resulting from our field sales force detailing effort will result in over half of our 2009 MOXATAG prescription of volumes occurring in the fourth quarter.

Now that our sales force is fully hired and ready to begin calling on healthcare professionals, we believe that MiddleBrook becomes an attractive candidate for other pharmaceutical companies that have a need for product detailing, but do not have the sales force or capacity to do so on their own. I will tell you that we have a laser focus on the MOXATAG launch, so while we will continue to evaluate inward bound co-promotion opportunities we believe this is more of a late 2009 proposition at the earliest.

That summarizes our key accomplishments to date. I believe we are in an excellent position to launch MOXATAG to healthcare professionals nationwide in less than two weeks. We are pleased with our distribution for MOXATAG and just like managed care it will improve over time. And keep in mind that MOXATAG can be on the pharmacy shelves within 24 hours anywhere in the country.

With that I will now turn the call over to Dave for review of our financial results and our business outlook.

Dave Becker

Thanks, John, and good morning to everyone. Net sales of our Keflex products totaled $1.7 million for the fourth quarter, a $1.2 million decrease or a 42% decline when compared to the 2007 fourth quarter results. During 2007, the company reduced the size of its contract sales force from 75 to 30 representatives. With respect to prescription data for the 2008 fourth quarter, total prescriptions were about 58,000 compared to 87,000 for the same quarter last year. This is a 33% decline. For the full year 2008, our total net revenues were $8.8 million compared to $10.5 million during 2007. Both the year over year and the quarter over quarter revenue declines are primarily driven by a reduction in the size of the contract sales force, which also reduced expenses.

Gross margin on sales was $1.4 million or 82.6% of net sales for the 2008 fourth quarter. During the prior year quarter, the gross margin was $2.1 million or 75.1% of net sales as a result of a $300,000 charge for obsolete inventory and labeling changes that was expensed through cost of sales. Gross margin for 2008 totaled $7.2 million or 81.5% of net sales. This compares to a gross margin of $7.9 million or 75.4% of net revenues for 2007. The net reduction in gross margin of 700,000 was more than offset by savings resulting from the reduction in the size of the contract sales force from 75 to 30 representatives. At approximately $190,000 per representative, that's an annualized savings of $8.5 million versus the prior year.

Research and development expenses were $4.8 million for the 2008 fourth quarter compared to $3.5 million for the same quarter last year. The increase in expense is due to an approximate $2.6 million non-cash charge related to our unused facility space located in Maryland. During the quarter, we made the determination that potential sublease income would be less than future lease payments required under the agreements. As a result, we have written off the future net lease expense. This facility space is currently being marketed by a commercial real estate broker to assist us with subleasing the space. This non-cash expense more than offset the general reductions in R&D expenses that were realized during the quarter, as a result of the company's actions to scale back headcount and project activity due to budgetary constraints.

Selling, general and administrative expenses for the 2008 fourth quarter was $8.7 million versus $5.6 million in the prior year quarter. The $3.1 million increase is driven by the hiring of our district sales managers, significant travel expense related to interviewing activities for our 271 person sales force, an $800,000 increase in stock-based compensation, and marketing preparation costs associated with the upcoming MOXATAG launch.

These increases were partially offset by savings achieved through a cancellation of the contract sales force in the 2008 fourth quarter and other cost reduction efforts that were put in place last year.

Net interest income for the 2008 fourth quarter totaled $337,000 versus approximately $62,000 during the same quarter last year. The increase results from the investment of the September 4, 2008 financing into short-term interest bearing securities. With regard to other expenses, the 2007 fourth quarter included a $2.1 million expense related to the fair value of the Deerfield warrant liability which was redeemed in connection with a $100 million EGI financing transaction and a $224,000 expense for the early extinguishment of debt that was paid off during November 2007. There were no similar expenses during the fourth quarter of 2008.

The final result is a net loss for the 2008 fourth quarter of $11.6 million or $0.13 per common share. This compares to a net loss of $9.1 million or $0.19 per common share during the prior year quarter. Keep in mind that as a result of the $100 million EGI financing transaction, an additional 30.3 million shares were issues in the third quarter of 2008. Those new shares were outstanding for the entire fourth quarter resulting in a weighted average shares outstanding of 86.4 million shares versus 46.7 million in the prior year quarter.

Now let's move on to the balance sheet, and here you will note four major changes when compared to the quarter ended September 30, 2008. And those changes are evident in cash; prepaid expenses; property, plant and equipment; and other long-term liabilities. We started the fourth quarter with a combined cash and marketable securities balance of $83.3 million and we ended with $74.7 million at December 31. Next you will note an increase in prepaid expenses from September 30 of $1.6 million to $2.6 million at December 31. The increase results from insurance policy renewals, FDA product and establishment fees, Keflex physician samples, and an unrealized gain on foreign currency forward contracts.

With respect to foreign currency forward contracts, all of our MOXATAG trade product and physician sample procurement transactions are denominated in either the euro or British pound sterling. To better allow us to plan our cash flows and mitigate the effects of fluctuating currency prices, we have entered into foreign currency forward contracts.

With respect to our net property, plant and equipment, you will see an increase compared to the September 30th quarter of $555,000. The increase is primarily related to the purchase of our sales force automation computer hardware as well as computers for our new employees in our Westlake, Texas office.

And finally, you will see a new balance of $2.3 million under the caption of other long-term liabilities. As I indicated earlier, we have engaged a commercial real estate firm to assist us with potential sublease of the unused Maryland laboratory space. While we have not closed the transaction at this point, we now have enough information that suggests that potential lease income will be less than our contractual future lease payments. And for that reason, we have recorded an expense of $2.6 million; $300,000 of that amount is included within current liabilities under the heading of ‘accrued expenses’ and the remaining $2.3 million is reflected within other long-term liabilities.

That concludes my review of the fourth quarter financial results. And at this point, I will provide our business outlook for 2009. As I mentioned, we began 2009 with approximately $74.7 million in cash and marketable securities. We believe that 2009 combined net sales for MOXATAG and Keflex will be in excess of $40 million. This assumes no generic impact on our Keflex 750 mg products and the successful launch of MOXATAG starting on March 16.

We just completed the hiring of our 271 person field sales force, each sales representative is expected to cost about $190,000 or $51 million on an annualized basis. That's a fully burdened number that includes all expenses incurred in the field as well as the cost of our district sales management and physician samples.

Our current product development plan suggests that we will spend sufficient enough to advance our Keflex PULSYS project to be prepared for patient enrollment into Phase III clinical trials in 2010. As you would expect, there’s some upfront work and headcount required for this to occur and it is dependent on the successful launch of MOXATAG and adequate financial resources.

With the significant investment in our sales force, our targeted marketing campaign, product development, and general administrative expenses, we currently estimate our total operating expenses will range between $93 million and $100 million for 2009. While we still have about 25 days left in March, we now have better visibility on the amount of product that will be sold to trade customers for the MOXATAG launch. Thus we believe that our first quarter net sales on a combined basis for MOXATAG and Keflex will be in excess of $7.5 million, just under 20% of our annual guidance. This represents product sales from our warehouse to retail and wholesale customers.

As it relates to the generation of MOXATAG prescriptions, it's important to note that we believe the ramp up will be modest initially and then pick up significantly in the fall of 2009. And the reason for that is twofold. First, we are launching MOXATAG as we come out of the season for upper respiratory illnesses. Secondly, our sales force will be establishing relationships with new physician offices. Thus, by the time we enter the next season, our representatives should be very efficient and effective in their territories. To put this in perspective, we believe that the fourth quarter of 2009 prescription volume for MOXATAG could exceed over 50% of the total 2009 MOXATAG prescription volume.

I also want to point out that you will likely see us carry a little more inventory in 2009 than might be expected. We were recently informed by our contract manufacturer of Keflex that they will be shutting down their operations. As a result, we purchased what we estimated to be an 18 month forward supply of our Keflex immediate release products. We are currently working on identifying another contract manufacturer to be prepared to manufacture our current Keflex immediate release products as well as to complete the development of our Keflex PULSYS development candidate.

And finally, our current plan suggests that if we hit our targets we could achieve operating profitability in 2010 without needing to raise additional equity financing. We will be monitoring the prescription update for MOXATAG each week and those data will ultimately drive that decision. I believe that this gives you the necessary information to update your models and track our progress in a meaningful way.

At this point, I will open the call up for questions.

Question-and-Answer Session

Operator

(Operator instructions) We have no questions in queue. I apologize; our first question does come from the line of Greg Wade of Wedbush Morgan. Your line is open.

Greg Wade – Wedbush Morgan

Hi, good morning. Greg Wade here, Wedbush Morgan Securities. I was wondering if you might just outline for us the sampling plan, what will the sample packs contain? How many will you be dropping off and for how long into the launch do you expect to be sampling? And then, could you perhaps provide us a little bit of background on what is typical with respect to the launch of a community based anti-infective product. Thanks.

John Thievon

Thanks, Greg. This is John. Our sampling will comprise of a number of different components. The samples will be in a one-pack blister. The goal will be to drop these samples with high prescribing physicians and let them initiate treatment for pharyngitis in the office and then write a prescription so the patient will go to the pharmacy and fill the prescription keeping in mind it is once-daily dosing. So, the first 24 hour dose will be ingested in the physician’s office. Basically in the past, prescriptions, especially in the antibiotic marketplace, sampling has been very heavy in this arena, except for the last 10 years or so because nobody has been sampling, certainly amoxicillin. So we feel we have a competitive advantage there. These samplings in terms of the timing, we will continue to use samples for the foreseeable future as they are extremely important to get physicians to remember MOXATAG and also be able to initiate treatment in the office. So we have plans to continue sampling for a significant time.

Greg Wade – Wedbush Morgan

Thanks, John, and one other question. With respect to the confidence the physician will have that when he writes the script for MOXATAG, that the patient will be able to pick that script up at their local pharmacy. How will you be communicating the availability of the product to the doctors so that they aren't worried that the patient is going to go a day or two without getting the script filled?

John Thievon

That's a great question. As I mentioned, we're very happy with our initial distribution at the retail shelf. We have a significant amount of stores out there that actually have MOXATAG on the shelves prior to the March 16 launch date. That will continue to improve over time. That is another reason why sampling is so important that even if the bottle of MOXATAG is not on the shelf when the patient brings the sample or brings the prescription in, they would have already taken the first day. If the MOXATAG is not on the shelves, that pharmacist, anywhere in the country, can bring the bottle of MOXATAG in within 24 hours. So, even if it's not available that day it would be available the next day, which is not uncommon in the launch of any new product. I will tell you that there are a significant amount of stores that already have it on the shelf. And as time progresses, you will see that that will improve. And our goal, ultimately, is to have it on every pharmacy shelf in the United States. The more successful we are at generating prescriptions and using those samples to help the patients get started, the more effective we will be over time. I would say that we are in a good position from a distribution perspective to get prescriptions filled immediately, and it will improve over time.

Greg Wade – Wedbush Morgan

Thanks for taking my questions this morning.

John Thievon

Thank you.

Operator

(Operator instructions) Thank you. We have no additional questions. I will now turn it back to the speakers for any additional or closing remarks.

John Thievon

Thank you for participating in today's call. We believe that MiddleBrook is well positioned to build long term shareholder value. We are about to launch MOXATAG, the first and only FDA-approved, once-daily amoxicillin into a large and stable marketplace. Market research shows that physicians value the compliance-enhancing benefits of once-daily therapy. And importantly, MOXATAG has no AV rated generic. We have a strong balance sheet and everyone at MiddleBrook remains focused on controlling expenses which we recognize is extremely important during this time of economic uncertainty. Lastly, we have two pipeline candidate products also based on our proprietary PULSYS technology, which was successfully utilized in our first NDA-approved product, MOXATAG. We appreciate your time today and your interest in MiddleBrook. Thank you very much.

Operator

Thank you. And this concludes today's conference call. You may now disconnect.

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