Alexza Pharmaceuticals Management Discusses Q1 2013 Results - Earnings Call Transcript

May.14.13 | About: Alexza Pharmaceuticals, (ALXA)

Alexza Pharmaceuticals (NASDAQ:ALXA)

Q1 2013 Earnings Call

May 14, 2013 5:00 pm 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

Roy Buchanan - Piper Jaffray Companies, Research Division

Patricia L. Bank - DISCERN Investment Analytics, Inc

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

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

Timothy P. Lynch - Stonepine Capital Management LLC

Operator

Good afternoon, everyone, and welcome to the Alexza Pharmaceuticals 2013 First Quarter Financial Results Conference Call. [Operator Instructions] This conference call is also being recorded, and if you have any objections, you may disconnect at this time.

I would now like to turn today's call over to Mr. Mark Oki, Senior Vice President, Finance and Chief Financial Officer. You may proceed.

Mark K. Oki

Good afternoon, and thank you for joining us today. On the phone with me is Tom King, Alexza's President and Chief Executive Officer.

On this call, we will review the company's financial results and discuss Alexza's recent accomplishments and ongoing activities before opening the lines for your questions.

I would like to remind you that the matters discussed on this call contain forward-looking statements that involve risks and uncertainties, including our ability to support operations based on existing cash resources; our ability, along with our partners, Teva Pharmaceutical and Grupo Ferrer, to commercialize products; the timing of the commercialization of products; and our projected revenues and expenses. Actual results may differ materially from the results predicted, and results recorded should not be considered an indication of future performance.

These and other risk factors are more fully discussed in our quarterly report on Form 10-Q that was filed with the SEC earlier today, 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.

As a reminder, Alexza's policy is to only provide guidance on product candidates and corporate goals for the next 1 to 2 fiscal quarters and to provide, update or reconfirm its guidance only by issuing a press release or filing updated guidance with the SEC in a publicly accessible document.

Clinical and corporate milestone guidance is as of today, May 14, 2013, and financial guidance relating to the company's current cash, cash equivalents and marketable securities is based upon balances as of March 31, 2013.

With that, I would like to now summarize the financial information for the first quarter of 2013.

We recorded $0.7 million of revenue in the quarter ended March 31, 2013 compared to $1.9 million in the first quarter of 2012. In both periods, we recognized revenues earned under the Grupo Ferrer license agreement. In the first quarter of 2012, we also recognized revenue from the license agreement with Cypress Biosciences, Inc.

GAAP operating expenses were $10.3 million in the first quarter of 2013 and $6.3 million for the same period in 2012. More specifically, research and development expenses were $6.2 million and $5 million for the quarters ended March 31, 2013 and 2012, respectively.

The increased expense in the first quarter of 2013 was a result of the continued buildout of our ADASUVE commercial manufacturing infrastructure, as well as additional regulatory expenses related to the MAA approval of ADASUVE in the EU.

General and administrative expenses were $4.1 million in the quarter ended March 31, 2013 and $1.2 million in the same period of 2012. The increase in the first quarter of 2013 was partially due to an uptick in pre-commercialization activities, such as market research, including, pricing and market segmentation studies, following the FDA approval of our ADASUVE NDA in December 2012.

In the first quarter of 2012, general and administrative expenses were reduced by a one-time event, a $1.4 million accounting reversal, as a result of the termination of one of our building leases and related subleases in March of that year.

We ended the first quarter with cash, cash equivalents and marketable securities of $11.7 million. We believe, based on our cash, cash equivalents and marketable securities balances at March 31, 2013, the upfront proceeds we've received from the recently announced agreement with Teva Pharmaceuticals, estimated product revenues and royalties associated with the sale of ADASUVE in the U.S. and EU, projected proceeds of the Teva note and our expected cash usage, we have sufficient capital resources to meet our anticipated cash needs into the third quarter of 2014.

As always, changing circumstances may cause us to use capital at a faster or slower rate than currently anticipated or to alter our operations.

I will now turn the call over to Tom for a review of Alexza's accomplishments and a business update.

Thomas B. King

Thanks, Mark, for those comments. Good afternoon, and thanks to all of you for joining on our Q1 conference call today.

The past few months have been marked by a truly remarkable achievements for Alexza. With the NDA and MAA approvals of ADASUVE in the U.S. and the EU for the treatment of agitation in adult patients with schizophrenia or bipolar disorder, we have accomplished something that few small pharmaceutical companies do: taking a proprietary therapeutic program from concept to approval. Further, our work involving -- involved advancing a new and novel device in combination with a pharmaceutical agent to create a product that will soon be launched in hospitals here in the U.S. and abroad.

With 2013 now well underway, we continue to execute on core objectives that will shape the future of Alexza.

The latest news was the joint announcement with Teva Pharmaceuticals of an exclusive U.S. license and supply agreement for ADASUVE. Under this broad agreement, Teva will be responsible for all U.S. commercial and clinical activities for ADASUVE, including the U.S. post-approval clinical studies, and has gained rights to conduct the digital clinical trials of ADASUVE potential new indications in neurological disorders. Alexza is responsible for manufacturing and supplying ADASUVE to Teva for commercial sales and for clinical trials.

Under the terms of our agreement with Teva, we received an upfront cash payment of $40 million and are eligible to receive up to $195 million in additional milestone payments based on successful completion of the ADASUVE post-approval studies in the United States and the achievement of net sales targets. In addition, Teva will make tiered royalty payments based on net commercial sales of ADASUVE in the United States.

Teva will also make available to us up to $25 million via a 5-year convertible note and agreement to lend, which Alexza may access to support its ADASUVE-related activities. We can prepay up to 50% of the outstanding amount of this loan at any time prior to its maturity. Teva may convert, at maturity date, all or a portion of the then outstanding amount under the note into equity of Alexza.

We couldn't be more pleased to have Teva as a partner. Teva brings a strong commitment to CNS and an established commercial presence in the hospital and psychiatric markets, which are exactly the settings for the use of ADASUVE.

Further, ADASUVE is an excellent fit with the Teva Select Brands group and Teva's new therapeutic entity, or NTE, strategy. We are confident in their ability to deliver commercial success for this important new product, ADASUVE.

With the signing of the Teva agreement and the announcement of our U.S. commercial strategy, we brought to conclusion a comprehensive and competitive process to determine the best U.S. commercial pathway for ADASUVE.

As the next step, we are already meeting with our counterparts at Teva to transfer our knowledge of the product, clinical performance, pharmacological profile and the agitation marketplace as we support their efforts to come up to speed.

A specific timeline for product launch has not yet been finalized or disclosed by our partner, but we will keep you posted and updated on the ADASUVE rollout.

In February 2013, we announced that the European Commission granted marketing authorization for ADASUVE, following to positive CHMP opinion in December last year. This approval covers all 27 member states of the EU, plus Iceland, Liechtenstein and Norway.

We also initiated the commercial manufacturing of ADASUVE in our Mountain View facility. Production from this facility will allow us to supply commercial quantities of ADASUVE to both Teva and Grupo Ferrer for their respective territories.

Group Ferrer is making excellent strides toward the initial launch of ADASUVE projected for the third quarter this year. Ferrer has already announced their plans to initially introduce ADASUVE in Germany and Austria in 2013, followed by planned launches in the remaining EU countries in 2014. Also during 2013, they will be submitting registration dossiers for the -- for ADASUVE in the countries in their territory that are not part of the EU approval.

Under the terms of our agreement with Ferrer, Alexza will receive future milestone payments based on first country sales in certain countries and also on meeting cumulative sales targets in the Ferrer territory broadly. We also received prenegotiated payments for the product we manufacture for Ferrer for their territory.

Moderate to severe agitation is experienced by nearly all patients with schizophrenia and bipolar disorder. For these patients, agitation is characterized by feelings of being out of control, including panic, cold sweats, poor impulse control, shaking and significant escalation of severity of their symptoms. 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 agitation episodes per year, with approximately 50% of those episodes being treated in a hospital setting, which includes the Emergency Department, Psychiatric Emergency Department and the Inpatient Psychiatric Unit. This is the market we will be addressing with the launch of ADASUVE in the U.S. and abroad.

Now that we have received approval for ADASUVE in the U.S. and the EU, we look forward to advancing additional products based on our Staccato platform to address areas of important medical needs, such as acute repetitive or cluster seizures, we call this ARS, which will be the patient population we plan to study with AZ-002, Staccato alprazolam.

Alprazolam, administered through our Staccato technology, has demonstrated excellent dose proportionality, exhibited a median Tmax of 2 minutes and was safe and well-tolerated in the studies conducted today.

According to the Epilepsy Foundation, epilepsy affects approximately 3 million Americans, making it the third most common neurological disorder in the United States. Acute repetitive seizures, or ARS, refers to seizures that are serial, clustered or crescendo and distinct from the patient's usual seizure pattern despite treatment from antiepileptic drugs. ARS occurs in a small subset of patients with epilepsy who regularly experience these breakthrough seizures in flurries or in clusters despite treatment with a regimen of their drugs.

ARS represents a serious unmet clinical need, and we believe there's a great promise for our products, such AZ-002 powered by our Staccato technology, to improve patient outcomes.

Dr. Jim Cassella, our EVP of Research and Development and our Chief Scientific Officer, has been selected to present this innovative product concept at the Antiepileptic Drug and Device Clinical Trials Conference, highlighting advances in the treatment of epilepsy, and he'll be presenting this later this week. We look forward to advancing this product candidate by initiating a Phase II proof of concept study later this year.

For 2013, Alexza is transforming from a development stage company to a commercial company. By the end of the year, we expect to have ADASUVE being sold in both the United States and Europe. Our manufacturing facility is up and running to supply this global launch of the product.

We're stronger financially than we have been in a long time, and we are putting AZ-002 from our Staccato based pipeline back into development. We look forward to updating you as we continue to make progress with ADASUVE in our pipeline during 2013 and beyond.

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] Your first question comes from the line of Charles Duncan with Piper Jaffray.

Roy Buchanan - Piper Jaffray Companies, Research Division

This is Roy in for Charles. So I guess, the first question is, I realized a lot of this is in Teva's hands, but just what is your sense of the drivers for the launch timing?

Thomas B. King

Well, Teva is now coming up a steep learning curve in terms of incorporating people beyond just the business development and the diligence teams. And so, the key driver will be for them to spend time from the clinical side, from the regulatory side and from the commercial side to identify all the things they need to launch the product and put together a launch plan which will be presented in the not-too-distant future to the joint steering committee of the partnership. And with that information, we'll have a clear idea of the timing and the overall sort of scope of what the launch will be.

Patricia L. Bank - DISCERN Investment Analytics, Inc

Okay, great. Another question, I guess, I don't know if you can answer is, but what's your sense of the -- of Teva's reach in the settings that are going to be relevant for ADASUVE? What do we -- do you know how many reps they have? What kind of -- how many settings?

Thomas B. King

Yes, we do. They actually tell -- sell Teva clozapine, which covers a lot of the same types of clinicians and the same settings that ADASUVE will be used, so both in the psychiatric market as, well as the hospital market, the inpatient market. Within the agreement that we have, the commitment that they've made in the agreement are at or exceed the levels of efforts that we thought were necessary to make this product successful. Their managed care, their managed market groups are obviously very significant. They have lots of expertise there. They have an outstanding sales group that sells into CNS. They have a good group of scientific medical liaisons. So we think all the elements are there. Plus, we have a comprehensive clinical team, health economics team, they have good experience with REMS programs. So we actually think of all the companies that we talked to broadly and all the strategies that we evaluated, Teva is an ideal candidate in terms of their reach, their passion for the product and their experience in these markets.

Operator

Your next question comes from the line of Scott Henry with Roth Capital.

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

Tom, I've got a few questions, so I'll try to batch as many short questions as I can, and then perhaps I'll jump in the queue. For starters, the R&D and SG&A, now that you know how you're going to launch the product, how should we think about those run rates going forward? I mean, if you think about R&D at $6 million in the first quarter of '13, my understanding is Teva is going to take on the Phase IV commitment, does R&D go down going forward? I know you have other pipeline products, and as well, G&A maybe that doesn't have any impact at all, but just how should we think about those 2 line items?

Thomas B. King

Yes. I think looking forward to the next 2 to 3 quarters of 2013, let's take G&A first, it will come down a little bit because we had discretionary spending on aspects of commercialization. And so, as we -- as Teva takes over that role and responsibility, some of that will obviously beat itself out. A majority of that, very honestly, is just the cost of running us a publicly traded company and aspects beyond the commercialization of ADASUVE in the United States. On the R&D side, for the balance of 2013, our R&D number is going to fluctuate for a couple different reasons. Some of the clinical costs and some of the regulatory costs are going to come down because of the role of Teva. We also are in a transition, where we're moving from expense based accounting to, I would say, capitalized based accounting with regard to our manufacturing, our quality systems and our supply chain. So some of the R&D expense will actually move up in the cost of goods line as we start having product that's actually being sold. Some of that will move into inventory and work-in-process on our balance sheet. So 2013 will be noisy, I think, on a year-over-year comparison of R&D just because some of those R&D costs will be coming down and some of them will be transformed into cost of goods and other aspects of us now being a commercial company and not a research-based company.

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

Okay. Now what would you estimate as the core R&D? I mean, if you pull out specific clinical trials, what is your base R&D spend?

Thomas B. King

Well, we will have an increase year-over-year on a small segment of that because now we're doing clinical work internationally to support the ADASUVE approval in the EU as part of our commitment to Grupo Ferrer. So for example, we're up and running with the QT study; we have the lorazepam study; and we have several other sort of similar to, in the United States, pediatric study and drug utilization observational study. So as Dr. Cassella and his team bring those up, those will be incremental R&D expenses over the next couple of years that we haven't had in the last year or 2. And we also have a little bit of expense coming in for AZ-002, both in terms of dose development moving it onto our commercial device and also the actual clinical trials that we expect to kick off later this year.

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

Okay. Shifting gears -- and thank you, that is helpful. The milestone payment, $40 million becomes $30 million after you pay Symphony Allegro -- or Allegro. A couple of questions, one, after you pay Symphony this $10 million, what is their participation in the royalty from Teva? And two, how should we treat that? I guess, it's a $30 million milestone given the accounting treatment, or is that going to be amortized over a period of time? And are there any taxes on that $30 million, or can you shield that pretty well?

Thomas B. King

At this point in time, we haven't finalized our discussions with Ernst & Young in terms of how that upfront payment -- I mean, we would recognize all $40 million of it if we do with over one payment or over the duration of the agreement is still unclear. And then we would have an expense that comes out because we paid the $10 million. And the other piece that impacts our P&L/balance sheet would be the contingent liability will also come down because of the payment that we make to Symphony. Moving forward, the deal we've struck with Symphony to buy the rights to AZ-004, AZ-002 and AZ-104 back in 2009 contemplated us sharing -- of the first $100 million of cash that would come in on partnering transactions, we would share 25% of that, and this now gets us to $90 million. So we have another $10 million that we would get, whether it's from Ferrer or from Teva or from licensing ADASUVE into China or India or Japan. That would also have a $2.5 million payment that would go to the Symphony Allegro shareholders. After that point, beyond the $100 million for everything that has to do with alprazolam and loxapine, the Symphony shareholders have a 10% share. So if we had a $10 million milestone off into the future, they would get $1 million of it. If we had $20 million in royalties, they'd get $2 million of it. So they have a sustaining 10% share of future cash that comes in as a result of us partnering the products they helped us develop.

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

Okay, that is helpful. And do you expect to be able to fully shield this from taxes?

Thomas B. King

We don't expect this payment to be taxable. There's still lots of ongoing analyses about our net NOLs, that sort of thing, but they really don't come into play in this particular transaction.

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

Okay, great. And the comments about the manufacturing cost almost imply to me that Teva will pay you a little more for manufacturing until you're up to a certain level where you can breakeven on the product and then it'll be a fixed price where you'll benefit from volume gains. Am I interpreting that correct?

Thomas B. King

Yes. It's actually a little bit inverted. They pay the kind of the GAAP accounting fully-burdened cost of manufacturing down to a floor. So the incentive is for us to drive down that cost as a function of us getting better and also volume. And below that floor then we could get the benefit of driving it down. So we're never at risk for being upside down on the transfer price to Teva. And the incentive is for us over the next couple of years to drive that cost down and as we achieve that and we actually are in the out-years are able to pick up, at least the way we forecast it, it's a manufacturing profit.

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

Okay. But as you put it, you'll never sell this product at a loss based on the way this is contracted out even...

Thomas B. King

That's the way it's set up with Teva, yes.

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

Okay, that seems favorable. Okay. And then, I guess, the final question would -- well, I guess, I got 2 questions. One, on the convertible note, do you have a deadline when you have to sign up to get that $25 million, or can you just keep that in your back pocket for when you need it?

Thomas B. King

We have 24 months to take it down. When we look at our spending on ADASUVE and kind of looking at things we're doing internationally and the things that aren't taken care of by the Teva agreement, most all that spending happens in that first 24 months. And so, it's a 5-year note that balloons out at the end of those 5 years. We can pay back our half up to any point to the date of maturity, but we have 2 years to take that loan down, if we choose to do so.

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

Okay. And then, the final question, which is a question I get a lot, and for people that don't know Teva and their presence in the psychiatric marketing category, could you tell me a little bit about Teva and why they're a good partner and what products they sell into that area, specifically, currently? Just I want to understand how to think of them as your partner.

Thomas B. King

Yes, you bet. And I have mentioned this real briefly and, Roy, maybe you didn't hear it because you were in the queue. But they sell Teva clozapine, and so it's a compound that has a very restrictive REMS program, so they have lots of experience. It's sold to psychiatrists who are treating patients in an inpatient environment. If you go on to Teva Select Brands, you can see they also have a portfolio of other hospital-based products, kind of acute care products. So they actually have a lot of skill in the 2 areas that we were looking diligently for, someone that's got prowess in the hospital, that obviously knows how to work themselves, get products on formulary, knows how to work through REMS, that whole bit to their managed markets and their sort of access group. But also, a sales organization and a scientific medical liaison organization that knows how to talk to psychiatrists. At the end of the day, there aren't many companies that have expertise on both sides. There are obviously very skilled psychiatric companies that don't sell into hospital, either very skilled companies that sell into the hospital that don't have any psychiatric experience. So Teva is actually unique in its positioning and in terms of having expertise in both of those key aspects to where we think ADASUVE needs to go.

Operator

Your next question comes from the line of Steve Bosak with WBB.

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

Considering how many calls you've had and how many questions you've just answered, I can't ask an excellent question, but I am going to ask a personal question. Considering this is your second bona fide launch of a platform technology, can you give us any personal color in terms of what we should be looking for, for potential upside markers? And at the same time, for things that would basically require you to give us a little bit more color or explanation on what's going to go on in the future for the platform. With that I'll hop back in the queue.

Thomas B. King

Oh, certainly. Thanks, Steve. Well, there is a coincidence here in that Teva does sell Actiq, and I was the CEO that developed Actiq, and we sold the company to Cephalon and Cephalon was acquired by Teva. So there's a strange deja vu here with regard to Teva, even though obviously in today's Teva, no one is there that was part of that transaction. I mean, the piece that made us excited about Teva is they share the vision for this product. It's fundamentally going to change medicine. We've always thought that; we've always believed that. But it is a new technology, and new technologies have its own areas of innovation uptake and delays sometimes with regard to people understanding it. Secondly, agitation is a symptom and not a disease. And so, it's a bit of a stepchild in terms of its treatment. Again, Teva understands that and our experience and our discussions with them fully convinced us that they'd be very excited and enthusiastic about it. From a product lifecycle perspective, we look at seeing the product launched into the patient populations that it's approved. And the clinical teams from both Teva and Alexza are looking forward to thinking about other patient populations that are in the hospital that you could do clinical research to establish the safety and efficacy of the product and also looking at using this product in the outpatient market, again, based on solid plan of clinical research to establish its safety and efficacy. But I do think that over time, that's where the upsides will lie is, this is a very good market. Our view is this is a multi-hundred million dollar product in the patient population in the setting that it's approved. But it has the opportunity because that's a very long intellectual property position to be able to be expanded over time based on solid clinical research showing safety and efficacy.

Operator

[Operator Instructions] Your next question comes from the line of Timothy Lynch with Stonepine Capital.

Timothy P. Lynch - Stonepine Capital Management LLC

Just a clarifying question on the one Scott Henry asked about Symphony Capital's deal terms. So could you just reiterate again, the first $100 million from any of the license deals you listed on those related products, yes, that 25% share, and how much of that has already occurred including the $40 million?

Thomas B. King

Yes. So we had a $40 million upfront from Biovail; a $10 million upfront from Grupo Ferrer; and a $40 million update from -- update -- $40 million upfront from Teva. So that sums to $90 million.

Timothy P. Lynch - Stonepine Capital Management LLC

Got it. Okay. So that's the $10 million you have left that you're referencing.

Thomas B. King

That's correct. So in 2006, 2007, Symphony Capital invested $50 million for the development of 004 and 002. And then, we bought that back with a combination of the stock transaction and this trailing royalty transaction to allow them to benefit a little bit with the upside to the company but also with the products that they had helped out to invest in and helped develop. And so, we're getting close to sort of that, the big first tranche. So we just have $10 million to go to clear that out.

Timothy P. Lynch - Stonepine Capital Management LLC

Okay, very helpful. And then the 10% for anything over and above that, does that include any format of income on those deals including royalty payments, for example?

Thomas B. King

Yes. So it includes what we call top line items, so royalty payments, milestones, cash that comes in. It does not include transfer price for manufacturing. So those are separate. So the things that would hit kind of our either income line as a royalty or income line as a cash payment to come in from a milestone off in the future, that would be subject to that, but not the transfer price on manufacturing.

Timothy P. Lynch - Stonepine Capital Management LLC

Okay, great. And just last question, obviously, you have more cash in the bank and you have the note at your option to pull down gives you quite a bit more flexibility, but, still, it seems like there might be a need for financing in the future before you're self-sustainable. How do you think about that not only in terms of how much you'd like to finance with the different pipeline opportunities you have, but maybe perhaps the formats that you may prioritize for financing some of that need?

Thomas B. King

Timothy, that's a good question. One of the -- 2 things, I think. One is that it gives us a chance to kind of take a deep breath here and work hard to get the product launched on both continents and work with our partners without sort of the overhang of financing, which is terrific, but it also allows us to go through a very thorough review of our pipeline. We've had a publicly stated pipeline, most of it's been on the cul-de-sac for a while. But we've also learned a lot about Staccato, and we've also thought about other product opportunities. So I think the opportune time for us to come back to investors and talk to about a use of proceeds is when we come back and say, "Well, we've got 002 back in the clinic or its way back into the clinic. We have some early signals of what ADASUVE is doing in the market. And oh, yes, by the way, we've got these other ideas now based on our proprietary technology that we think makes sense to move forward." And we think that's probably a great story to go out and talk about a use of proceeds some time off into the future.

Operator

There are no further questions in the queue at this time. I would now like to turn the call over to Mr. Tom King for any closing remarks. Please proceed, sir.

Thomas B. King

Okay. Thank you, operator. Thank you, again, for your time today. We really appreciate it. It's been an incredible quarter for us, and we've accomplished so much. We look forward to updating you as we forge ahead with the launch of ADASUVE and the advancement of our pipeline. Thank you, again, for your time today, and we look forward to keeping you updated. Have a good day.

Operator

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

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