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Executives

John Woolford - Principal

Armando Anido - Chief Executive Officer and Director

Keith A. Goldan - Chief Financial Officer, Principal Accounting Officer and Vice President

Gerald W. McLaughlin - Chief Commercial Officer

Analysts

Liana Moussatos - Wedbush Securities Inc., Research Division

Michael W. Schmidt - Leerink Swann LLC, Research Division

Elliot Wilbur - Needham & Company, LLC, Research Division

William Tanner - Lazard Capital Markets LLC, Research Division

Daniel H. Cheng - Stifel, Nicolaus & Co., Inc., Research Division

NuPathe (PATH) Q4 2012 Earnings Call March 26, 2013 8:30 AM ET

Operator

Good morning, and welcome to the NuPathe Fourth Quarter 2012 Earnings Conference Call. Today's call is being recorded. I would now like to turn the call over to Mr. John Woolford. Please go ahead.

John Woolford

Thank you, operator, and good morning, everyone. With me on today's call are Armando Anido, Chief Executive Officer; and Keith Goldan, Vice President and Chief Financial Officer. Terri Sebree, President; and Jerry McLaughlin, Vice President and Chief Commercial Officer, will also be joining us for the Q&A portion of the call. We issued a press release detailing fourth quarter 2012 financial results this morning. For those of you who may not have seen the release, it is available on our website at www.nupathe.com in the Investor Relations section.

The format of today's call is as follows. Armando will begin with an overview of recent corporate highlights. Keith will then provide a summary of our financial results for the quarter, and Armando will end the prepared remarks with a brief closing, followed by a Q&A session.

Before we begin, I'd like to remind you that we will make various remarks during this conference call that constitute forward-looking statements. All remarks that are not historical facts are hereby identified as forward-looking statements and include, among others, statements regarding the potential benefit and commercial prospect of ZECUITY, plans regarding the commercial launch of ZECUITY, our ability to obtain commercial partners and obtain additional capital to launch ZECUITY and our plans, expectations and beliefs regarding future operations, performance, financial condition and other future events.

Forward-looking statements are based upon our current plans, expectations and beliefs and are subject to numerous risks, uncertainties and assumptions that could cause actual results to differ materially and adversely from those reflected in such statements, including those factors discussed under the heading Risk Factors in our Form 10-K for the year ended December 31, 2011, which is on file with the SEC and available through the Investor Relations section of our corporate website. As a result, you should not rely on any such forward-looking statements. While the company may elect to update forward-looking statements from time to time, the company specifically disclaims any obligation to do so. Also, today's call may not be reproduced in any form without our expressed written consent.

I will now turn the call over to Armando Anido, Chief Executive Officer. Armando?

Armando Anido

Thank you, John, and thank you, all, for joining us this morning. Our efforts over the last year and especially the last quarter culminated in the achievement of a major milestone for the company with FDA's approval in January of ZECUITY for the acute treatment of migraine with or without aura in adults.

As many of you know, ZECUITY is a single-use sumatriptan iontophoretic transdermal system. The patch is applied to the upper arm or thigh during a migraine and provides relief of both headache pain and migraine-related nausea with a low rate of triptan sensations, which are the adverse events commonly associated with this class of medicines. ZECUITY is the first and only approved patch for the treatment of migraine and an important treatment option for the millions of patients who suffer from migraine-related nausea along with their headache pain.

We discussed the FDA approval during our conference call in January, but I want to reiterate significance for migraine sufferers. We believe ZECUITY will be a game-changing treatment option for many of the estimated 8 million diagnosed migraine patients who frequently experience both headache pain and migraine-related nausea or MRN. We remain on target to launch ZECUITY in the fourth quarter of this year.

In addition to FDA approval of ZECUITY, we recently secured additional capital to strengthen our balance sheet. As we discussed on last quarter's call, we completed a $28 million sale of preferred stock and common stock warrants in October. In late January, we announced that all of the preferred stocks had converted into common shares. As of today, we have 29.1 million common shares outstanding.

Now we are laser focused on securing global commercial partners and preparing for launch. The U.S. commercial partner will enable us to maximize the commercial opportunity for ZECUITY. There is a core target audience of approximately 10,000 neurologists and headache specialists who account for approximately 1/3 of triptan prescription volume. Additionally, there's a discrete segment of the primary care market for which approximately 30,000 primary care physicians can expand our reach to 2/3 of the triptan prescription volume.

We also believe there is significant value outside of the United States and therefore, intend to seek development and commercial partners internationally as well. We still intend to have a partnership in place prior to the launch of ZECUITY.

On the launch preparation front, we're making good progress with our CMC activities, including manufacturing scale up and process qualification. We anticipate producing the validation batches and launch supplies this summer, ahead of the expected rollout of ZECUITY in the fourth quarter.

We continue to build upon the extensive launch preparations we have completed over the past few years. As previously discussed, our market research with well over 700 physicians, more than 800 patients and pharmacy and medical directors from insurance companies, accounting for more than 130 million covered lives in the United States, has been completed. We have a detailed field launch plan, including physician targeting, sales territory identification and a sophisticated geo-targeting model that allows for optimization of marketing dollars by geographic location.

We have a managed care strategy to obtain reimbursement that is highly consistent with the brand strategy and product positioning. We have finalized ZECUITY's branding and have a clear and well-defined product positioning and messaging platform. Feedback from our physician and patient research confirms that ZECUITY is well-positioned to address both headache pain and migraine-related nausea with a low rate of triptan sensations.

The organization required to launch ZECUITY will depend upon the scope and structure of the commercial partnership that we expect to consummate prior to launch. Our intent is to build out our commercial infrastructure to complement that of our partner. We will provide more details on our commercial plans and timings as we approach the launch.

In connection with the FDA's approval of ZECUITY, we agreed to several post-marketing requirements. We agreed to conduct 3 pediatric studies in 12- to 17-year-olds, a study that characterize the pharmacokinetics of ZECUITY in adolescents, which we will initiate in the third quarter this year; a placebo-controlled single-dose efficacy study; and a 12-month open-label safety study. We've also agreed to initiate a 7-day rodent dermal study in the second quarter of this year, and depending on the results, a follow-up rodent dermal carcinogenicity study.

Also, in connection with FDA's approval of ZECUITY, 4 of our patents were listed in the FDA Orange Book. Based on these patents, we expect product exclusivity through April 21, 2029. Additional pending patents have the potential to provide protection into 2032.

With that, I'll turn the call over to our CFO, Keith Goldan, to review our financial results. Keith?

Keith A. Goldan

Thank you, Armando, and good morning, everyone. We issued a press release detailing financial results for the fourth quarter 2012 earlier this morning, and we will be filing our 10-K tomorrow.

NuPathe reported a net loss applicable to common shareholders of $19.1 million for the fourth quarter of 2012 compared with a net loss applicable to common shareholders of $5.6 million for the fourth quarter of 2011. For the full year 2012, NuPathe reported a net loss applicable to common shareholders of $37.8 million compared with a net loss applicable to common shareholders of $23.2 million for the full year of 2011.

Both the fourth quarter and full year 2012 periods include a $13.25 million noncash charge for an original issue discount related to the preferred stock that was issued in October. Excluding this noncash charge, the net loss for the fourth quarter and full year would have been $5.9 million and $24.5 million, respectively.

Fourth quarter 2012 operating expenses were $3.7 million compared with $5.1 million in the 2011 period, broadly reflecting the benefits of the company's cost-containment efforts, which were implemented at the end of the third quarter of 2012. Selling, general and administrative expenses rose to $2.6 million in the fourth quarter of this year compared with $1.9 million spent during the same period last year, largely the result of higher noncash stock compensation charges during the fourth quarter of 2012.

This increase was offset by a reduction in research and development expenses during the fourth quarter of 2012 to $1.1 million compared with $3.2 million in the comparable quarter of 2011. The decrease in R&D spending was largely attributable to reduced spending on clinical and CMC expenses related to ZECUITY. Additionally, the 2011 period included higher development and regulatory expenses for efforts related to the resubmission of the ZECUITY NDA.

Net cash used in operating activities for the 12 months ended December 31, 2012, was $20.6 million, primarily a result of spending for normal operating activities and cost related to development and regulatory expenses for the preparation of the resubmission of the ZECUITY NDA. During that same period, we also used $0.5 million of cash in investment activities, and financing activities provided $20.6 million in cash, primarily related to the previously mentioned equity offering, as well as a term loan completed in November, partially offset by early prepayment of the company's previous term loan facility.

As of December 31, 2012, NuPathe had $22.6 million in cash and cash equivalents and working capital of $19.8 million compared with $23.1 million in cash and cash equivalents and working capital of $11.0 million at December 31, 2011. We expect our cash and cash equivalents will be sufficient to fund operations and debt service obligations into the fourth quarter of 2013.

The amount of additional capital required to launch ZECUITY and fund our operations and to service obligations beyond the fourth quarter of 2013 will depend largely upon the timing, scope, terms and structure of the commercial partnership that we are able to enter into for ZECUITY. As Armando stated earlier, we intend to build our commercial infrastructure to complement that of our partner. Incremental capital may come from our business development activities, including upfront and milestone payments, equity and/or debt financing. As always, we remain focused on creating shareholder value as we evaluate our options.

I'll now turn the call back over to Armando for closing remarks.

Armando Anido

Thank you, Keith. Let me close by saying how proud we are to have achieved the approval of ZECUITY, the first and only FDA-approved patch for migraine. This approval is a significant milestone for NuPathe and for the doctors and patients who face the treatment challenges of migraine every day. We remain focused on our key objectives of securing commercial partners and preparing for a successful launch. We again thank all of our stakeholders for their continued support.

And with that, we're now happy to take questions. Operator, please begin the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions]

We'll hear first from Liana Moussatos with Wedbush Securities.

Liana Moussatos - Wedbush Securities Inc., Research Division

Could you characterize your partnership discussions' progress during the first quarter?

Armando Anido

Yes, we're pleased with the progress, Liana, at this point, that we've made. And as we mentioned in the prepared remarks, we anticipate having a partner in place prior to the launch of ZECUITY.

Liana Moussatos - Wedbush Securities Inc., Research Division

And do you have any term sheets?

Armando Anido

We're not going to disclose information about the exact point in the progress that we're making, so -- but we're happy with where we are.

Operator

We'll take our next question from Michael Schmidt with Leerink Swann.

Michael W. Schmidt - Leerink Swann LLC, Research Division

You mentioned a potential -- there are potentially different structures with regards to a partnership. So I was wondering what structures would you envision as being your preferred choice, co-promote or maybe royalty or maybe other structures that you can envision. And then on the patch technology, I was wondering, given the pretty strong patent protection until 2029, or potentially 2032, it seems to me there is some significant value in the technology platform. Do you have any plans to potentially out-license the technology or maybe think about follow-on products given that the technology is now validated with the FDA approval? And then a housekeeping question, could you just walk us through real quick through the share count calculation?

Armando Anido

Sure. Thank you, Michael, and I guess there are 3 questions that you asked there. One is about potential structures and a partnership. And I think as we've previously mentioned, we're relatively agnostic to a particular structure. I think that depending on who the potential partner is, we'll probably dictate exactly what structure that could be. I think we're looking at a whole host of options relative to what those could be. Could it be a co-promote, could it be a licensing deal or even broader? And I think until the final selection of who that partner is, it will be kind of up in the air for us. I think in total, what we're looking for is that that will provide the greatest shareholder value, and I think that we'll look to the partner. If they bring a significant amount of effort, it will dictate also what our commercial structure will look like as well. On the second one, it's around patch technology. I think that we do have protection that's predominately focused around the use of ZECUITY in migraine. There are some other options for us and I think they're downstream. Assuming that we have the appropriate amount of cash in order to further develop, that we would look to really see whether or not there are some options there for us that can unlock even more value out of the current iontophoretic technology. One of the other things that we do have that's important to remind folks about is our Long-Acting Delivery technology. That is the biodegradable implant that are in preclinical at this particular point, and those also are options for us as we look forward. And we have been in the process of seeking commercial and development partners for the 2, NP201 and NP202. On the share count, maybe Keith can address kind of where we are and exactly how you get to our numbers.

Keith A. Goldan

For the per share amounts that I read, we used the weighted average basic and diluted common shares outstanding for 2012 of $15.2 million. However, Armando did mention in his remarks that earlier in the first quarter, we did have a complete conversion of all the preferred shares. So as of now, the total common stock outstanding, as Armando mentioned, is 29.1 million. And the other potentially dilutive securities that are outstanding include warrants. There is about 14.4 million warrants outstanding. However, those are not penny warrants, they do have a weighted average exercise price of around $2 per share. There are also about 1.5 million stock options outstanding. Weighted average exercise price of those is about -- right around $3.09 a share. And there are restricted stock units outstanding totaling about 2 million shares, 2 million units.

Operator

We'll take our next question from Elliot Wilbur with Needham & Company.

Elliot Wilbur - Needham & Company, LLC, Research Division

First question for Keith, just a follow-up on your share commentary. Can you just remind me of what, if any, lockups exist on the Series A stock that was converted into common?

Keith A. Goldan

Yes. So the preferred that was converted into common are now registered and freely tradable. The warrants I mentioned that were there were 14.4 million warrants outstanding. 14 million of those 14.4 million become exercisable on April 23 of this year.

Elliot Wilbur - Needham & Company, LLC, Research Division

Okay. And then following up for you, Keith, as well. Are you still planning on shipping product to the trade in the second half? And if can you remind me -- if so, would you expect that to occur at the end of the third quarter or during the fourth? And then just as a follow-up to that, I'm assuming that revenue recognition will be based on some sort of demand pull-through, but I just want to confirm that.

Keith A. Goldan

Yes. So the answer to your final question is yes, we would expect revenue rack to be a demand-based. The answer to your first question is we are planning to complete our manufacturing validation batches this year in time to have the channel adequately stocked for a fourth quarter launch. So yes, we are planning on shipping into the channel this year in preparation to that Q4 launch. We're not being more specific at this time as to when in fourth quarter we expect the product to be available by prescription.

Elliot Wilbur - Needham & Company, LLC, Research Division

Okay. And then just one last follow-up question for Armando. I know these conversations and discussions are very fluid. But in terms of just thinking about the partnership, I mean, is it fair to say that you've kind of narrowed your focus list down to a list of high-probability candidates, and now it's just kind of a matter of going back and forth and thinking about structure and terms and the like? Or are you still sort of out there in the process of identifying potential additional partners?

Armando Anido

Yes. Elliot, as I mentioned earlier in one of the other questions, I think the exact point in where we are in the process, I'm not going to elucidate on. We are happy with the progress that we have made, and I think that we -- we're still focused on getting this secured ahead of the launch in the fourth quarter.

Operator

We'll hear next from Bill Tanner with Lazard Capital Markets.

William Tanner - Lazard Capital Markets LLC, Research Division

I got a couple of them. Armando, you made a comment about doing a 7-day derm rodent study. I think you said depending on the results, you might have to do a carc study. So I wonder if you could elaborate on that, then I have a follow-up.

Armando Anido

Yes. As part of our post-marketing requirements, the FDA, we had done some work in both humans, as well as in pigs before. And the FDA, I think, as part of the approval, wanted us to do a rodent study. So that is a study that will be conducted starting in the second quarter of this year. And then, depending on the results then, we will move forward into a rodent carcinogenicity study sometime in the second half of '14.

William Tanner - Lazard Capital Markets LLC, Research Division

But when you say depending on the results, I mean, what is -- so presumably, are you going to be looking for a signal that would necessitate the carc study or -- I mean, just trying to understand it.

Armando Anido

Yes, I think it's a matter of whether or not we see any penetration of ZECUITY into the skin of the rodent and we'll be looking at PK levels. So it depends on whether or not we see any penetration or not.

William Tanner - Lazard Capital Markets LLC, Research Division

Okay. So but it's not going to be looking at just the logic evidence that there is some malignancy, something like that?

Armando Anido

No, not at all.

William Tanner - Lazard Capital Markets LLC, Research Division

Okay. And then just kind of not to beat a dead horse, I understand there's not a lot you can say. But I mean, just thinking about broad brush as the template for a deal, it would sound like it's not going to be like what MAP, as an example, did with Allergan that they partnered with Allergan for the specialist and then retained the PCP opportunity. So it's fair to say that NuPathe is going to partner with one partner for both the specialist and however that's going to be carved out between you and them, and then presumably the same partner to take on the PCP effort.

Armando Anido

Yes, Bill, we're, as I mentioned, we are agnostic relative to what the structure can potentially be. So I'm not going to comment on exactly -- excluding any particular structure at this particular point. I think that, all in all, we're looking to maximize the value of ZECUITY, and that can take a bunch of different forms and with a bunch of potential different partners.

Operator

[Operator Instructions]

We'll hear next from Daniel Cheng with Stifel.

Daniel H. Cheng - Stifel, Nicolaus & Co., Inc., Research Division

It's Daniel in for Annabel. I had a quick question just regarding your field force. And can you just remind us what your plans are for getting the full field force online? And after you do secure a partnership, what are the steps and how long will it take to get everyone trained and ready to go?

Gerald W. McLaughlin

This is Jerry McLaughlin, thanks for the question. The size and structure of our sales force will complement that of our partnerships. So until such time that, that's consummated, we will then put our plan in place. It'll be roughly about 3 months from initiation of that ramp up to having them trained and ready to go. We have multiple plans in place, and that's something we'll share more information as we get closer to launch.

Operator

And at this time, I'd like to turn the call over to Armando Anido for closing remarks.

Armando Anido

Very good. Well, thank you, all, very much for participating this morning and for the questions, and we look forward to updating you at our next quarterly call. Thank you.

Operator

This does conclude today's conference. We thank you for your participation. You may now disconnect.

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