Alexza Pharmaceuticals Inc. - Special Call

May. 8.13 | About: Alexza Pharmaceuticals, (ALXA)

Alexza Pharmaceuticals, Inc. (NASDAQ:ALXA)

May 08, 2013 9:00 am ET

Executives

Mark K. Oki - Chief Financial Officer, Principal Accounting Officer, Senior Vice President of Finance and Secretary

Thomas B. King - Chief Executive Officer, President, Director and Chairman of Finance Committee

Analysts

Charles C. Duncan - Piper Jaffray Companies, Research Division

Scott R. Henry - Roth Capital Partners, LLC, Research Division

Stephen G. Brozak - WBB Securities, LLC, Research Division

Edward H. Nash - Cowen and Company, LLC, Research Division

Jason Kantor - RBC Capital Markets, LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Alexza Pharmaceuticals Inc. Conference Call. My name is Alice, and I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I'd now like to turn the call over to Mr. Mark Oki, Senior Vice President of Finance and Chief Financial Officer. Please proceed, sir.

Mark K. Oki

Good morning, and thank you for joining us today. On the phone with me is Tom King, Alexza's President and Chief Executive. Before we get started, I would like to remind you that the matters discussed on this call contains forward-looking statements that involve risks and uncertainties, including those related to the potential commercial opportunity of ADASUVE Staccato loxapine, Teva's ability to commercialize ADASUVE in the U.S. and the overall aspects of the commercialization of ADASUVE in the U.S. and Europe. Actual results may differ materially from the results predicted, and reported results should not be considered an indication of future performance. These and other risk factors are more fully discussed in our annual report on Form 10-K, which we filed with the SEC on March 26, 2013, most particularly, under the caption Risk Factors. Alexza disclaims any obligation to update or revise any forward-looking statement made on this call as a result of new information or future developments. Alexza will not be providing an update to financial guidance on today's call. We will host a separate conference call on May 14, 2013, to provide updated financial guidance and a general business update, in addition to the company's projected May 14, 2013, filing date of the first quarter 10-Q.

I will now turn the call over to Tom.

Thomas B. King

Thanks, Mark. Good day, and thank you very much for joining us early this morning with this exciting update. Teva Pharmaceuticals USA, a subsidiary of Teva Pharmaceuticals Industries Ltd., and Alexza Pharmaceuticals announced this morning that the companies have entered into an exclusive U.S. license and supply agreement for ADASUVE. This is the culmination of a rigorous process involving multiple interested parties and negotiations that began many months ago. We started 2013 with the important goal of finalizing the U.S. commercial strategy for ADASUVE, along with U.S. NDA approval by the FDA on December 21, 2012.

Key to achieving this important milestone, Alexza conducted an intensive market research and analyses and obtained substantial input from experts and consultants in order to gain an accurate and robust understanding of the resources required to achieve the successful launch and commercialization of ADASUVE. As many of you are aware, we completed a competitive process, in which 2 commercial strategies and number of well-considered options were vetted in parallel by our executive team, topside advisors and board.

Per the agreement announced today, Teva will be responsible for all U.S. commercial and clinical activities for ADASUVE, including the U.S. post-approval clinical studies. Alexza will be responsible for manufacturing and supplying ADASUVE to Teva for commercial sales and for all clinical trials. Teva also has the right to conduct additional clinical trials of ADASUVE for potential new indications in neurological disorders. Under the terms of the license and supply agreement, Alexza will receive an upfront cash payment of $40 million and is eligible to receive up to $195 million in additional milestone payments based upon the successful completion of the ADASUVE's post-approval studies in the United States and achieving net sales target. In addition, Teva will make tiered royalty payments based on net commercial sales of ADASUVE. Teva also will make available up to $25 million to Alexza via 5-year convertible note and agreement to lend, which Alexza may access to support of ADASUVE activities. Alexza may prepay up to 50% of the outstanding borrowed amount at any time prior to maturity. Teva may convert at maturity all or a potion of the then-outstanding amount under the note into equity of Alexza.

We couldn't be more pleased in having Teva as a partner in in the commercialization of ADASUVE in the United States. Teva brings an established commercial presence in both the hospital and psychiatric markets, which are exactly the settings for ADASUVE has been initially approved.

Teva has considerable strength and market presence with the Teva Select Brands group, and we are confident of their ability to deliver commercial success of this important new project.

In evaluating the commercial options for ADASUVE, we set key criteria for selecting a commercial partner. Exceptional sales and marketing capabilities in resources and a high level of enthusiasm and commitment for bringing ADASUVE to patients who can benefit from this novel therapeutic. This defines Teva and their view for launching and growing ADASUVE.

As I mentioned earlier, we arrived at this transaction through a competitive process. We had been highly focused on establishing the best commercial arrangement for ADASUVE, in which we can build near and long-term value for Alexza and its stockholders through the commercial success of ADASUVE, and we firmly believe we have arrived at a great outcome.

2012 is a significant year and long-anticipated achievement for Alexza with the U.S. and EU drug approvals on manufacturing scale up. 2013 will be the year of ADASUVE commercialization in the U.S. through our partner, Teva, and in Europe through our partner, Grupo Ferrer. As we celebrate these successes, I'd like to remind us all what the launch of ADASUVE will mean to patients and the clinicians who treat them. ADASUVE represents a significant opportunity to improve patient care for a group of patients who has few advocates and few approved therapeutic options.

Moderate visited agitation is experienced by nearly all patients with schizophrenia or bipolar disorder. For these patients, agitation is characterized by feelings and awareness of being out of control, including panic, cold sweats, poor impulse control, shaking and escalating severity of the symptom. In fact, agitation can escalate rapidly and unpredictably, creating an unstable and potentially dangerous situation for patients, their caregivers and treating physicians and hospital staff.

Our market research indicates that patients average 11 to 12 episodes of agitation each year, with approximately 50% of those episodes being treated in the hospital setting, which includes the emergency department, the psychiatric emergency department and the in-patient psychiatric unit. This is the market that will be addressed with the U.S. launch of ADASUVE. We are greatly encouraged by the consistent and positive feedback we receive from physicians and nurses who treat these patients. Both clinical-thought leaders and hospital-based physicians alike are excited about the potential of ADASUVE to provide a new treatment option for patients in the midst of an agitation episode.

Alexza was started by a visionary idea by Dr. Alex Zaffaroni, of an ingenious drug-delivery technology that would make possible new products such as ADASUVE. Today, with the U.S. and EU approvals of ADASUVE, as our first Staccato-based product out of the gate, we are taking yet another positive step for putting the technology in the hands of the physicians and their patients.

We are delighted to be announcing this agreement today and look forward to being announced then in partner to Teva as they embark on the U.S. commercial path with ADASUVE. We'll be updating you as we continue to make progress, and as always, we fully appreciate your support of Alexza.

We would now like to open today's conference call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from Charles Duncan of Piper Jaffray.

Charles C. Duncan - Piper Jaffray Companies, Research Division

My first question is regarding the launch and the deal. In terms of the launch, is timing still planned for the third quarter? And then in terms of the deal, are there any performance metrics in terms of any minimum, like physician touch points, or this the best-efforts deal?

Thomas B. King

Sure, Charles. So we just completed the deal and the deal has been in negotiation for a period of time. The launch -- final launching timing will be announced by Teva, as they get their arms around both what they need, what they're going to put in place, the timing of manufacturing supply, all that sort of things. So what we'll be looking to an update on the overall timing. Certainly, we're looking for a 2013 launch, but we can't give the specifics today, because we don't have the specifics of the exact launch date. In terms of efforts, the efforts is our commercial reasonable efforts with certain standards that are included in the agreement that outlined resources, both in terms of people and efforts, that are similar to or greater in what we have previously talked about what this market needs. If you recall, it's a focused market of about 1,000 hospitals. We've always talked as the group meeting about 40 FDEs in the field to make this product very successful. And we have commitments of efforts at or above that level from Teva.

Charles C. Duncan - Piper Jaffray Companies, Research Division

And then next question is regarding payments attached to you. I suspect that you're not going to give us specific royalty rates. But if you could provide a range, that would be helpful, and current visibility in the tierings in terms of different levels of scale. And will you be -- how will you book supply payments? Would -- could you possibly get paid yet this year for providing product to Teva?

Thomas B. King

Yes, so we -- let me answer the second question first. So we would book revenues from Teva in 2 ways. When we sell product to them on a transfer price, that income that will come to us, and you will see that and offer it back to what we'll call from an accounting perspective, but it will certainly be revenue attributed to cost of goods of them ordering product. And then we will also see revenue coming to us as a royalty rate. And so, you'll see actually 2 remunerations that come to us over the course of each quarter. In terms of specifics of royalty rates and tiers, we're not providing any additional guidance at this point in time. The details of the transaction are what they are. I would say they're at competitive rates in the standard for the products of this size and in this category.

Charles C. Duncan - Piper Jaffray Companies, Research Division

Okay, and final question. As you mentioned Teva's diligence in terms of the market. And I assume that they came to a conclusion on the market which was roughly equivalent to your's or maybe, if I remember, about $250 million are the potential. The other question is regarding IP dilutions? How extensive did they take a look at ADASUVE IP?

Thomas B. King

I guess my brief answer would be, it was impressively thorough in terms of intellectual property diligence, both those in terms of what we patented and also freedom to operate in terms of what we patented.

Operator

And so your next question comes from the line of Scott Henry of Roth Capital.

Scott R. Henry - Roth Capital Partners, LLC, Research Division

So just a couple of questions. I think a lot of them were just hit on. But for starters, I know they're going to pay you an upfront payment, but they're also going to do this post-approval clinical study. Could you give me an idea of what is the magnitude of that study? Because that would seem to be a pretty significant investment Teva's going to have to make as well.

Thomas B. King

It is. We actually -- and is outlined actually in our approval letter, which is available online with the FDA, we have 3 post-approval studies and commitments with the FDA for United States approval. One is a 10,000 patient observational study to collect the use of ADASUVE in the real life. The protocol synopsis was submitted to the FDA. I know they're currently having back-and-forth discussions about finalizing that protocol. And so that's a project that will probably run 2 to 3 years in terms of collecting that data from an observational study. The second, 2 studies that are part of our post-approval commitment are 2 pediatric studies. We had a pediatric waiver and an adolescent deferral. So these are studying adolescents that have bipolar disease or schizophrenia. The first study is a pharmacokinetics kind of Phase I, if you will, dose tolerability study in adolescents. And upon the completion and identification of a maximum tolerated dose, we have actually moved into -- in this case, Teva will move into a dose study, probably a couple of doses against placebo actually doing efficacy. And if the data were good, then you would actually get an expanded indication into adolescents to use ADASUVE for the treatment of their agitation. So it is a significant investment. It's a great amount of work, and the data from these studies will be important in terms of shaping the future size and the opportunity being on what we currently identified, and it's exciting to be working with Teva on these projects.

Scott R. Henry - Roth Capital Partners, LLC, Research Division

Okay. And I don't recall, did you ever put a number on that Phase IV commitment in the past? In 10,000 patients, I guess, every thousand dollars per patient is $10 million. I don't recall if you put a price on that in the past or...

Thomas B. King

We have not specifically. We said it's at $10 million or below. It's a chart review, and so it's not a randomized study. It's not something that has the variables that make it to the price of $10,000 per patient. So $1,000 or less is probably the right number. And at the end of the day, it's actually driven by the number of sites. So if you have 50 to 100 sites, it's significantly less expensive than if you had 200 or 300 sites. So the number of sites has not been finalized. And to a certain degree, that will be a decision between Teva and Alexza, but that would be more of a driver of the overall cost as opposed to the number of patients.

Scott R. Henry - Roth Capital Partners, LLC, Research Division

Okay, great. And just a couple of questions on the economics, I'm not sure what you can answer. The $195 million, can you give us an idea of the mix between sales milestones and clinical milestones to get to that $195 million? I don't know if you can give color on that.

Thomas B. King

Yes. Not today, Scott, but thanks for the question.

Scott R. Henry - Roth Capital Partners, LLC, Research Division

Okay. And I don't want to ask you about the specific royalty because I know you won't answer that, but just when I think about the economics of this transaction to Alexza, is it a pretty -- is it a mix between direct royalties and then manufacturing revenues? I don't know if it's been clear if you sell the set cost? Or you do make a profit on manufacturing? Should we think about that as kind of a split between those 2 levers?

Thomas B. King

Yes. We actually -- I've mentioned just real briefly when -- to Charles' question. We do take revenues from 2 different sources. One is the transfer price of product. We ship to them that they sell. And that is done based on commercialization costs down to a floor. There's incentive for us to increase our efficiencies and drive cost down. And if we're successful with that, we can eventually take manufacturing profit in addition to just the royalties that would come from top line sales. But they incumbent on us to supply product and supply product debt across. And if we hit those targets, then we can benefit from that work.

Scott R. Henry - Roth Capital Partners, LLC, Research Division

Okay. So that, in effect, will become more profitable as the volume increases? Is that going to be trailing in a flat -- at a flat rate?

Thomas B. King

That's correct. I mean, our overall operating -- I guess, tenant has been in our manufacturing is we have a similar sort of arrangement with Grupo Ferrer. And so the more load we put on our manufacturing facility, it benefits everybody in terms of the transfer price, but it also benefits Alexza in terms of potential profitability out of that manufacturing facility.

Scott R. Henry - Roth Capital Partners, LLC, Research Division

Okay, great. And just a final question. Obviously, you have a lot more cash now and you have less burn in front of you as you're not launching the product. Does this change what you do with the rest of your pipeline? Do you start to expedite a few of those compounds? How should we think about that?

Thomas B. King

Yes. We're excited about bringing the pipeline back to the floor. Staccato is obviously improved technology now, both in the United States and Europe. And we're excited about seeing what is the right -- what are the right choices for us. And we probably discussed AZ-002, the Staccato appraisal in for acute repetitive seizures, and we remain on track to put that product back into the clinic this year, and we'll see data from that study sometime in 2014. And if -- there's a chance now to go back and look at some of the other ideas that we've probably disclosed, but as importantly, ideas that we've been thinking about that we haven't disclosed and reinvigorate the pipeline and take Staccato to the next level with new pipeline-based products.

Operator

Your next question comes from the line of Steve Brozak of WBB Securities.

Stephen G. Brozak - WBB Securities, LLC, Research Division

I'm glad someone else asked you the granular questions on royalties, and you were able to say no to them instead of me. But in going in with Teva, all kidding aside, they obviously have a psychiatric understanding and an understanding of what the the psychiatric community is looking for. So there's a platform there that lends itself well. But they also have a platform for other drug, potential drug products. Did that go into your deliberations in terms of partnering with them? And considering the fact that they'll now understand how to disseminate your product, will there be potentially other product disseminations through them or similar to this type of deal? And I have one follow-up after that.

Thomas B. King

Certainly. Well, yes, Teva has an NTE strategy that they've been talking about for the last year or so. And Teva defines ADASUVE as an NTE, which is a technology that reestablishes or enables a broader use of a product. So there is a scientific and intellectual, I think, interest and curiosity with Staccato technology. But going back to ADASUVE, they are uniquely positioned out of all the work that we've done because of both their site presence and their hospital-based presence. They also had extensive experience with REMS programs. So they are impressively uniquely positioned to be able to do great work with ADASUVE, which was a primary driver. Any sets of conversations we might have with them, at this point in time, it's just potential for us to have a conversation. So we're focused on ADASUVE at this point, Steve.

Stephen G. Brozak - WBB Securities, LLC, Research Division

Okay. And the follow-up on that is, obviously, now you've got a situation where you've done more homework and you got more homework under your belt than any company of any size in terms of understanding the markets. So do you think that, that'll be able to give you a better way of monitoring progress and seeing a data that comes back, given the fact that you've, obviously, have all the partnering data from your previous development? I'll hop back in the queue after that.

Thomas B. King

No, that's a good point. This agreement has some of the more standard elements including a joint steering committee and 3 joint project teams, and one of them being a commercial team. We've met several times with the commercial team at Teva and shared with them all of our knowledge, and we envision the joint commercial teams being a source of that, being able to continue to share that as they take that information and embellish it into doing the [ph] launch the products. So I think it gives us a great insight in being able to move forward.

Operator

And your next question comes from the line of Edward Nash of Cowen and Company.

Edward H. Nash - Cowen and Company, LLC, Research Division

What are -- just maybe ask a bit about the sales force. Maybe can you speak a little just exactly what the number of sales people are for Teva that are going to be focusing on this? And maybe a little bit about where the product will actually fit with regard to will it be a first position with regard to marketing?

Thomas B. King

Yes. So the specifics of positioning, and are still confidential, and Teva would like them to remain that way from a competitive perspective. They have a significant presence in terms of the number of people, far in excess of the 40 that I've mentioned. And the exact allocation of individual's time and stuff, both in the field and the managed markets groups and in the sale groups is still being finalized. But as I mentioned a little bit earlier, that effort will exceed what we've talked about, what we think is needed based on some of our assessment in terms of number of people. So we're excited about that aspect. They have a clozapine product of which sells into a similar group of physicians, treating physicians, that psychiatrists that see patients within the hospital. So they have this unique already established presence with clinicians through that product. And so that learning and that expertise along with riding the REMS program for that product has given us extreme insight into sort of their skills and capabilities. Obviously, they're fantastic at pricing, running managed markets and all that sort of aspect given their breadth of portfolio. So we're actually looking forward to a -- kind of a robust portfolio of services and activity out of Teva.

Edward H. Nash - Cowen and Company, LLC, Research Division

Great. Just my last question is, for any additional potential new indications for ADASUVE, are there any back-term payments associated with those additional indications as well? Or would that just also just encompass within the back-end royalties that you would get and also the sale of product?

Thomas B. King

So it will be the latter, Edward. So Teva has sole responsibility for all of the investment into those new indications. And the way we would get remunerated is through sales of the product through royalties and through transfer price of the manufactured product.

Operator

[Operator Instructions] Our next question, however, comes from the line Jason Kantor of Credit Suisse.

Jason Kantor - RBC Capital Markets, LLC, Research Division

Tom, all my questions have been answered, but I just want to echo congratulations on a good deal and look forward to see you in the launch.

Thomas B. King

Well, thank you, Jason. I remember first meeting you in coordination of our IPO in 2006, and you mentioned that we are one of the few companies that actually got their IPO-based product actually to the market. So AZ-004 was on our list, and I give hats off to you to making that note. So thanks for the congratulations and we look forward to keeping you posted.

Operator

I'd now like to turn the call back over to Tom King for closing remarks.

Thomas B. King

Fantastic. Thank you, Allison. And thank you again for all us -- to all of you for joining us early this morning. We're very excited about our Teva partnership and the U.S. commercialization of ADASUVE. And we look forward to talking with you again on May 14 for our first quarter earnings call and business update. So have a great morning. Thanks.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and good day.

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