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Optimer Pharmaceuticals (NASDAQ:OPTR)

Q1 2013 Earnings Call

May 09, 2013 5:00 pm ET

Executives

David A. Walsey - Vice President of Investor Relations & Corporate Communications

Henry A. McKinnell - Chairman and Chief Executive Officer

Stephen W. Webster - Chief Financial Officer, Principal Accounting Officer and Senior Vice President of Finance

Analysts

Marko K. Kozul - Leerink Swann LLC, Research Division

Brian P. Skorney - Robert W. Baird & Co. Incorporated, Research Division

Alan Carr - Needham & Company, LLC, Research Division

Heather Behanna - JMP Securities LLC, Research Division

Sara Slifka - Morgan Stanley, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Optimer Pharmaceuticals First Quarter Financial Results Conference Call. [Operator Instructions] As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Mr. David Walsey, Vice President of Investor Relations. Sir, you may begin.

David A. Walsey

Thank you. Welcome to the Optimer Pharmaceuticals first quarter 2013 conference call. With me today, from the company, is our Chief Executive Officer and Chairman of the Board of Directors, Hank McKinnell; and our Chief Financial Officer, Stephen Webster.

Please note that this conference call will include forward-looking statements regarding future events and the future financial performance of Optimer. Because the statements deal with future events and are subject to many risks and uncertainties, actual results may differ materially from those in the forward-looking statements. For a full discussion of these risks and uncertainties, please review Optimer's annual report on Form 10-K and subsequent quarterly reports on Form 10-Q that's filed with the U.S. Securities and Exchange Commission.

This conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, May 9, 2013. Optimer undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call. This conference call is also being webcast and will be archived on our website for 30 days after today.

At the end of February, we announced the commencement of a process to explore a full range of strategic alternatives. We cannot predict or speculate on the outcome of this process or how long it might last. As previously indicated, we will not comment on it further or respond to questions related to the strategic review until the process is completed.

Earlier today, we released financial results for the quarter-ended March 31, 2013. If you have not received this news release or if you would like to be added to the company's distribution list, please visit the Investor section of our website at www.optimerpharma.com.

I would now like to turn the call over to Hank McKinnell, our CEO and Chairman.

Henry A. McKinnell

Thank you, David. Since the accepting the position of Optimer's CEO a little over 2 months ago, I've been focused on the strategic review of alternatives on behalf of our Board of Directors and also on an operations review for advancing the availability of DIFICID for patients with Clostridium difficile-associated diarrhea, known as CDAD. I've been working with the Optimer team to continue the initiatives launched last year and to evaluate additional strategies to accelerate growth of the product.

Recall that these initiatives include a hospital contracting, or a discount program, aimed at reducing access costs in hospitals. Hospitals are the key channel where DIFICID prescriptions are initiated. We've also implemented the DIFICID Rx Assist program, which we launched to help improve continuity of care for patients in the retail setting by providing a variety of information resources, including ways to reduce the patient's out-of-pocket expense. Our efforts are certainly being supported by a new technology add-on payment for DIFICID established by the Centers for Medicare & Medicaid Services last year, the first ever for an oral drug, and educational initiatives to help institutions better understand disease burden.

Generally, these new initiatives were put in place late last year and we are just beginning to see the impact in the marketplace. The one thing I have learned since becoming CEO is that DIFICID is a great product, as demonstrated by its superiority to vancomycin in sustained clinical response through 25 days after the end of treatment. We have a good mix of programs in place to support broader adoption of DIFICID.

I'll take a few minutes to provide some thoughts on our first quarter results and then I'll hand over the call to Stephen Webster, our CFO, to provide more detail.

This afternoon, we reported $16.8 million in net DIFICID product sales for the first quarter, this is flat when compared to the first quarter. Disappointing on the face of it, but a little stronger when you look underneath the top line number. As you know, we calculate net product sales of DIFICID on delivery to our wholesalers, what we refer to as ex-factory sales. In the quarter, ex-factory shipments declined 3.3% from the fourth quarter. There was, however, a significant wholesaler inventory sell down during the quarter, especially during March. Wholesaler inventory for DIFICID were at all time lows on March 31.

We also track shipments from the wholesalers to health care providers, which is a better measure of actual customer demand. Estimated ex-wholesale bottles shipped in the first quarter increased by nearly 5% to more than 7,600 from approximately 7,250 in the fourth quarter. This is a somewhat encouraging sign despite the ex-factory numbers. The reason I'm encouraged here is looking at April USX factory sales an estimated ex-wholesaler shipment. We believe we are seeing signs that the inventory levels, as well as demand for DIFICID by health care providers are increasing.

As we've noted in the past, the initiatives we put in place in the latter part of 2012 are not quick fixes and are taking time to bear fruit. That said, I believe we are effectively implementing those initiatives. Although it may take more time and may be taking more time than I'd like, we are seeing progress in establishing DIFICID as an important treatment for patients with CDAD. When these efforts and other initiatives come together, I'm confident we can accelerate DIFICID growth.

With that, I'll have Stephen provide some details on the quarter.

Stephen W. Webster

Thanks, Hank. Total revenue for the quarters ended March 31, 2013 and 2012, was $19.4 million and $14.4 million, respectively, an increase of $5 million. The increase was due to an increase in DIFICID net product sales, as well as an increase in contract revenues.

DIFICID net product sales in the U.S. and Canada for the quarters ended March 31, 2013 and 2012, were $16.8 million and $14.4 million, respectively, an increase of $2.4 million. The increase was due to an increase in the number of customers ordering DIFICID and increased sales to existing DIFICID customers, as well as the impact of a 5.6% price increase effective January 3. As Hank mentioned, we recognized product sales of DIFICID upon delivery to our wholesalers.

Contract revenue for the quarter-ended March 31 was $2.6 million. There was no contract revenue and in the year-ago quarter. The $2.6 million was due to fidaxomicin shipments to Astellas Pharma Europe, Astellas Japan, AstraZeneca and Specialised Therapeutics Australia, as well as royalties received from Astellas Pharma Europe. In addition, we recognized approximately $300,000 of revenue on the upfront payments we received from the AstraZeneca and Astellas Japan in the prior year.

Cost of product sales for the 3 months ended March 31, 2013 and 2012, was $1.6 million and $1.2 million, respectively. The increase this year was due to higher net product sales in the quarter as compared to the year-ago period.

Research and development expense for the quarters ended March 31, 2013 and 2012, was $9.9 million and $11.1 million, respectively, a decrease of $1.2 million. The decrease was primarily due to lower CMC expenses, as well as lower consulting expenses. The decrease was offset by higher health economics and outcomes research expenses. We also incurred higher expenses related to our prophylaxis and pediatric clinical trials.

Selling, general and administrative expense for the quarters ended March 31, 2013 and 2012, was $34 million and $25.5 million, respectively, an increase of $8.5 million. The increase primarily was due to higher legal, professional and outside service expenses. We also recognized higher stock compensation expense primarily related to the previously announced management departures.

Co-promotion expenses with Cubist for the quarters ended March 31, 2013 and 2012, were $3.8 million and $10.1 million, respectively, a decrease of $6.3 million. The co-promotion expenses for the quarter ended March 31, 2012, included an accrual of the first year sales target bonus and an accrual of the first year gross profit on sales above the sales target. As you may recall that year 1 milestone was achieved.

Net loss for the first quarter of 2013 was $31.3 million, or $0.65 a share on a basic and diluted basis, as compared to net loss for the first quarter of 2012 of $11 million or $0.23 a share on a basic and diluted basis. The net loss in the year-ago quarter was favorably impacted by a $23.8 million gain upon the de-consolidation of OBI.

At March 31, 2013, we held cash, cash equivalents and short-term investments of $93.5 million and had 48 million shares outstanding on March 31.

I'll now turn the call back over to Hank.

Henry A. McKinnell

Thank you, Stephen. Doctors around the world all ask the same question, and basically, it's a variation on what's new. Fortunately, we have lots of answers. In addition to the publication of numerous studies sponsored by Optimer and others, we also continued to make significant process -- progress in life cycle management.

The Phase IIIb trial evaluating DIFICID for the prevention of CDAD in patients undergoing bone marrow transplantation continues to move forward on schedule. As of April 15, a total of about 150 patients were enrolled at 35 sites. The interim analysis, which will be of 170 patients, is expected in the second half of this year.

Recruitment in our Phase IIa clinical study, evaluating the pharmacokinetics of DIFICID in pediatric patients, continues to enroll. We have enrolled about half of the planned number of patients, but as you probably know in this patient population, the study is enrolling at a slower pace than would be the case in an adult study.

Before concluding, I'd like to note that DIFICID was granted marketing approval by the Australian regulatory authorities in April and our partners Specialised Therapeutics Australia is commencing commercialization next week.

To conclude, we have a great product. And we have the right strategies and initiatives for success. That noted, I also believe that the previously announced review of a range of strategic alternatives is timely, consistent with good business practices and will help promote efficiency and value optimization for shareholders. We cannot predict or speculate on the outcome of this process or how long it might last. And as David noted in the introduction, we will not comment further until the process is completed. We will not be able to respond to any questions about the process today.

As we move towards midyear and beyond, we intend to maintain our focus on building the success of DIFICID and conducting our review of strategic alternatives so that we can improve patient access to DIFICID and deliver value to our stockholders.

With DIFICID, we have a differentiated product for a disease that is a global health care challenge. We are working diligently to position DIFICID and Optimer for success.

That concludes my formal remarks, I will now turn the call over to the operator for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Marko Kozul from Leerink Swann.

Marko K. Kozul - Leerink Swann LLC, Research Division

I wanted to ask, given your modest first quarter growth in demand, can you give us a preview of the additional strategies you referred to in your prepared remarks aimed at accelerating growth and any other new measures you might be taking to drive sales towards an inflection point? And can you also give us some additional color on the encouraging trends you mentioned you're observing in the month of April?

Henry A. McKinnell

Well thank you, Marko, both for those questions and for your recent report. I like it a lot. With respect to the operational review, what I found was a really talented organization, small by my prior experience obviously, but very talented people. What we needed to do, and in fact, are doing, is simplifying the message, with 2 published studies, this is not a terribly complicated story. We do have superiority in sustained response, which is a major opportunity in a market characterized by 20% to 60% recurring. So we needed to simplify the message, we needed to clear the barriers to access, which is what our discounting program is doing. And we need to position the product for first-line use as opposed to reserve, reserve, reserve, which is revenue or line of antibody products identifying themselves. So we've done that, we've clarified the message that was communicated through the sales force starting with our POA meeting last month. And we retargeted -- this product was launched primarily to key opinion leaders, mostly ID specialists, in the major academic medical centers. The business is mainly in the hospitals and it does require an ID consult. But frankly, there's more opportunity in the community hospitals and some of the long-term care facilities than we were realizing in the academic medical centers. So that's still a target, we need to go back there, maybe when we have more data. But the market development here, mainly through what we call the data is showing the burden on the hospital plus the simplified message delivered to the right people, is starting to produce result. I'm hesitant, frankly, to discuss April, although I will because it's pretty exciting. One month is not a trend, but we're seeing a significant uptick in demand and sales, partly due to a restocking of wholesalers from March, when we were right at the bottom of our 14- to 28-day inventory level at the wholesalers, so we are seeing a recovery of that sell down of inventories, which is what we've hoped for. But we're also seeing a pretty strong improvement in fundamental demand as you've seen in the recent IMS data. So I'm hoping, with our sales force out there doing their job with the medical information we're communicating, this is the beginning of a much stronger quarter. But I've been in this business long enough to know that one month is not a trend.

Operator

And our next question comes from Brian Skorney of RW Baird.

Brian P. Skorney - Robert W. Baird & Co. Incorporated, Research Division

I guess, just one thing, I just want to see if maybe if you can help us understand. Have you seen any impact in terms of employee turnover, or simply a kind of sales force focus coming post the announcement? And do you think that there's any issue around the sales force's attention to the product right now that you're seeing some of the weakness in the last quarter as a result of a -- the potential of the company could wind up being acquired?

Henry A. McKinnell

Well I don't think so, but let me try to explain that. We announced 2 things at the end of February, a quite significant change in management and the beginning of a process to review strategic alternatives, so some disruption in the organization is frankly to be expected. But I've not really seen any significant disruption to our ability to be successful with DIFICID. There's been some turnover in the sales force. The end of April, I think the numbers are, of 110 territories, 106 were filled. We've had a little bit of turnover within those numbers, but we were able, in this environment, to hire some really talented experienced sales representatives, so I don't think that's been a major factor here. I do think that the fact that we didn't have the right message to the right targets probably accounts for more of the slowdown here. And as I've said already, March was impacted, I think, more by the reduction in wholesaler inventory.

Brian P. Skorney - Robert W. Baird & Co. Incorporated, Research Division

Great. And I -- we've got some of the numbers on x U.S. DIFICID in terms of royalty. But I wonder if you could give us any further quantification, maybe even in just one country, sort of, just to get a feel for how that launch is going. And what -- I think we're pretty familiar with VANCOCIN in the U.S. and what the CDI market looks like but this is really sort of a first-branded product x U.S.

Henry A. McKinnell

Well Astellas is now launched in 15 countries in Europe. And I know the Astellas organization well, I'm very confident in their ability to be successful. It's very early days. As you probably know, in Europe, different regulatory environments, different pricing environments not much happens until you get price approval, but let me have Stephen try to answer your specific question here.

Stephen W. Webster

Yes. We are -- sorry, Brian, we don't break down the individual component pieces of the contract revenue line, although you will see segment reporting from Canada. By and large, as Hank said, 15 countries, I think their rollout is generally going according to plan. And we are -- we and they, are both pleased with the pricing that they've been able to garner over in Europe so far. So more to come, it's early days. They're adding new territories every quarter, every month, and we are starting to see checks, so I guess just stay tuned because we're not, at this point, breaking that out.

Operator

And our next question comes from Alan Carr from Needham & Company.

Alan Carr - Needham & Company, LLC, Research Division

What are your expectations on breaking even? I think, before, you said maybe by year 3 after launch, has that changed at all? And do you also have the same expectations in terms of penetration of the C. difficile market?

Henry A. McKinnell

Well, I'll let -- we don't provide forward guidance. The goal remains to breakeven next year, that is completely dependent on the revenue line. We have some flexibility on expenses but my belief in this business is you don't starve your resources. At our current selling price, we have about a $6 billion potential. We're not going to get all of that, obviously, but I think it's worth spending to achieve the rightful place for DIFICID in this area of enormous unmet medical need, so the goal is to breakeven next year. That is dependent on the revenue line. If we're short on the revenue line, that means we don't breakeven next year. But then to be honest, to be fair, we have not seen the pickup I've been expecting in scripts here. But hopefully, April are the green shoots of spring here.

Alan Carr - Needham & Company, LLC, Research Division

Okay. And then a follow-up here, to what extent is you all's efforts in terms of reducing costs here with the NTAP program and then the discount in hospitals, is that -- what sort of impact does that had on a -- like, on a given doc that felt it was too expensive in the first place? Does this bring it down? What sort of reaction they get to that? Do they feel that it's still too expensive or how many does that win over?

Henry A. McKinnell

Well price is an enormous barrier to access here and intent to prescribe. The infectious disease area is one that I know well and the ID guys want more new drugs but they don't want to pay for, the more they reserve them, so it's a difficult area. But I know of no other area where there is such unmet medical need and such a clear advantage in a new product introduction in a market, by the way, with no competitive pressure. There've been no introduction in this marketplace for 25 years. So the kind of feedback I'm getting from the ID community is at this price we're not going to use it anywhere, at a lower price, we'd use it everywhere. So the discounting that's available to hospitals now is the NTAP program, which is a 50% reduction in cost, and our own discounting, which is in the 20s. So net to the hospital is a competitive price now. The problem is, we haven't communicated that effectively to enough people.

Stephen W. Webster

And obviously that's -- the NTAP is only available to qualified Medicare patients.

Henry A. McKinnell

Yes, it's in the Medicare market, yes.

Operator

And our next question comes from Heather Behanna of JMP Securities.

Heather Behanna - JMP Securities LLC, Research Division

I actually have just a couple questions for Stephen. One is if you could just go into a little bit the cost of contract revenue and just sort of talk about what components go in there and how we might see it increase or decrease as we move forward and increase revenue from outside the U.S.? And then the second question was just if we were expecting any other payments or anything else that would show up from the -- from OBI? Or if that is done with?

Stephen W. Webster

Let me take the last half of your question, first, Heather. OBI, we're done with. Remember in the fourth quarter of last year, we sold the last of our share ownership and there are no more payments there. As far as the cost of contract revenue, I wish I could give you a good answer but the component pieces of that, there are a couple of component pieces of the contract revenue which has different cost levels there. One of the component incomes is the royalties from Astellas in Europe where we actually only owe royalty payments to par. When we have both pharmaceutical sales, as we did to Astellas Japan in this quarter, both are sold at costs, so there really is a 100% cost associated with the bulk pharmaceutical sale. With STA and AstraZeneca, we have a transfer pricing mechanism that we sell them products that inherently incorporates the double-digit royalties that we have in Europe. So the component costs and the different pieces of the contract revenue all have incredibly different cost of goods, and it's very difficult to predict when our customers will make bulk pharmaceutical purchases. And I would just expect that line item, both those line items to bounce around a little bit until they gain a little more critical mass. I wish I could be more helpful. I wish I could predict our numbers. They jump all over the place.

Henry A. McKinnell

It's very dependent on geographic mix, obviously, so it's a tough one for us. But it'll smooth out here over time.

Operator

Our next question comes from Sara Slifka from Morgan Stanley.

Sara Slifka - Morgan Stanley, Research Division

I have 2 quick ones. Just for the transplant interim analysis, is this something that we're potentially going to see something from? Or is it just kind of an internal check for trial design or futility or those kinds of things? And then secondly, what was the growth-to-net for the quarter?

Henry A. McKinnell

Let me take the first and I'll give Stephen the second. The BMT study is what's called an adaptive design, so it means there's a blinded look, not blind to the committee obviously, but blind to everybody else, look at the data, mainly to predict the eventual size -- the sample size needed to conclude the study. So at 170, they take a look, they see from the statistical power that's been generated to-date how many patients would be needed to show statistical significance. We're planning on about 340 patients, that could go up or down depending on interim look, but there will be no information on safety or efficacy at that point. And, Stephen, on the second?

Stephen W. Webster

Okay. Yes. Growth-to-net was 22.8% in the first quarter.

Henry A. McKinnell

And, Sarah, that actually -- that number is kind of an insight into an earlier question. That says to me our discounting programs are not being adopted as rapidly as I would like to see. That number should be higher.

Operator

And our next question comes from [indiscernible] from Bank of America.

Unknown Analyst

My first one is, historically, has there been any seasonality seen in C. diff groups? And then if so, when does that occur? Secondly, you took a price increase at the beginning of January, I believe, have you experienced any pushback form any of your hospitals as a result of that price increase? And I have a couple of follow-ups.

Henry A. McKinnell

Okay. Well seasonality, as you probably know, infectious disease tends to be high in the wintertime. There is such limited penetration of DIFICID, frankly. I don't think seasonality is a factor whatsoever. I have seen in other companies' reports that there seems to be a very weak flu season this year in spite of a very early start. So on average, it probably is a weak season. I don't think that has anything whatsoever to do with DIFICID. We are obviously experiencing price pushback from hospitals. I don't think that has anything to do with our price increases. In fact, we've increased our discount from 25% to 29% at hospital level to offset the impact of the price increase, but that's not our problem. Our problem is broader resistance to the price, not the price increase.

Unknown Analyst

Okay. And can you give some color as to what your mix is between use in hospitals versus use in long-term care facilities, if you have any of that visibility?

Henry A. McKinnell

Yes. That's a very important question. Thank you for asking it. Initiation tends to be in hospitals, but the discharge in, I think, 30% -- I forgot the number. Stephen?

Stephen W. Webster

It's 30% for the long-term care.

Henry A. McKinnell

Yes. 30 -- discharge to long-term care is about 30% of the market. And, of course, if there's recurrence and then the patient comes back into the hospital again, gets discharge back into a long-term care, it's a real mess. And as you might imagine, the impact of C. difficile diarrhea in a long-term care setting is not good for the patient, their caregivers or other patients who live there. So it's an area of enormous unmet medical need. What is interesting is the medical directors of the long-term care facility also practice in hospitals. So in some cases we've got a nexus between the prescribing physician, between the 2 institutions. But it's an example of the retargeting we're doing. The initial targeting wasn't to this sector at all, in part because it wasn't the biggest market, but it may be the biggest area of unmet medical need, one that is available to us and one that we are now contracting with quite successfully. And this is an area which, in April, I think referring to April again, but we saw a major increase in usage by a long-term care that I would hope we can continue.

Unknown Analyst

Okay. And my last question is what steps are underway to prepare for the upcoming termination of the Cubist arrangement?

Henry A. McKinnell

Well we looked at that very carefully, obviously, account by account, territory by territory. We are adding to our sales force a very modest amount, maybe 10 eventually. We're doing a territory-by-territory analysis in terms of the account coverage we need. We're also adding 20 contract sales representatives, which tend not to be as productive as your own sales reps in part because of turnover, but with a small number like 20, I'm confident we can manage that very effectively. That agreement terminates in July, as you know, at the end of July.

I think we have time for one more question.

Operator

And our next question comes from Marko Kozul from Leerink Swann.

Marko K. Kozul - Leerink Swann LLC, Research Division

I wanted to ask a quick one about the upcoming interim analysis for the bone marrow transplant study. Can you remind us whether you will have access to the unblinded findings? And whether you might plan to make those public?

Henry A. McKinnell

We will not have access to the unblinded findings. If we did, that would blow the study. What we will know is what the new study number is. If it goes up significantly, that won't be a good result, if it goes down significantly, that will be a source of some optimism. The one thing we're seeing here is extremely rapid enrollment, every center is putting patients into this study in part because they see the impact on outcomes in these units. There's some oncology data being published shortly, which underscores the burden of the disease. The abalier data, which is down to individual hospitals, shows the burden of this disease. So I think what we're seeing is the bone marrow transplant units of which there's not many in the country, but they are seeing the dramatic impact of this disease on survivability and the outcome for their patients and they're enrolling patients very aggressively in this study. So I have no doubt that this study will complete probably more rapidly than we expect, almost irrespectively of the numbers, because we're enrolling so rapidly.

So thank you all for joining us. I look forward to updating you throughout the year on our progress. Thank you and goodbye.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program, you may all disconnect. Everyone, have a great day.

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