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Executives

Steven Webster - SVP of Finance and CFO

Mike Dougherty - President and CEO

John Wilson - VP of Sales and Marketing

Analysts

Michael Yee - RBC Capital Markets

Greg Wade - Wedbush Morgan

Adolor Corporation (ADLR) Q1 2009 Earnings Call April 29, 2009 9:00 AM ET

Operator

Welcome to the Adolor Conference Call. At this time, all participants are in a listen-only mode. There will be a question-and-answer session to follow. Please be advised that this call is being taped at the request of Adolor.

At this time, I'd like to introduce your host for today's call, Steven Webster, Senior Vice President of Finance and Chief Financial Officer of Adolor. Please go ahead.

Steven Webster

Good morning and thank you for joining us. Today, we will discuss our first quarter 2009 financial results. Before we begin, let me remind you that certain statements on this call may be forward-looking and are subject to risks and uncertainties associated with our business. These statements may concern, among other things, guidance as to future revenue from ENTEREG; our operations and prospects, transactions, intellectual property, litigation, the development of pharmaceutical products, clinical trials and any potential approval of our product candidates.

Additional information and risk factors affecting the Company's business and financial prospects and factors that could cause Adolor's actual performance to vary from our current expectations are available in our SEC filings. Investors with further questions should contact me at 484-595-1500. This conference call is being webcast via the Adolor home page and it will be archived for one week after the call.

Also speaking on today's call will be Michael Dougherty, our President and Chief Executive Officer, and John Wilson, Vice President of Sales and Marketing. Following our prepared remarks, we'll be pleased to answer your questions, at which point Eliseo Salinas, our Chief Medical Officer, will join us.

Now, I'll turn it over to Mike Dougherty.

Mike Dougherty

Thanks, Steven. Good morning, everyone, and thank you for joining our call today. I'll start off today by sharing some of the highlights of the first quarter with you.

First, we saw continued growth in ENTEREG shipments and recognized product sales during the first quarter. Net shipments were $2 million in the first quarter, up from $1.6 million in the fourth quarter. Net product sales revenue recognized was $1.4 million, up from $1.1 million in the fourth quarter of 2008.

We also saw continued progress in the inclusion of ENTEREG on hospital formularies. We estimate that ENTEREG was added to about 125 formularies during the first quarter, bringing the total to approximately 425 as of March 31. Importantly, about 275 of these hospitals are among the largest 1,400 target hospitals that perform 80% of bowel resection procedures in the United States.

A few other updates of interest related to ENTEREG during the quarter, our commercial partner, GlaxoSmithKline, completed a reorganization of its national hospital's sales force, and we just participated in the GSK national sales meeting in Texas last week with this group. ENTEREG is a very important product for this GSK hospital group. Indeed, no product has a higher incentive compensation waiting for these individuals than ENTEREG.

Also in the first quarter, we added 10 additional Adolor representatives to co-promote ENTEREG, largely in the Midwest. This augments approximately 15 reps we had in 2008, focused primarily in the Northeast and Southeast regions, and gives us a very real direct reach into the field alongside our GSK colleagues.

We also increased our staffing in the Medical Affairs arena. These individuals play a key role in responding to medical questions and discussing scientific data, oftentimes in the field in support of the brand.

And finally, we're pleased to receive $8.4 million in cash from GSK in the first quarter relating to the acceleration of payments owed under the collaboration agreement. We expect to receive an additional $1 million in the second quarter relating to this contract amendment. We finished the quarter with a cash position of $124.7 million.

John Wilson will provide some additional comments on ENTEREG. But before that, let me make a few comments on our development programs. For ENTEREG, we recently began actively screening patients in our Phase IV trial in patients undergoing radical cystectomy for bladder cancer. In our delta agonist program with Pfizer, we began recruitment of healthy volunteers for the multiple PK studies we are undertaking of both ADL5859 and 5747.

As we have communicated, we designed these studies in response to the PK findings in our Phase IIa studies last year. And they are intended to more fully assess the pharmacokinetic profile of these compounds prior to initiating proof of concept Phase II studies later in the year. ADL7445, our proprietary mu opioid receptor antagonist for opioid bowel dysfunction, is on track for an IND filing in the third quarter of this year. We're very excited about this compound and are anxious to initiate clinical evaluation in an area where there remains a large and unmet medical need.

I would now like to ask John Wilson to make a few remarks regarding the ENTEREG sales and marketing activities in the first quarter.

John Wilson

Thanks, Mike. On the last call, I highlighted the three key areas where we focused our sales efforts. First, on registrations and P&T Committee approvals in new hospitals.

During the quarter, we made excellent progress in these areas. Hospital registrations under the E.A.S.E. program now total over 1,275. More importantly, we saw strong growth in the number of hospitals accepting ENTEREG on formulary. As of March 31, ENTEREG was on formulary at over 425 hospitals, an increase of 40% since December 31. The bulk of the formulary approvals occurred in February and March, as P&T Committee activity restarted following year end.

We're hopeful that the recent increase in formulary approvals will translate into new customers and new sales, as hospitals incorporate ENTEREG into their treatment paradigms. Second, we have focused on initiating usage in hospitals that have added ENTEREG to their formulary during the past few months. In this area, too, we saw results as evidenced by a significant increase in the number of first time ordering hospitals this past quarter.

Third, the combined Adolor and GSK sales forces have been focusing on driving consistent product reordering. Again, during the first quarter, we saw progress with the number of reordering hospitals increasing by 62% from 185 at year end to 300 as of March 31. Our success in these three key areas should begin to translate into growth in ENTEREG shipments, and we saw evidence of this during the first quarter. Net product shipments were up 25% despite the modest decline in surgical procedures that typically is seen in the first quarter in the hospital marketplace.

As we have discussed in the past, securing formulary approval is one of the critical steps that is generally required before a hospital will put ENTEREG on a standing order. Formulary approval is often a lengthy and complex process that varies from institution-to-institution. On our end, the process starts with building awareness of the ENTEREG data package among appropriate healthcare providers.

After identifying a physician champion within a hospital, we then work with the hospital pharmacists to ensure their institutions are registered in the E.A.S.E. Program.

At the same time, we'll share health outcomes and pharmacoeconomic data with appropriate hospital personnel and members of the P&T Committee as they prepare for the formulary review. Following formulary approval, however, the process does not end. We must then provide educational support and in-servicing to help incorporate ENTEREG into the hospital's treatment pathway and healthcare provider ordering processes for bowel resection patients.

We also are receiving positive feedback from hospitals performing medication use evaluations, or MUEs, where outcomes and pharmacoeconomic data regarding the use of ENTEREG in the hospital are generated and collected independently by the institution. We're encouraged to see that these independent analyses replicate and further support our own clinical data.

We anticipate that some of these evaluations will be made public over the coming months, beginning at the Northwest Surgical Society meeting in August. And we look forward to sharing the results as soon as they're disclosed. These are the kinds of practical experience data that we feel are important to drive continued uptake of ENTEREG.

Along those lines, I'd like to share with you some examples of what we're hearing from the field. One of my favorite success stories involves a patient in a world renowned teaching institution, who unfortunately was required to undergo his fourth bowel resection.

At the time of each of his three prior procedures, ENTEREG was not commercially available. The patient reported to his surgeon that the post-operative experience following this fourth bowel resection, the first in which he received ENTEREG, was remarkably different than the previous ones. He said he felt much better and he recovered much more quickly. Upon discharge from the hospital, he even asked the surgeon the name of the company that makes ENTEREG.

From physicians, we regularly hear comments like, we use ENTEREG on all our colectomies, we find our patients get home sooner and healthcare costs go down. Another surgeon states, much like prophylactic antibiotics, ENTEREG is an integral part of our bowel resection care set.

From an operational perspective, there were two very important developments during the first quarter. The GSK sales force reorganization and the addition of the 10 new Adolor reps. As Mike mentioned, these two teams joined together in Dallas last week and had a highly productive joint national sales meeting.

The enthusiasm from the attendees was readily apparent. Key opinion leaders shared real life outcomes data and discussed the positive impact on their institutions when using ENTEREG. Reps shared their own success stories, and more importantly, discussed best practices in overcoming some of the common impediments to selling into the hospital market. I can assure you that the reps, both GSK's and Adolor's, left the meeting excited about getting back out into the field and making it happen.

As Mike mentioned, we added 10 new Adolor reps in late March, largely in the Midwest, to augment our existing presence in the Southwest and Northeast. Three of the five largest bowel resection hospitals in the country are in this region, and we now have people on the ground to complement their GSK counterparts.

Let me close by adding that the recent accelerated rate of formulary approvals and an increasing number of first time customers, along with the enthusiasm of our sales force, are encouraging signs that we are on the right track to grow ENTEREG sales.

With that, I will turn it over to Steven for a review of the first quarter financial results. Steven?

Steven Webster

Thanks, John. Total revenues for the first quarter of 2009 were $6.7 million, up from $6.2 million in the year-ago quarter. First quarter revenues consisted of $5.2 million in revenues from our collaborations with GSK and Pfizer, and $1.4 million in net ENTEREG sales.

Net shipments of ENTEREG in the first quarter were $2 million, up from $1.6 million in the fourth quarter of 2008. Net sales of ENTEREG differ from net shipments, as currently we recognize product sales revenue only on reorders from existing registered hospital customers. As of March 31, 300 hospitals had reordered ENTEREG, which is up from 185 hospitals at year end.

Operating expenses aggregated $20.4 million and $17 million for the quarters ended March 31, 2009 and 2008 respectively. R&D expenses for the quarter increased by $0.9 million, or 8%, to $12.3 million in 2009 due to increased R&D on our OBD Program, offset by decreased spending on our delta program with Pfizer on ENTEREG development, and in other external spend.

SG&A expenses increased by $2.3 million to $7.9 million in 2009, primarily related to increased costs associated with the commercialization of ENTEREG. Our reported net loss for the first quarter of 2009 was $13.2 million, or $0.28 a share, up from a net loss of $9.1 million, or $0.20 per share, in the year ago quarter. Net cash and short term investments used in the quarter was $7.2 million after taking into account the receipt of the $8.4 million cash payment from GSK.

We closed the quarter with $124.7 million in cash, cash equivalents, and short term investments. We had approximately 46.3 million shares outstanding at March 31. Mike?

Mike Dougherty

Thank you, Steven. We will open the call to questions in a moment. Let me first share some thoughts on our first quarter results.

We are, of course, pleased to report continuing progress with every new hospital registration, formulary approval, and product shipment. But clearly, there is much more to do here and this remains an opportunity that is largely in front of us.

The hospital environment is indeed a very challenging one, especially now, and the adoption curves, particularly for new drugs and new indications, can be extended. Our view, both at Adolor and GSK, remains the same. And that is that ENTEREG provides first-in-class, demonstrable improvements in patient quality of life and significant pharmacoeconomic benefits to healthcare providers.

We are intensifying our efforts to accelerate the adoption of ENTEREG for the benefit of the over 0.5 million patients who undergo bowel resection surgeries each year in the United States. With our strong clinical data, positive physician feedback, and continued growth in hospital awareness, we expect to see our efforts reflected in ENTEREG sales growth in 2009 and beyond.

We'll now open the call to questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Michael Yee with RBC Capital Markets.

Michael Yee - RBC Capital Markets

Thanks, can you hear me okay.

Mike Dougherty

Yes, we can, good morning Michael.

Michael Yee - RBC Capital Markets

Good morning, couple of questions. Can you describe some of the trends at some of the larger hospitals? I guess, are these guys using it as standard care? How does it vary from doctor to doctor? What causes your doctor to use it in all their patients versus only some? Certainly, you don't know who's going to have POI, so it's a prophylactic, so what's driving a doctor to do one practice versus another?

Mike Dougherty

Yes, maybe I'll start off on that and then ask John Wilson, whose people are out in the field every day to make some comments. Clearly, we have adoption within certain of the more significant hospitals and we're pleased about that.

We have quite a number of hospitals that are considering the drug and are in various stages of that consideration, including planning formulary approvals. What drives those considerations varies greatly from hospital-to-hospital. And we have a saying here, when you know everything there is to know about a hospital, everything there is to know about a single hospital.

So it's really a function of getting out in the field and working with those institutions individually. We're fortunate in that regard in that we have a substantial detailing effort that is. And a substantial number of people in the field to call on those 1,400 targeted hospitals. And maybe with that, John, you can make some more specific comments about what we are seeing within specific institutions.

John Wilson

Sure. All of that is true. We do see a wide range in time to adoption. And I guess that punctuates my comments by just saying that once you're on formulary, that's really the starting point. And then where our efforts are focused is to try to get ENTEREG to be a part of the fabric of the individual institution protocol or the individual physician protocol on the treatment for bowel resection. That includes order sets; it includes being listed on the treatment pathway, and the protocol. So there is a number of logistical issues that need to be addressed within each hospital after you're on formulary. And as Mike said, they vary greatly from institution to institution.

Michael Yee - RBC Capital Markets

So when it varies from institution to institution, I guess, are any institutions having it as are mandating it? Or it really is still left up to the doc and you have to talk to the doc and convince the doc?

John Wilson

Well, mandate is a bit of a strong word, okay? I'd say that in many institutions, we are on stand rewards in that all of the bowel resection patients in those institution within ENTEREG.

Michael Yee - RBC Capital Markets

Okay, so there are some certain hospitals where that is the case?

John Wilson

Correct. And we're also seeing a growing number of institutions conducting their own medication use evaluations or MUEs, as I mentioned in the lead-in; where they're evaluating ENTEREG on their own body of patients, conducting pharmacoeconomic analyses, outcome analyses. And certainly when those are completed, you definitely become part of the fabric of the treatment pathway.

Michael Yee - RBC Capital Markets

And in regards to the GSK sales force, how many salespeople do they have now coming out of this reorg, I guess, as you described it? And what other products are in the bag with these salespeople?

Mike Dougherty

Yes, they have a couple hundred people in their hospital sales force and ENTEREG is one of three products that a hospital sales force with GSK details.

Michael Yee - RBC Capital Markets

And what are those products?

Mike Dougherty

They are (inaudible).

Michael Yee - RBC Capital Markets

Okay. And then a housekeeping question. The contract regs went down sequentially. That's just as I mean, you would expect that to be lumpy going across the year and that's reimbursement from Pfizer? Is that driving it? And then SG&A also went down sequentially. I would expect it to be going up with marketing efforts. But is there something driving that, or was there something one-time in the fourth quarter?

Steven Webster

Nothing one-time there, Michael. The contract revenues go up and down, chunk of that is the amortization of the up fronts. And the rest of it is contract reimbursement for work being done. Obviously, there was Q1, year ago; there was some ENTEREG development work that was reimbursed. That is now at a deminimus level. And then where the Delta program is with the reformulations and going back to Phase I, the reimbursement isn't as big as when we were in the Phase II's. On the SG&A side, you'll see those maintain relatively levels will go up a little bit with the addition of the 10 reps. But by enlarge, those are timing differences on some of the sales and marketing and commercialization initiatives.

Michael Yee - RBC Capital Markets

Okay. Thanks.

Operator

(Operator Instructions). Your next question comes from Greg Wade with Wedbush Morgan.

Greg Wade - Wedbush Morgan

Good morning, thanks for taking my questions this morning.

Steven Webster

Good morning Greg.

Greg Wade - Wedbush Morgan

Can you talk to the 1,400 targeted hospitals of which you've achieved formulary status on 275? How many of those hospitals have made a negative decision?

Mike Dougherty

Good moring Greg, I don't have at my fingertips the number of denials. I can tell you that certainly the number of approvals far outweighs or outnumbers the number of denials. Denials actually can come about for any number of reasons. And they're not necessarily entirely negative or they don't necessarily reflect on the product. In many cases, many institutions increasingly have adopted practices where they won't consider a product for inclusion on formulary until some on the market for some period of time.

And in some cases, that period of time is six months; in other cases, it may be as long as 12 months. For that earlier time period, the six-month period, we're actually rolling into a period of time where we're seeing that six-month period has lapsed at a number of hospitals and we are looking forward to formulary consideration. And other times, denials can come with them very clear action items, which are a pathway for us to provide additional information or to proceed accordingly. So as I said, the rate of approvals far outnumbers the denials. And it's not necessarily a bad thing when reflection on the product.

Greg Wade - Wedbush Morgan

And is it GSK or Adolor folks that are responsible for this part of the sales cycle?

Mike Dougherty

It's really both. And in many ways, it's led by GSK in that the people out in the field lead the process and the GSK people, obviously, in the field, the reps outnumber the Adolor people.

Greg Wade - Wedbush Morgan

And then with respect to this metric, is there a target number of formulary decisions and wins you have for 2009?

Mike Dougherty

Yes, good question. The math today yields about a 20% formulary acceptance level, long-term, I don't know that the answer is 100%; I don't know that the objective where the reasonable target is to be on 100% formularies, but it's clearly in the 80% variety. And where we are at yearend is difficult to project. We added 125 in the first quarter. I think John mentioned most of those occurred in the latter part of the first quarter. We have ambitions of adding more in the second quarter, third, and fourth quarter. And I suppose at year-end will be somewhere between that 20% and 75%.

Greg Wade - Wedbush Morgan

For the financial results, can you tell us what your target year-end cash might be?

Mike Dougherty

Well, we haven't said, maybe I will start there and then ask Steven to make some comments. We haven't put out projections, the burn rate and our financial condition is something we give a good deal of consideration to on a day-to-day basis around here. But looking historically, we burned about $35 million last year; less than that in 2007. Our operations of course, benefited in those time periods from payments from Pfizer and GSK, but this is something we consider an integral part of our business and it continues. As Steven mentioned, will bring in about $9 million from GSK in the first half of 2009.

And going forward, we're certainly committed to bringing that burn rate down overtime, which we think is achievable. And it's achievable on the back of growth in ENTEREG sales. So, Steven, any further comments to make?

Steven Webster

No, I think that's about it, Greg. The big wildcard, of course, is the contribution from ENTEREG. You saw us in the first part of last year, we were burning 11 to 12 a month and with the launch, as we explain throughout the year, we saw that go up to about the 15 a month range per quarter. And what you'll see is those levels of expenses we're going to try to maintain and hold. We think we've got the right investment in our programs. We think we've got the right investment of commercial effort behind ENTEREG, and that's both through Medical Affairs and through John Wilson's group. So I think, you will see that the costs stabilize where they are and we're hoping that the ENTEREG will sort of cut into it.

Greg Wade - Wedbush Morgan

Thanks for taking my questions.

Mike Dougherty

A pleasure. Happy to follow up if you have additional, Greg. I think at this point, since it's 9:30 with a lot of people having their eyes on the open, we'll conclude the conference call. We will be available for follow-up if people have individual questions. And I thank you all for your participation today.

Operator

Ladies and gentlemen, that does conclude our conference call for today. Thank you for your participation.

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Source: Adolor Corporation, Q1 2009 Earnings Call Transcript

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