Sucampo Pharmaceuticals' CEO Discusses Q4 2012 Results - Earnings Call Transcript

Sucampo Pharmaceuticals, Inc. (NASDAQ:SCMP)

Q4 2012 Earnings Call

March 13, 2013 5:00 PM ET

Executives

Silvia Taylor – SVP, IR, Public Relations and Corporate Communications

Ryuji Ueno – CEO, Chief Scientific Officer Founder and Chairman

Stan Miele – SVP, Sales and Marketing President, Sucampo Pharma Americas, Inc.

Andrew Smith – VP, Operations and Finance

Peter Lichtlen – Senior Medical Officer and VP, European Operations

Cary Claiborne – CFO

Taryn Joswick – VP, Clinical Development

Analysts

Irina Rivkind – Cantor Fitzgerald

Tim Lynch – Stonepine Capital

Christian Glennie – Edison Investment Research

Dan Trang – Stonegate Securities

Jason Aryeh – JALAA Equities

Operator

Good afternoon, and welcome to Sucampo’s Fourth Quarter and Full-Year 2012 Financial Results and Operating Highlights Conference Call. For opening remarks and introductions I would like to turn the call over to Silvia Taylor, Sucampo’s Senior Vice President of Investor Relations, Public Relations and Corporate Communications. Please proceed.

Silvia Taylor

Thank you, operator, and good afternoon, everyone. Thank you for joining us today. The earnings release and its attachments announcing Sucampo’s fourth quarter and full-year 2012 financial and operational highlights is being distributed this afternoon. For those of you who have not yet seen it, you will find it posted in the For Investors section of our website at www.sucampo.com shortly. We also plan to file our 10-K shortly, and once filed a link to that document will also be posted on our website.

Now please turn to Slide 3 of our presentation deck. Our agenda today is as follows. Dr. Ryuji Ueno, Chairman of the Board, Chief Executive Officer and Chief Scientific Officer, will provide an overview of the quarter and highlights for the year. Stan Miele, Senior Vice President of Sales and Marketing and President of Sucampo Pharma Americas, will review development in the U.S. for AMITIZA and RESCULA.

Andrew Smith, Vice President of Operations and Finance, will review AMITIZA development in Japan and Europe. Dr. Peter Lichtlen, Senior Medical Officer and Vice President of European Operations, will review our pipeline activities followed by Cary Claiborne, Sucampo’s Chief Financial Officer, who will review the financials. Finally, Dr. Ueno will provide closing comments just ahead of the Q&A portion of the call. Additional members of Sucampo’s team are present and available to answer your questions then.

Before we begin, on Slide 4 please note that various remarks management makes on this conference call and the information contained in today’s earnings release are as of March 13, 2012. The company assumes no obligation to update forward-looking statements contained in this conference call, earnings release or the attachments as a result of new information or future events or development.

This conference call, earnings release and the attachments contain forward-looking information about the company’s future operating and financial performance, business plans and prospects, in-line products and product candidates, and share repurchase plans that involve substantial risks and uncertainties. Please refer to the forward-looking statement in the 10-K found on our website for additional risk factors affecting our forward-looking statements.

Now I will turn the call over to Dr. Ueno. Dr. Ueno, please go ahead.

Ryuji Ueno

Thank you, Silvia. Hello, everyone. Thank you for joining our conference call today. Please turn the slide.

In the fourth quarter of 2012 we continued to fulfill our mission of bringing prostone-based medicine to patients around the world. 2012 was a year of tremendous achievement for Sucampo as we reached several important milestones for both AMITIZA and RESCULA franchises. With the AMITIZA approval and loyalties in Japan and the U.K., this year we’ll be recognizing revenue on three continents. Our pipeline is also continuing to progress and with two new prostones progressing into the clinic we now have a total of five prostone-based compounds in clinical development. We’re also eagerly anticipating the late April PDUFA date for AMITIZA for opioid-induced constipation (inaudible).

In the United States in December, the FDA approved our sNDA for RESCULA unoprostone isopropyl for the lowering of intraocular pressure in patients with open-angle glaucoma or ocular hypertension. Open-angle glaucoma is the most common form of glaucoma, and ocular hypertension affects millions more in the United States alone. RESCULA is the first BK channel activator approved for this indication.

RESCULA’s strength is its safety and tolerability profile. As you heard during our RESCULA update call last month, Sucampo has begun active commercialization of the product and it is now available in pharmacies across the U.S. We are pleased to say that the early response to the RESCULA launch has been quite positive, and we expect to carry this momentum through the remainder of 2013. Additionally, early reports from the ophthalmic market are that it is favorable to receiving a product that has a different and unique mechanism of action.

Turning now to AMITIZA, as Stan Miele will expand upon later, we’ve experienced solid growth and expansion in the quarter and the year in the United States even in the presence of the competitive launch at the end of 2012. I am also pleased to let you know that in December we received a $15 million milestone payment from Abbott Japan triggered by the first commercial sale of AMITIZA in Japan, the second largest pharmaceutical market in the world.

AMITIZA is the first prescription medicine ever available in Japan for chronic constipation and it was launched by Abbott Japan to primary care and specialty physicians on November 22, 2012. Fourth quarter sales in Japan were double our initial expectations. We are particularly proud of the fact that this is the first time that Japan has ever approved a drug for chronic constipation, and that patients now have a treatment option for this condition.

In the United States, AMITIZA continues to demonstrate strong dollar sales growth. As reported to us by our partner, AMITIZA year-over-year net sales during the fourth quarter grew by 31.3% to $74.6 million. As we look at monthly data, we have continued to see solid growth with January 2013 being our second-highest month of AMITIZA net sales ever.

Also in the United States, we received a supplementary approval of AMITIZA from the FDA that removed pregnancy warning and precautions from the label and clarified information regarding the use of AMITIZA by pregnant and/or nursing women. We believe this will help physicians and women of childbearing age who are suffering from IBS-C or CIC to better evaluate the risk-benefit profile of AMITIZA. And it will provide a competitive advantage for the product in the market.

The supplemental approval also added details to the Mechanism of Action section of the label, which highlights AMITIZA’s ability to reduce intestinal permeability via the restoration of tight junction protein complexes. We believe this is important to further clarify understanding of how AMITIZA may work for clinicians evaluating the treatment of patients with IBS-C since the increase in permeability and destruction of tight junction is thought to be one of the major causes of IBS-C.

Our PDUFA date for the opioid-induced constipation indication remains late April 2013. We are pleased with how the review is proceeding, and we continue to maintain ongoing discussion with the FDA on our filing. Following the first sale for this indication, Sucampo will earn $10 million milestone payment from Takeda per the terms of our contract with them. In Switzerland we reached an agreement with the authorities for the reimbursement price for AMITIZA for CIC, and we have begun to build the sales organization in Switzerland.

Another achievement for AMITIZA in the second half of 2012 was its approval in the United Kingdom for the treatment of CIC. Our priority now is to achieve National Institute for Clinical Excellence, in short NICE, endorsements so that we can actively market AMITIZA in the United Kingdom. And we have already had our first meeting with NICE. We have begun commercialization efforts while we await NICE endorsement.

In Asia too, the success we achieved with AMITIZA and RESCULA, we also continue to make progress in advancing our pipeline of prostone-based candidates. As you may recall, we discussed our pipeline priorities at our September 12 Analyst Day. Our Phase 1 trial of an oral combination of SPI-8811 or cobiprostone for the prevention and treatment of oral mucostitis remains on track. We expect to complete the trial in the second quarter of 2013.

As you will hear more during this call, development of oral mucostitis is a common severe side effect of cancer treatment. This is an area of unmet medical need because there are no prescription drugs available for prevention or treatment of oral mucostitis. Progress with SBI-017 and SBI-3608 for the management of severely symptomatic lumbar spinal stenosis continues.

Lumbar spinal stenosis is caused by degenerative change in the lumbar spine and is a common disease among the aging population. We initiated our Phase 2a trial for SPI-017, the ID formulation of the product in the first quarter of 2013. We also initiated a Phase 1 program for SPI-3608, the oral version of the product, in the fourth quarter of 2012. We remain on track to report on the progress of both trials in the fourth quarter of 2013.

We are very pleased that we now have two products in Phase 3 clinical development. As we will discuss in the call, later this year we will begin a Phase 3 program for a pediatric indication for AMITIZA. And after a successful Phase 2 trial for unoprostone isopropyl in retinitis pigmentosa, unoprostone isopropyl will move into Phase 3 clinical development under the guidance of our development partner, R-Tech Ueno, Ltd. As we reported earlier this year, the Japanese government has adopted unoprostone isopropyl into a technology transfer program which will provide funding for R-Tech Ueno’s Phase 3 development costs in retinitis pigmentosa.

Unoprostone isopropyl’s mechanism of action, BK channel activation has demonstrated strong evidence of the protective effect of unoprostone on the retina in both in vitro and in vivo non-clinical models. We are very encouraged by the successful phase 2 clinical data from Japan where significant positive differences were seen on evaluation of visual sensitivity when comparing unoprostone isopropyl versus placebo treatments of mid to late phase retinitis pigmentosa patients. Sucampo is co-developing unoprostone isopropyl with R-Tech Ueno and we may proceed with the development program for retinitis pigmentosa in the future, assuming the Phase 3 Japanese program is successful.

I’m also pleased with the appointment of our two newest board members, Barbara Munder and Maureen O’Connell. They are both highly qualified and bring a breadth of experience in public companies to Sucampo board that we think will be very valuable as we move forward. I am very pleased with the progress we made in 2012. It was truly a transformational year for Sucampo and I’m confident that we will successfully execute against our plans for 2013 as we grow AMITIZA and RESCULA and advance our product pipeline portfolio.

I will now turn the call over to Stan Miele who will give a commercial update regarding the launch of RESCULA in the United States and the continued commercialization of AMITIZA in the U.S. Stan?

Stan Miele

Thank you, Dr. Ueno. Good afternoon. It’s a pleasure to speak with everyone. I’m very excited to speak with you about two key areas. First, Sucampo’s launch of RESCULA in the United States, where we are ahead of schedule on many fronts and second, the update on AMITIZA as we evaluate an additional entrant into the market.

Please turn to slide eight. Our sNDA for RESCULA for the lowering of intraocular pressure or IOP in patients with open-angle glaucoma or ocular hypertension was approved in December and we moved quickly to launch the product in the first quarter of this year. In February, we announced that RESCULA was available in pharmacies across the U.S. Dr. Ueno mentioned open-angle glaucoma is the most common form of glaucoma and currently affects in excess of 2 million people in the U.S.

It is estimated that ocular hypertension also affects an additional 3 million to 6 million patients in the U.S. This results in approximately 30 million prescriptions per year in the United States.

RESCULA provides an alternate route for intraocular pressure or IOP reduction in the treatment of these conditions. Its mechanism of action affects the BK channels, which increases the outflow of aqueous humor through the trabecular meshwork. As a result, there have been over 6.4 million dispensed bottles of RESCULA on a global basis, primarily in the Japanese market. We expect to build upon the Japanese experience and accelerate patient utilization in the U.S.

We are positioning RESCULA as an appropriate choice for eye specialists who are trying to balance efficacy with the management of side effects, particularly the 5% to 10% of patients who cannot tolerate a prostaglandin analog due to ocular side effects.

We are excited to have an 11% share of voice through our 40 Sucampo sales representatives. The first 12 months of launch we expect to have approximately 60,000 face-to-face interactions in which we will reach prescribers representing 80% of the market. In fact, we’ve made over 5,000 calls since early February and have provided over 50,000 samples to eye specialists. As a reminder, this market is highly sample sensitive. It is typical for patients to receive a 30-day sample to assess both efficacy and safety before a prescription is written. The early feedback is positive and many clinicians have begun using RESCULA samples, with some prescribing the medicine, which should be reflected in the IMS data over the next several months.

Achieved managed care coverage of RESCULA is also a high priority. So far we have had 47 face-to-face meetings with the plans and pharmacy benefit managers that constitutes 80% of the covered lives. We are pleased that managed care is seeing the value of RESCULA and many of the top plans are providing interim coverage of the product while they await making a final decision through their P&T committees.

In summary, we are pleased by the favorable reception to RESCULA so far and will continue to work hard toward the goal of minimizing any potential obstacles for patients and physicians and ensuring a positive experience with RESCULA. I look forward to continuing to update you on the RESCULA launch throughout the year.

Now turning to AMITIZA in the U.S.; I would like to first give a brief review of the recent AMITIZA prescription trends and how we are pleased with what we are seeing thus far. Please refer to Slide 9. If we look at reported IMS monthly prescription data, January 2013 was the second-highest month of total prescriptions ever, up 9.7% from January 2012.

In the fourth quarter of 2012 both TRx and NRx growth over the same period last year were up 6%. We believe that based on the revised AMITIZA label, removing the negative pregnancy test, along with the updated mechanism of action highlighting the reduction in intestinal permeability. This will further differentiate AMITIZA and be a catalyst for continued growth, regardless of new competition.

As we reported earlier today, AMITIZA net sales have increased during the quarter by 31.3% to $74.6 million as reported to us by our partner Takeda. This growth in net sales was primarily due to both volume and price increases. We expect this trajectory of strong growth to continue, given AMITIZA’s well tolerated safety profile and the desire by prescribers, particularly primary care physicians, to prescribe drugs that have an established track record of safety over several years.

Since its launch almost seven years ago, AMITIZA has been prescribed more than 7 million times. Toward the end of 2012 we saw the addition of a new entrant into the marketplace, which will continue to bring a heightened level of awareness to the CIC and IBS-C diseases and help bring new patients into the market. As this market continues to grow, we expect AMITIZA to capture an increasing number of patients and market share.

As stated above, January 2013 was the second-highest month of total prescriptions in AMITIZA’s history. Based on some early data points, AMITIZA has grown the business in the face of a competitive launch. Our position is to again focus on our product’s strengths and also exploit some of the strong managed care gains over the past year along with our label revisions.

Turning to our potential new indication for AMITIZA, our PDUFA date for the opioid-induced constipation indication remains late April. We are pleased with how the review is proceeding, and we continue to maintain ongoing discussions with the FDA on our filing. We still strongly believe that the priority review demonstrates a significant unmet medical need for the condition of OIC and we believe AMITIZA when approved will be well positioned by our partner to take advantage of this unmet medical need.

In the U.S., there are over 200 million opioid prescriptions written annually, and our research shows that moderate-to-severe OIC affects conservatively between 2 million to 2.5 million non-cancer chronic pain patients in the U.S. OIC is an area of high unmet medical need and patients are suffering with few, if any viable treatment options. The scientific literature states that anywhere between 40% to 80% of chronic opioid users will experience constipation as a side effect, and that when it occurs; the constipation is likely to be moderate-to-severe. So severe, in fact, that some patients choose to live in pain and discontinue their opioid treatment, rather than suffer the constipation that ensues.

In addition, we know that primary care physicians, who prescribe the majority of these patients, are also looking for a medicine indicated to treat their patients with OIC. We are working with Takeda to prepare for the launch of the new indication when it is approved. Also, upon the first sale of AMITIZA for this indication, we will receive a $10 million milestone payment from our U.S. alliance partner.

I’d like to now turn the call over to Andrew Smith, Vice President of Operations and Finance to provide comments on the AMITIZA commercialization efforts in Japan and Europe. Andrew?

Andrew Smith

Thank you, Stan, and good afternoon, everyone. Welcome to the call. Please refer to Slide 10. We’re very pleased that AMITIZA was approved in Japan during the second quarter of 2012 for the treatment of chronic constipation. And our partner, Abbott Japan was successful in carrying out a comprehensive launch of AMITIZA beginning in late November 2012. The first commercial sale of AMITIZA resulted in a $15 million milestone payment to us from Abbott Japan in December. We’re particularly proud of the fact that this is the first ever prescription medicine approved for chronic constipation in Japan.

Abbott Japan deployed an extensive sales and marketing effort designed to introduce AMITIZA to the primary care and specialty physician audiences. Importantly, we’ve received guidance on pricing reimbursement for AMITIZA in Japan. This is important because it will allow more patients to have access to the product. The launch continues to progress extremely well. Fourth quarter product sales of $5 million, exceeding Abbott Japan’s initial projection; in addition, Abbott’s detailing efforts for AMITIZA rank in the top 20 in GP segments of all pharmaceutical detailed products in Japan, early into its sales efforts for the product.

We’re pleased that there is now a high level of product awareness and excitement among Japanese physicians about AMITIZA. So we’re pleased with these commercialization efforts and encouraging earning results by our Japanese partner and look forward to strong sales of AMITIZA in Japan in the coming months.

Turning now to AMITIZA in Europe; as mentioned in our last earnings call we received a reimbursement price for AMITIZA in Switzerland on December 1, 2012 and we have begun to build the sales organization in Switzerland. As Dr. Ueno mentioned at the start of the call, we are making progress on our plans to launch AMITIZA in the U.K. We have initiated a nice endorsement process for both CIC and OIC indications which we believe is one of the keys to gaining widespread adoption of AMITIZA in the U.K. and gaining an established prescriber base.

In addition, as we’ve previously disclosed we are using the MHRA approval to seek expansion of AMITIZA’s CIC indication to other European markets via the mutual recognition procedure. And finally we’ve completed our filings for the OIC indication in Switzerland and the U.K. this quarter.

With that, I’d like to turn the call over to Peter Lichtlen to discuss our pipeline. Peter?

Peter Lichtlen

Thank you, Andrew. Good afternoon, everyone. It’s a pleasure to speak with you. We’ve had a busy year in R&D this year and we have a lot to talk about so let’s go to it.

Please refer to slide #12. We continued to make progress on AMITIZA including the development of a new liquid dosage form of the product. This liquid dosage form is significant because it can allow us to provide AMITIZA to new patient populations who cannot swallow the current gelcap, namely pediatric and many geriatric patients.

Our commercial team will be working with our partners to properly position this new dosage form. Additionally, a 100% of the development cost for the new liquid dosage form will be reimbursed by Takeda for the term of our contracts with them. We are pleased to let you know that we continue to make progress toward the pediatric functional constipation indication and we plan to initiate a Phase 3 program in the U.S., Canada and Europe in the third quarter of this year. Importantly, Takeda will fund the majority of the development cost for the pediatric indication again per our contracts.

Now please turn to slide #13. Our progress continues on SPI-8811 or cobiprostone for the prevention and treatment of oral mucostitis. Development of oral mucostitis is severely painful inflammation of the oral cavity, is commonly associated with cancer treatment, such as radiation and chemotherapy. Currently no truly effective treatment option exists, making this an area of high unmet medical need. Additionally oral mucostitis can have incidence rates of approaching 100% in certain cancer types. The effects of oral mucostitis can be devastating for cancer patients, leading to dehydration, insertion of feeding tubes and sometimes even discontinuation of cancer therapy in the more extreme cases.

We have developed a new spray formulation of SPI-8811 for local use for this indication, and we are currently testing this compound in a Phase 1a clinical trial. This trial allows us to fulfill our corporate mission of using innovative research and development and our proprietary prostone technology to meet the unmet medical needs of patients. We continue to expect to complete Phase 1a of this trial in the second quarter of 2013 and plan to initiate a Phase 1b-2a clinical trial in the fourth quarter of this year.

On Slide 14 our progress on the Phase 2 trial of SPI-017, an IV compound for the management of severely symptomatic lumbar spinal stenosis continues, as does our Phase 1 trial of SPI-3608, an oral treatment modality for mild-to-moderate patients with the same disease. We plan to conclude these trials in the fourth quarter of this year. These trials are being conducted in Japan, where the only currently approved medication for LSS is an oral PGE1 analog. We know that prostaglandins are associated with poor systemic safety and require careful and fractionated dosing.

In the United States and Europe, no medications are approved for this specific indication. Again, this is clearly an area of unmet medical need.

Finally, life cycle management of unoprostone isopropyl is a priority for us. As Dr. Ueno briefly mentioned earlier, the Japan Science and Technology Agency has agreed to provide the majority of the funding for R-Tech Ueno’s Phase 3 clinical development costs for unoprostone isopropyl for retinitis pigmentosa under the Adaptable and Seamless Technology Transfer Program. Sucampo is co-developing unoprostone isopropyl with R-Tech Ueno.

This program provides a participating institution with a total R&D funding of up to ¥2 billion, approximately US$22 million for up to 7 years. If the development is successful, the participating institution repays a total amount of the provided funding by paying royalties based on product sales.

If the development is not successful, the participating institution repays 10% of the provided funding with no interest payments due. As part of our agreement for unoprostone isopropyl with RTU, Sucampo will receive the data from this Japanese clinic development program which if successful will play a significant role in development efforts for retinitis pigmentosa for unoprostone isopropyl in the United States and Europe.

Retinitis pigmentosa is a group of retinal degenerative diseases characterized by night blindness, the progressive loss of peripheral vision and eventually loss of central vision leading to blindness. As retinitis pigmentosa progresses daily life becomes increasingly more difficult. There are currently no drugs approved for the treatment of RP. Sucampo received an orphan drug status from the FDA for the treatment of retinitis pigmentosa in 2010. We will seek orphan drug status in the EU as well this year.

With that I look forward to answering your questions at the end of this call and now turn it over to Cary Claiborne to provide our financial update. Cary?

Cary Claiborne

Thank you, Peter. Good afternoon, everyone. I’d like to review the financial highlights for the quarter and the full-year review. I’ll start with slide 17. Total revenue for the fourth quarter 2012 was $34.9 million compared to $14.2 million in the fourth quarter of 2011 a growth rate of 145%. Total revenue for the full-year 2012 was $81.5 million compared to $54.8 million in the prior year, a growth rate of 49%. I’ll cover the drivers of the year-over-year increase in a few minutes.

R&D revenue for the fourth quarter of 2012 was $15.1 million compared to $2.7 million during last year’s fourth quarter. For the full-year 2012 R&D revenue was $21.5 million compared to $9.2 million in the prior year. The increase in R&D revenue was primarily due to the receipt of the $15 million milestone payment from Abbott Japan partially offset by lower activity associated with the completion of our Phase 3 OIC trial for AMITIZA in the U.S.

Now please move to Slide 18. Net sales of AMITIZA in the U.S., which are reported to Sucampo by our alliance partner Takeda, increased 31% to $74.6 million in the fourth quarter of 2012 compared to $56.8 million in last year’s fourth quarter. Net sales of AMITIZA increased 20% to $271.9 million for the full-year 2012 compared to $226.4 million in the prior year. As reported to us by Takeda, for both periods the increase in AMITIZA U.S. net sales was primarily due to both volume and price increase.

Product royalty revenue for the fourth quarter of 2012 was $14.2 million, an increase of $3.4 million or 31% from $10.8 million in last year’s fourth quarter. Product royalty revenue for the full-year 2012 was $50.7 million, an increase of $9.2 million or 22% compared to $41.5 million in the prior year. As Takeda reported, the increase was primarily due to higher price and volume of AMITIZA net sales in the U.S.

As I’ve mentioned in some of our recent investor conferences, our revenues under the agreement with Abbott are not royalties but are actual sales of AMITIZA product to Abbott Japan under our license and commercialization agreement. You’ll see this reflected on our P&L as product sales revenue and cost of goods sold. Product sales revenue and cost of goods sold also includes sales of AMITIZA in Europe and in future quarters, this will be where we report RESCULA sales.

In 2012, we recognized $5 million of product sales revenue and $3 million of cost of goods sold, compared to nil for both in 2011. The majority of the sales were related to our sales of AMITIZA to Abbott Japan.

Please move to slide 19, which features additional financial highlights. Let’s take a look at income next. For the fourth quarter of 2012 income from operations was a profit of $13 million, an increase of $9.4 million compared to a profit from operations of $3.6 million in the fourth quarter of 2011. For the full year of 2012, income from operations was a profit of $8.3 million, compared to a loss from operations of $17.7 million in the prior year.

For the fourth quarter of 2012, Sucampo reported net income of $13.5 million or $0.32 per share, an increase of $10.8 million compared to a net income of $2.7 million or $0.06 per share in last year’s fourth quarter. The fourth quarter of 2012 included a foreign exchange gain of $0.9 million compared to a gain of $14,000 in last year’s fourth quarter. For the full year of 2012, Sucampo reported a net income of $4.8 million or $0.12 per share, compared to a net loss of $17.3 million or $0.41 per share in the prior year.

Now, taking a look at operating expenses, R&D expenses were $7.1 million in the fourth quarter of 2012, compared to $7.7 million for the same period last year. For the full year 2012, R&D expenses were $21.3 million, compared to $33.5 million in the prior year. For both periods, the decrease was primarily due to higher expenses in 2011 associated with the completion of a Phase III OIC trial for AMITIZA.

G&A expenses were $7.6 million in the fourth quarter of 2012, compared to $12 million in last year’s fourth quarter, a decrease of $4.4 million or 37%. G&A expenses were $30.2 million for the full year 2012, compared to $41.3 million in the prior year, a decrease of $11.1 million or 27%. For both periods, the decrease in G&A expense is primarily due to lower legal, consulting, and other professional expenses that were related to the conclusion of certain legal matters partially offset by increases in corporate marketing and branding and staff organizations to support business growth.

Selling and marketing expenses were $4.2 million in the fourth quarter, compared to $2.1 million in last year’s fourth quarter. For the full year of 2012, selling and marketing expenses were $18.7 million, compared to $8.8 million in the prior year. For both periods, the increase in selling and marketing expenses relates primarily to some non-recurring pre-commercialization planning activities for AMITIZA and the commercialization and launch costs for RESCULA.

And finally, as it relates to operating expense, in 2011, Sucampo reported income of $11.1 million from the favorable settlement of a legal claim related to a dispute with Covance, a CRO that performed clinical trials for the OIC indication. The amount represented receipt of $10 million in cash and cancellation of outstanding payables of $1.1 million and was reported as a reduction to 2011 operating expenses. This is on a separate line on our income statement. There were no corresponding amounts in 2012. We think this is notable, because when you exclude this one-time settlement, our year-over-year decrease in total operating expense is actually $13.4 million.

Let’s move on to the balance sheet. Please refer to slide 20. As of December 31, 2012, cash, cash equivalents, restricted cash and investments were $91.4 million, compared to $93.4 million at December 31, 2011. As was mentioned earlier on the call upon Abbott Japan’s first commercial sale of AMITIZA in Japan, Sucampo received a milestone payment of $15 million that was received in the fourth quarter of 2012.

As we stated during our third quarter earnings call on November 2, 2012 our board authorized an increase in the amount of our common stock repurchase program from the previously announced $2 million up to an aggregate of $5 million. During the fourth quarter we purchased 146,908 shares at a cost of $721,487. For the full year of 2012, we purchased 270,043 shares at a cost of $1.28 million.

I’m also very pleased to report that Sucampo generated positive operating cash flow of $17.2 million in the fourth quarter and $12 million for the full year of 2012. The slight decrease in our cash position, as well as the positive cash flow for the year reflects the improvement in year-over-year operating results I just mentioned, as well as our continued focus on working capital management.

Thank you for your attention. I look forward to your questions at the end of this call. Now, I would turn the call back to Dr. Ueno to summarize the value drivers achieved in 2012 and to discuss this year’s value drivers. Dr. Ueno?

Ryuji Ueno

Thank you, Cary. Please turn your attention to slide 22. I’m proud of the fact that we met all of our key value drivers for 2012. We’re excited as we look forward to our productive 2013. As we look to this year we have set the following key value drivers for the year that we believe will increase shareholder value. These include for AMITIZA receiving approval of AMITIZA’s sNDA for OIC in the second quarter of 2013.

Upon the first sale of AMITIZA for OIC, Sucampo will receive $10 million milestone payment. Achieving first patient first visit in our pediatric functional constipation Phase III trial for AMITIZA by the third quarter of this year. Growth of AMITIZA sales in Japan. Submission for regulatory approval of AMITIZA in the treatment of OIC in Switzerland and in the UK by the first quarter of 2013. I am pleased that we have just achieved this value driver today.

Seeking NICE endorsement for both CIC and OIC, and making AMITIZA visible in the UK, with reimbursement by some local budget holders. Beginning active marketing in Switzerland for CIC. Use of MHRA approval to seek expansion of AMITIZA CIC indications to other European markets via the mutual recognition procedure.

For RESCULA, the continued successful rollout of RESCULA in the U.S. For the pipeline, completion of our oral mucostitis Phase IA trial for cobiprostone in the second quarter of 2013, and initiation of our Phase IB plus IIA trial in the fourth quarter of 2013. And finally, completion of our spinal stenosis Phase IIA trial for SPI-017 in the fourth quarter of 2013.

As you can see, we have a busy year ahead of us. I thank you for your continued support as we move forward on these key priorities and work to increase shareholder value. We are now ready to start the Q&A portion of the call. Operator, please open up the lines for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Irina Rivkind with Cantor Fitzgerald. You may proceed.

Irina Rivkind – Cantor Fitzgerald

Hey, guys. Thanks for the questions. Very nice quarter. I wanted to start by asking about the liquid AMITIZA dosage form. Can you walk us briefly through the plan for development of this form and its launch? Thanks.

Taryn Joswick

So, Irina, this is Taryn Joswick. I’m the VP of Clinical Development. I’ll speak a little bit about the development plans and then I’m going to pass it over to Stan for the discussion about the market. So the liquid formulation, we’ve been working on it for some time now, and we’re currently in the clinical study phase of evaluating the liquid formulation and preparing basically the data package that would constitute the dossier that we’ll file with the FDA for the new formulation to be added to the labeling. And Stan, I’ll let you speak with...

Stan Miele

Right, as it relates to the commercialization side of this, we’ve certainly been focused on a liquid formulation for quite a while. I don’t want to confuse things. We’re still a bit of a ways off from actually bringing this to market. But we’re certainly focused on this from not only a pediatric perspective, but also a geriatric, or certain senior care populations as well.

And we have the ability to look at various concentrations, at this point in time though, we’re still focused on the existing CIC concentration, which is the 24 microgram and, but you know, as we look at the pediatric side of things, we would, we’re evaluating other dosage concentrations for that. But on the senior care side, we would be focused on the 24 microgram as a liquid formulation.

Irina Rivkind – Cantor Fitzgerald

Okay. For the $5 million in AMITIZA sales to Abbott in Japan, does that reflect a loading of inventory that’s going to be worked down later? Or is it more reflective of demand?

Cary Claiborne

I think, this is Cary, Irina; there is some loading of inventory as they were ramping up to launch in the fourth quarter.

Irina Rivkind – Cantor Fitzgerald

Okay. Have you guys disclosed AMITIZA pricing in Switzerland?

Cary Claiborne

Have we disclosed that?

Silvia Taylor

Andrew, can you take that question please?

Andrew Smith

Sure. Yeah, I mean the AMITIZA pricing in Switzerland is publicly available. It’s CHF2.59, equivalent to about $2.75.

Irina Rivkind – Cantor Fitzgerald

Is that per day or per dose?

Andrew Smith

I’m sorry, per day.

Irina Rivkind – Cantor Fitzgerald

Okay. Thank you. And I guess I’ll jump back in the queue and I’ll let someone else go.

Operator

Your next question comes from the line of Tim Lynch with Stonepine Capital. You may proceed.

Tim Lynch – Stonepine Capital

Yeah, hi, a lot of good stuff going on. Question about U.S. AMITIZA sales, thanks for the color on Q4 and January. How is February in terms of IMF data in the face of competitive pressures?

Stan Miele

Well, we can take a look at some of the weekly data and we tend to look at weekly data, I don’t want to say with skepticism, because you have to look at consecutive weeks to see if you have a pattern developing. We were down 0.1% versus the prior week when we looked at the first week of February, and then in subsequent weeks we were up over 8%. In general, we’re still holding firm where we – with what our expectations are for February.

I mean, I think it’s – when we look at also sort of new to brand prescriptions, there’s an interesting phenomenon as we begin to analyze that where Linzess has started to sort of decline as we look at those naive patients who are in fact entering the market. And we’re actually gaining a larger share for some of these new to the brand patients entering into the market.

So, I look at the first two months of December and January when Linzess was on the market initially launching, we were up over 6%, roughly 6.3% year-over-year. February weeklies, we’re certainly keeping a close eye on that, but at this point in time even with new prescriptions we feel confident that we’re going to be able to maintain and grow our share respectively.

Tim Lynch – Stonepine Capital

That’s great. And do you think that’s attributed to maybe a lack of historical marketing for AMITIZA now with the category getting more attention and perhaps Takeda putting more prominence to it that is the dynamic going on? What do you attribute that to, just the strength in prescription trends?

Stan Miele

Well, we’ve been noticing over certainly the last year a revised effort post arbitration, but a lot of the consistency relative to the marketing effort focusing on the safety, focusing on the mechanism, Takeda buying into some of the targeting that we had been challenging them on all along. But I think of late it’s clearly – I think we welcome the noise to the market and the issue will be who wins the battle of the new naive patients coming to the market. Both of us want the market, both us and certainly Ironwood to increase, and we want the, those patients that are naive.

And what we’re pleased to see again, if we take a look at the last since January, there has been a consistent decline in the newer patients going over to Linzess versus those that are actually coming over to AMITIZA. So, I think it’s a combination of a focused marketing effort by Takeda, and the safety message that’s finally resonating with a lot of the primary care physicians as well. In addition to a strong managed care position that Takeda has within the last 12 months done a very concentrated effort to put ourselves in a position of strength with respect to both commercial lives and managed care lives.

Tim Lynch – Stonepine Capital

Great. And one last question, then I’ll hop back in the queue. With the loading for Abbott, sales to Abbott in Japan, can you just give us some color on end-user demand? You said, they exceeded expectations, doubled your expectations more than Abbott’s expectations, what percent of that $5 million can we view as perhaps the initial stocking?

Silvia Taylor

Okay, Andrew, do you want to take that question about Japan sales?

Andrew Smith

Sure.

Silvia Taylor

Thank you.

Andrew Smith

The initial stocking, the sales in Q4, the bulk of that was initial stocking. Remember the launch was really November 22. It’s quite early stages. To see that we’re very encouraged with the early signs of performance and growth as we said, but I think probably you’ll see that in our next call.

Tim Lynch – Stonepine Capital

Great, Thank you.

Operator

Your next question comes from the line of Christian Glennie with Edison Investment Research. You may proceed.

Christian Glennie – Edison Investment Research

Hi, good afternoon. Just to follow-up on the Japan situation; is that sort of margin that you’ve got there, that’s 40%, is that, would that be, is that a reasonable perspective, is that going to pan out over the while?

Cary Claiborne

I mean, that’s rough order what you would expect to see.

Christian Glennie – Edison Investment Research

Okay. Thank you. And then on Europe for AMITIZA, can you talk a bit about the sort of investments you’re making there in UK and Switzerland in terms of preparing to get that fully commercial and/or considering sort of local distribution partners and that sort of thing?

Andrew Smith

Okay, it’s quite early stages, as we’ve said. In those markets in UK and Switzerland, we’re directly marketing the product ourselves. And because it’s the early stages, particularly in the UK where we’re going through the NICE endorsement process and looking to have some demand with local budget holders, we’ll put in place the appropriate level of coverage to cover that growth, but it hasn’t been significant to date.

Christian Glennie – Edison Investment Research

Okay. Thank you. And then just one final one on AMITIZA, U.S. with the potential OIC approval aside from obviously the milestones, can you talk a bit about sort of implications in terms of Takeda’s commercialization of that opportunity, they’ll see the addition of that to the label and how that – how you see that?

Stan Miele

This is Stan. I think we – I hope we adequately covered that in the script, but I will say that based on the early discussions and the ongoing discussions with Takeda and the priority review, Takeda’s committed to treating this as almost a re-launch opportunity. So we, as in both Takeda and Sucampo, see this as a great opportunity and are prepared to properly execute a re-launch with this additional indication when approved.

Christian Glennie – Edison Investment Research

Okay. Thank you.

Operator

You have a follow-up question from the line of Irina Rivkind with Cantor Fitzgerald. You may proceed.

Irina Rivkind – Cantor Fitzgerald

Actually two follow-up questions; Stan, I’m very interested to learn about your methodology in figuring out how – about the new patients to AMITIZA versus new patients to invest. Can you just elaborate on that a little bit more?

Stan Miele

Yeah. This is actually something that you can actually get from – when you start looking at the IMS data. And we can have a separate follow-up phone call...

Irina Rivkind – Cantor Fitzgerald

Yeah.

Stan Miele

Because you also go back sort of historically as well, looking at the last 12 months. But there is a formula and a methodology that’s used where you can look at the only drawback is for example if a patient was on – let’s say that they were on AMITIZA and then they dropped AMITIZA and then three months later, they decided to go back on another product, they would actually still show up as a naive product or a naive patient rather. But we can set up a call, I’d be glad to be live, go through that with you in a consultation.

Irina Rivkind – Cantor Fitzgerald

Okay. Okay, and then the second one is about the OIC market and you mentioned that there’s 2.5 million moderate to severe patients. And I just wanted to see if – in your model assessment, are those patients already taking prescription medications? Or do you view these as being on OTC products that are going to enter the existing constipation market once there’s an approved indication? Thanks.

Stan Miele

Right. So, this is through both our qual and quantitative research, and the majority of those patients are still taking over-the-counter products or MiraLAX if required. So, we feel very confident that even though there are some patients at this point in time taking AMITIZA for OIC, it’s off-label, it’s not formally indicated and there is a small percentage of our current utilization that’s for OIC. However, the majority of those moderate to severe patients are not – they’re still taking over-the-counter products and the PRN laxatives on an as needed basis.

What we’re trying to do is focus on the moderate to severe because we believe strongly that those are the ones that would gravitate towards an RX product versus those that just have an occasional bout of constipation. And that’s why we’ve been a bit more conservative than others as it relates to market size, but we still feel confident that the 2 million to 2.5 million are the ones that in research clearly indicate they’re looking for something and they would welcome an RX product.

Irina Rivkind – Cantor Fitzgerald

Do you have any estimates around how many days they would use this product? Is it similar to your other AMITIZA days used, or no?

Stan Miele

At this point in time, it’s still similar to that of what we’re looking at on the CIC side. And again it’s probably, it’s in the range from a modeling standpoint, we’re still using that 156 days. That’s what we’re using internally.

Irina Rivkind – Cantor Fitzgerald

Thanks very much.

Operator

You have a follow up question coming from the line of Tim Lynch with Stonepine Capital. You may proceed.

Tim Lynch – Stonepine Capital

Thanks. On RESCULA, so I know I used to know, the sales force was shifted from focusing on institutional AMITIZA counts to ophthalmology if I understand correctly. And you used to receive some form of reimbursement from Takeda prior to that shift, and now they’re all paid for in house. Is that correct?

Stan Miele

Yes, Tim. That’s correct.

Tim Lynch – Stonepine Capital

Okay. Okay. And with RESCULA, when do you expect you will see some visibility on usage? I know this is a re-launch and expectations are often low for a re-launch product unless the label’s new, but what kind of color do you think we’ll get from you and when? Because it sounds like this will be grouped into your product sales line on your income statement, so we may not have it broken out, but in terms of script data, something to give us a sense of traction in the marketplace.

Stan Miele

Right. So, we’re starting clearly with the early metrics of sampling contacts, details, et cetera, but you will begin to see script trends within the IMS data. For all intents and purposes, we’re not expecting things to start even showing up until we get into the March timeframe, but I’ve also been fairly straightforward saying that due to the 30 days of sampling, bringing patients back, we’re not looking at this as sort of an early trajectory when you see an acceleration.

It’s more on the latter part of this year once you get a lot of the samples utilized and the appropriate patients are identified, but you should be able to start looking at script trends as early as the coming weeks, but I would say that if we really want to get a solid gauge of where we expect RESCULA to go from a trajectory standpoint, it’s the second half of this year where we have the greater expectations of what we want to see with the lift from an NRx and TRx perspective.

Cary Claiborne

And, Tim, this is Cary. And even though you’re right on the P&L, there won’t be separate line item. We will talk to the rest of the sales versus the AMITIZA sales on our calls and in our investor meetings where we have conferences.

Tim Lynch – Stonepine Capital

Great. And last question, do you consider that sales force now that it’s kind of a more expensive piece of infrastructure is something that you may leverage regarding business development in licensing products, things like that? Is this kind of a strategic infrastructure or cost that you plan to look externally to potentially leverage?

Stan Miele

Well we’re certainly always open and continuing to evaluate business development opportunities and I could not agree with you more that from a cost effective standpoint, you always want to have more than one product in the bag and I think at this point in time, we’re focused on RESCULA, but with the assumptions that we will be successful then it certainly can parlay into some other opportunities as well. And we are doing this in as judicious a manner as possible, but – and but we will certainly – we are certainly entertaining and looking at other potential opportunities from a BD perspective.

Tim Lynch – Stonepine Capital

Great. Thank you.

Operator

Your next question comes from the line of Marco Rodriguez with Stonegate Securities. You may proceed.

Dan Trang – Stonegate Securities

Hi, everyone. This is Dan Trang actually sitting in for Marco Rodriguez. Stan, could you provide some color in regards to the sales force and kind of the launch of RESCULA. I believe it is kind of the same sales force from AMITIZA, am I correct there?

Stan Miele

Yes, sir. It’s the same team that we had before. They – our sales team, the average yearly experience is about 9.5 years. They’re very – their experience. A third of our reps had prior ophthalmic experience and they spent a significant amount of time profiling the targeted physicians even prior to launch. So, that’s why we believe at time of launch, we’ve been extremely successful having access to these offices, having access to the key physicians both ophthalmologists and optometrists. And we’re also supported by the medical and scientific affairs team who did about three months’ worth of prelaunch activity. So, we’re very pleased with the access that our team’s been able to garner thus far.

Dan Trang – Stonegate Securities

Good.

Operator

(Operator Instructions) You have a follow-up question coming from the line of Christian Glennie with Edison Investment Research. You may proceed.

Christian Glennie – Edison Investment Research

Hi. Yes, thanks. Just a couple on the financials, I know you don’t give really specific guidance as such, but obviously looking at some of the key operating R&D and selling, marketing and then in terms of Q4 numbers, how we should be thinking about that for 2013? Any guidance you can provide?

Cary Claiborne

Well, I’ll just give you directionally. Selling and marketing, as you know, we’re launching – we launched RESCULA. So, we expect selling and marketing expenses to increase in 2013 as we’re launching RESCULA. R&D, as you heard, we’re going into a Phase 3 trial for pediatric indication for AMITIZA. So, you would expect R&D to expand – increase as well, but keep in mind that a significant portion of that trial will be reimbursed by our partner, Takeda, in the U.S. And then G&A, G&A we don’t anticipate significant change year-over-year in G&A. We are continuing to focus on being productivity within our staff functions and we built that up in 2012 to support the business growth.

Operator

You have a follow-up question coming from the line of Jason Aryeh with JALAA Equities. You may proceed.

Jason Aryeh – JALAA Equities

Hey. First of all, very nice quarter. Two questions, one for Stan, one for Cary, to pick up on Mr. Lynch’s question about adding additional products to the bag, I assume, Stan, that you will probably wait to see how RESCULA launch plays out. And if it’s successful you’ll add products to the bag, but probably not prematurely?

Stan Miele

That is correct.

Jason Aryeh – JALAA Equities

Okay, great. And I think that’s very prudent. And Cary, you had just talked about G&A being steady from the 2012 levels where there was obviously a lot of legal expense in the first half of that at least. Would that not – would it not be lower because that thankfully comes off the books?

Cary Claiborne

Well, yeah. I think you saw we announced a little while ago about a generic lawsuit.

Jason Aryeh – JALAA Equities

Yep.

Cary Claiborne

So, there will be legal expenses associated with that. So, yeah, there are definitely decreases, but there are – there’s some other things like that that are – would be offsetting part of it.

Jason Aryeh – JALAA Equities

So probably, the bit of staff that you’ve added and that lawsuit you think would – it would balance out?

Cary Claiborne

I think – yeah. Without being specific, I think that’s the way to think about it.

Jason Aryeh – JALAA Equities

Great. And I’m sorry, this is probably been asked in the Abbott Japan questions, but I’m confused about your revenue recognition. You recognize revenue as you sell product to Abbott. So in other words, it’s not based on their stocking they’re selling into the channel or sell-through? Is that correct? Or is it...

Cary Claiborne

That’s correct. That’s correct.

Jason Aryeh – JALAA Equities

Okay. So really, it’s completely – it could be completely non-correlated related with either their selling into the channel or their – or the sell-through?

Cary Claiborne

Well, I guess the way to think about is, it is ahead of them selling into the market.

Jason Aryeh – JALAA Equities

Yeah.

Cary Claiborne

And then, they will sell in the market and then replenish with additional orders to place to us and then we sell to them. So, the other thing that’s important to note when you think about it that way is you don’t want – so you take that $5 million in the fourth quarter and just annualize it when you think about 2013, because they may order sporadically and not necessarily order the same amount every month from us.

Jason Aryeh – JALAA Equities

Sure.

Cary Claiborne

But you will – the trend should correlate if they’re increasing – selling more – increasingly selling more in a market then their orders to us would increase.

Jason Aryeh – JALAA Equities

Sure. And so do you think – when you think about that $5 million, do you think that that is essentially what they put into the channel initially or do you think there’s some sell-through expectation there? How do you view what they’re doing? Maybe they’ve given you some guidance?

Cary Claiborne

Andrew, do you want to comment on that? I know they – we are very pleased with the robustness of their launch. They have a lot of reps out in the field, and the early data we received on their detailing. They were doing a lot of detailing. But because of confidentiality, we can’t really discuss their sales.

Jason Aryeh – JALAA Equities

I understand.

Andrew Smith

I don’t think I can reiterate the point earlier that the launch was on November 22. And we had – that’s the sales we’re recognizing in the fourth quarter. So, it’s a very early stage.

Jason Aryeh – JALAA Equities

Yeah, well, again, congratulations on a nice quarter; nice to see AMITIZA holding up so well. And thanks.

Cary Claiborne

Thanks.

Andrew Smith

Thank you.

Operator

(Operator Instructions) You have a follow-up question coming from the line of Tim Lynch with Stonepine Capital. You may proceed.

Tim Lynch – Stonepine Capital

One last question, guys. I know you said late April as the PDUFA for OIC for AMITIZA. Can you just tell us the PDUFA date, so we can be sure to be paying attention and be prepared for the potential result?

Taryn Joswick

Yeah. Hi, this is Taryn, again. Yeah, we have not disclosed the exact PDUFA date. And certainly, we are very pleased with how the review is progressing. I can tell you that much. And certainly, we expect to receive FDA’s final decision on or before that date in late April.

Tim Lynch – Stonepine Capital

All right. Thank you.

Operator

There are no further questions in the queue at this time. I would now like to turn the call over to Silvia Taylor for closing remarks. You may proceed.

Silvia Taylor

Well, thank you everyone for joining us this evening. We look forward to speaking to you again soon. If you have any follow-up questions, please do not hesitate to contact me. Thanks and good night.

Operator

Thank you for your participation on today’s conference. This concludes the presentation. You may now disconnect. Have a great day.

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