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Executives

Stephen Webster – SVP, Finance and CFO

Mike Dougherty – President and CEO

John Wilson – VP, Sales and Marketing

Eliseo Salinas – Chief Medical Officer and SVP, R&D

Analysts

Ian Sanderson – Cowen and Company

Ling Wang – Brean Murray

Edmond Budd [ph] – RBC Capital Markets

Adolor Corporation (ADLR) Q2 2009 Earnings Call Transcript July 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, Stephen Webster, Senior Vice President of Finance and Chief Financial Officer at Adolor. Please go ahead.

Stephen Webster

Good morning and thank you for joining us. Today, we will discuss our second 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 or anticipated levels of cash and investments, 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 other 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.

Now I will turn it over to Mike Dougherty, Adolor’s President and Chief Executive Officer.

Mike Dougherty

Thanks, Stephen. Good morning everyone and thank you for joining our call today. Let me begin by reviewing our agenda, I will open the call with some introductory and overview comments after which John Wilson our vice president of sales and marketing will discuss our progress in the second quarter with ENTEREG in the marketplace. Then Eliseo Salinas our chief medical officer will update you briefly on our R&D programs including our progress towards resuming clinical valuation later this year in our delta program. Stephen Webster will then provide a review of the second quarter financial results and we will close with a question-and-answer session.

So let me start off by sharing some of the highlights of the second quarter. First on ENTEREG we saw continued growth in shipments and product sales during the second quarter. Net shipments were $2.9 million, up from $2 million in the first quarter. Net product sales recognized were $2.4 million, up from $1.4 million in the first quarter of 2009. We experienced our first and second million dollar months in this second quarter as shipments in both May and June exceeded this level.

We continued to make progress in the inclusion of ENTEREG on hospital formularies. We estimate that ENTEREG was added to about 175 formularies during the second quarter bringing the total to approximately 600 as of June 30, up from 425 at March 31. Importantly, over 350 of these hospitals are among our primary target customers, the 1400 hospitals that perform 80% of bowel resection procedures in the United States.

Turning to our delta agonist program with Pfizer, we recently received the results of the PK studies that we conducted for both ADL5859 and ADL5747. I am pleased to report that based on the results of these studies, we are ready to proceed with clinical proof of concept evaluation of both compounds in multiple medications [ph] later this year. And finally ADL7445 our peripheral mu opioid receptor antagonist for opioid bowel dysfunction remains on track for an IND filing in the third quarter. We are completing the preclinical practicality [ph] work associated with the filing and plan to initiate clinical trials in the fourth quarter of this year.

I will now turn it over to John Wilson.

John Wilson

Thanks, Mike. We continued to execute on the critical activities I have described on previous calls, securing hospital registrations, gaining formulary access and initial ordering for new hospitals, and driving utilization with existing customers. Hospital registration done under the E.A.S.E. program now total over 1425 and we saw an increase in the number of hospitals placing ENTEREG on formulary. As of June 30, ENTEREG was on formulary at over 600 hospitals up from 425 at March 31 with over 365 of those hospitals a part of the group of 1400 targeted hospitals. We saw the increase in formulary approvals during the first quarter translate into new customers in the second quarter and we hope to continue this positive trend. We added over 125 new hospital customers in the month of June alone.

A significant focus is of course on those hospitals that have become repeat customers. Again during the second quarter, we saw progress with a number of hospitals that have reordered ENTEREG increasing by 50% from 300 at March 31 to approximately 450 as of June 30. Our success in these three key areas should help to accelerate the growth of ENTEREG’s shipments in the near term. We saw continued evidence that these efforts are starting to pay off as new shipments were up 45% in the quarter. This growth rate exceeded the 25% growth in net shipments we saw in quarter one. We continued to receive encouraging feedback from physicians who are using ENTEREG in the marketplace as well. In fact, we expect that some of this information will begin to be communicated and presented to the medical community in the form of institutional case studies in medical use evaluations. We are aware of several such studies underway and importantly results of the first such study will be presented next week.

Dr Timothy Beard the surgeon at the Bend Memorial Clinic at St Charles Medical Center in Oregon will present health and pharmacoeconomic data from his use of ENTEREG to the Northwest Society of Colon and Rectal Surgeons on August 7. His presentation is entitled incorporation of alvimopan as part of perioperative management of patients undergoing colectomy a single surgeon’s experience. This will be the first time the results of an independently conducted outcome study would be available to the medical community and we expect that there will be additional studies and assessments like this presented in future months.

The current hospital environment is challenging and it remains an increasingly difficult one in which to launch a first-in-class therapeutic. Pharmacy budget constraints, increased legislation in sales practices and the difficulties in accessing key positions, not to mention the broader prospect of a national healthcare insurance program all affect pharmaceutical companies with hospital products. ENTEREG faces the additional challenge of a lack of therapeutic interchange as there is no existing old drug to come off formulary for ENTEREG to replace.

That said we remain encouraged by the positive feedback from physicians who have begun to use ENTEREG. Our challenge is to successfully navigate these hospital complexities in order to transfer this experience to the broader audience and we do have some robust successes upon which to build. Some of the most well respected hospitals in the country are significant ENTEREG users and we continue to add to this list of premier institutions. Of the top hospitals that perform the largest number of bowel resection procedures annually in the United States to date seven have placed ENTEREG on formulary. Acceptance by these large respected institutions serves to confirm our belief that ENTEREG addresses a significant unmet medical need for bowel resection patients. Equally important, other institutions look to these leading high-volume hospitals to set the standard of care for bowel resection procedures. Having these types of thought leading hospitals onboard helps in increasing the awareness and acceptance of ENTEREG in the marketplace. We will keep diligently executing the sales and marketing plan that GSK and we have in place and hope to accelerate the positive trends we saw in Q2.

Now I will send it over to Eliseo who will update you on the delta program and ADL7445.

Eliseo Salinas

Thanks, John. I will start with the delta program. As you will recall, following the mix we sold to be served with ADL5859 in phase 2a filed at the end of 2008, Pfizer and we made the determination to reformulate both compounds and conduct additional PK studies with both ADL5859 and ADL5747. I am pleased to report that these studies were quite successful and enlightening. The primary finding is that there is an interaction between food and the delta aggregates resulting in lower plasma concentration of the compounds in the presence of food. Importantly, when this is controlled for we see consistent, predictable and stable plasma levels in all populations, young and elderly (inaudible) as well as patients suffering from chronic pain.

Pfizer and we have determined that we are now ready to proceed with the phase 2 testing of both compounds and we are working towards shaping phase 2a proof of concept studies to test both ADL5859 and ADL5747 in patients with osteoarthritis as well as a study to evaluate ADL 5747 in postherpetic neuralgia. We anticipate these studies commencing in the fourth quarter this year. We are encouraged that we know now why the earlier result was mixed and we have a rational plan for the design [ph] of sequence studies.

As to ADL7445 for OBD, we are making final preparations on our IND which will be filed in the third quarter and subject to FDA clearance we are on track to begin clinical testing in the fourth quarter of this year.

I will now ask Stephen Webster to review the second quarter financials. Stephen?

Stephen Webster

Thanks, Eliseo. Total revenues in the second quarter of 2009 were $9.1 million consisting of $6.7 million from our collaborations with GSK and Pfizer and $2.4 million in net ENTEREG sales. Shipments of ENTEREG in the second quarter were $2.9 million up from $2 million in the first quarter. Sales of ENTEREG differ from that shipments as currently we recognize product sales revenue only on reorders from an existing registered hospital customer. As of June 30, 450 hospitals have reordered ENTEREG that is up 50% from the 300 at the end of the first quarter.

Total revenues for the six months ended June 30, 2009 were $15.7 million consisting of $11.9 million from our collaborations and $3.8 million in product sales. Net shipments of ENTEREG for the first half of 2009 aggregated $4.9 million. Revenues in 2009 decreased as compared to 2008 largely the result of the receipt in 2008 of a $20 million milestone payment from GSK on FDA approval of ENTEREG.

Operating expenses aggregated $25.9 million and $20.5 million for the quarters ended June 30, 2009 and 2008 respectively. R&D expenses for the second quarter decreased by $1.3 million or 10% to $12 million in 2009 due to decreased internal R&D expenditures and lower external R&D spend on ENTEREG and the delta program versus 2008. External R&D spend did increase in 2009 on our OBD and other programs. SG&A expenses for the second quarter increased by $2.3 million over 2008 levels to $9.5 million primarily related to costs associated with the commercialization of ENTEREG and the expansion of our sales force.

In June we effected a restructuring of our operations reducing staffing levels by about 30%. This cutback is intended to save approximately $12 million in operating expenses on an annualized basis beginning in 2010. As a result, operating expenses in the second quarter of 2009 reflect a $4.2 million restructuring charge. Our reported net loss for the first quarter of 2009 was $16.5 million or $0.36 a share versus net income of $7.5 million or $0.16 a share in the year ago quarter. For the six months ended June 30, 2009 our net loss was $29.7 million or $0.64 a share, up from a net loss of $1.6 million or $0.03 a share in 2008. The 2008 results were favorably impacted by the aforementioned $20 million milestone payment from GSK.

Net cash and short-term investments used in the quarter was $16.1 million which reflects both the receipt of $0.09 million cash payment from GSK and $1.3 million in severance payments related to the restructuring. We closed the quarter with $108.6 million in cash, cash equivalents and short-term investments. We had approximately 46.3 million shares outstanding at June 30. Following the restructuring, we did indicate that we expect to end the year with approximately $85 million in cash and equivalents. Mike?

Mike Dougherty

Thank you, Stephen. Two closing comments, as you heard from John, we continued to make progress with the commercialization of ENTEREG evidenced by the accelerated rate of shipments, the increasing number of hospitals using the product, and growth in a number of hospitals that include ENTEREG on their formularies. As I said before, clearly there is much more to do here and this remains an opportunity that is largely ahead of us.

Hospital environment is historically a difficult one into which to introduce new products and this is particularly true now. But at the same time, ENTEREG is a product that is well suited to the various challenges this marketplace presents providing demonstrable improvements in taste and quality of life as well as significant and measurable pharmacoeconomic benefits to healthcare providers. We believe this message is beginning to resonate in this marketplace and look forward to reporting our progress to you over time.

We will now open the call to questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Ian Sanderson of Cowen and Company.

Ian Sanderson – Cowen and Company

Good morning, thank you for taking the question. First on ENTEREG, if you get further into the process, the formulary negotiation process with hospitals what has been I guess the most consistent pushback you have received on a sort of therapeutic review basis? And secondly, on the ADL5859 and 5747 have those been reformulated in any way to deal with the food effect as you go into the phase 2a trials and maybe if you can provide a bit more color on exactly what the end point and what you are getting at in those trials?

Mike Dougherty

Sure. Thanks, Ian, good morning. I will take the first question. This is Mike and then, I will ask Eliseo to make some comments on the delta compound. You know we have grown to say around here that when you know everything there is to know about one hospital, a hospital formulary, everything there is to know about one hospital so that the issues, the successes are varied among institutions. Having said that, if I were to look for the most common theme it may simply be that hospital institutions often have some period of time that must last before they consider a new product for inclusion on formulary. Sometimes that is a year, we have seen a few cases where that may even be a bit longer than that but in a rather diverse area I would say that is probably the most consistent area of pushback that they want to see the product on the marketplace for a period of time, perhaps sound experience from other institutions and then they are going to make an assessment. And with that, maybe Eliseo you can make some comments on the delta compound.

Eliseo Salinas

Yes, good morning, Ian. We did reformulate both 5859 and 5747 and the intention is to maximize the dissolution. So when you suspect that the absorption might be challenging, what you want to do is that your drug has the maximum, the best possible dissolution so that does not contribute to the problem. With it there still is a food effect with the dissolution and today we are going to be further characterizing that during the coming – in parallel with the pivotal council [ph] studies. You cannot necessarily expect that you are going to handle that exclusively with the formulation. But we will further characterize the different type of food, different timing with respect to the drug absorption, etc during the pivotal council. You mentioned the question regarding study in point, these studies will be in both compounds in osteoarthritis and what we mentioned would be pain in the short-term trials, the two-week trial, measuring pain and the second would be a study on postherpetic neuralgia of course with pain as the primary combinable where we will assess 5747.

Ian Sanderson – Cowen and Company

Okay. And so, will both 5859 and 5747 be in this ’08 pain trial and then just 5747 in the second trial.

Eliseo Salinas

Correct, yes.

Ian Sanderson – Cowen and Company

Okay, thank you very much.

Mike Dougherty

Thank you, Ian.

Operator

Your next question comes from Ling Wang of Brean Murray.

Ling Wang – Brean Murray

Hi, thank you for taking my question, my first question is with regard to ENTEREG here, I was wondering whether you can elaborate what are the feedbacks you got from the hospitals who have an adherence with the drug and maybe what do you think goes to their decisions as to whether they will repurchase, reorder the drug or not? And then my second question is that I wanted to sort of know better what needs to be done between now till the first quarter for the two delta compounds?

Mike Dougherty

Okay, thank you, Ling; this is Mike. I will start with that and maybe ask John Wilson and Eliseo to make some comments. In terms of the feedback, as John touched on our prepared remarks, the feedback has been very, very positive and certainly the uptake has been slower than we would like but our focus is very much forward and we are fortified in part by some of the good trends we saw in June but also from the feedback we are getting from customers, John, do you want to touch on that?

John Wilson

Yes, I am very encouraged by the feedback we receive from customers and I think the example of this institutional case study coming from Dr Beard August 7 and those that will follow on will serve to typify some of the feedback we have received and help accelerate the adoption in other institutions. They look to this peer to peer sort of experience with ENTEREG.

Mike Dougherty

Now, Eliseo to comment on what is ahead between now and the fourth quarter.

Eliseo Salinas

Right. We were preparing and awaiting the result of the five pharmacokinetic studies that we conducted and the plan is that during the fourth quarter we are initiating the two studies osteoarthritic studies with 5859 and 5747 and the neuropathic pain in postherpetic neuralgia with 5747.

Ling Wang – Brean Murray

Okay, thank you.

Mike Dougherty

Thank you, Ling. I understand that there is one more question.

Operator

That question is from Edmond Budd [ph] from RBC Capital Markets.

Edmond Budd – RBC Capital Markets

Hi this is Edmond Budd on behalf of Michael Yee. I was just wondering if you noticed any hospitals or any regions where reorder rates might be particularly strong.

Mike Dougherty

Yes. Again, John, why don’t you take that and I think the short answer to your question is yes.

John Wilson

Yes, we are seeing adoption rates not surprisingly in the Southeast and the central part of the country exceeding what we see in the Northeast and in the West and that is typical of products in this similar stage of launch experience. Historically products have adopted more quickly in the Southeast than in the central part of the country but the encouraging news for us is that we are seeing growth in each of these respective areas albeit at a different rate but that rate is consistent with launches of prior products.

Edmond Budd – RBC Capital Markets

And do you notice any – I think those are the reasons where your own sales reps are detailing, am I correct in making that conclusion?

John Wilson

You are correct in that we are not deployed in the western part of the country but I am very pleased with the efforts we have from our partner in GSK, we have a formidable sales force and experienced one in the institutional marketplace with ENTEREG in primary selling position and supported as the primary product in their incentive plan. I am very pleased with the effort we are getting from our GSK counterparts in that area.

Edmond Budd – RBC Capital Markets

And do you have any more plans to add any more reps maybe in the regions where you are not present now?

Mike Dougherty

Well, never say never. But, our current plan is to maintain the field force that we have today which totals to 25 people in three different regions. You may remember that we restructured that arrangement with GSK only late last year and we think for the time being we are going to stay the course.

Edmond Budd – RBC Capital Markets

Okay. And then, the final question, in terms of hospitals that are reordering do you notice any trends in their use patterns or in their buying patterns?

John Wilson

Certainly. As hospitals have greater experience with ENTEREG over time typically their utilization or their percentage of use versus their (inaudible) section has increased not surprisingly. So this is again an encouraging sign for us, an indicator that as people get more experienced with the product, their results are positive and encouraging them to use the drug more.

Edmond Budd – RBC Capital Markets

Okay, thank you.

John Wilson

Thank you.

Mike Dougherty

Alright, thank you everyone that concludes our call and thank you for your attendance and attention.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now disconnect.

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Source: Adolor Corporation Q2 2009 Earnings Call Transcript
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