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Inspire Pharmaceuticals, Inc. (NASDAQ:ISPH)

Q2 2009 Earnings Call

July 31, 2009 10:00 am ET


Jenny Kobin - VP or IR and Corporate Communications

Christy Shaffer - President and CEO

Tom Staab - EVP, CFO and Treasurer

Ben Yerxa - EVP and Chief of Research and Development


David Amsellem - Piper Jaffray

Liana Moussatos - Wedbush

Joseph Schwartz - Leerink Swann

Jon Stephenson - Summer Street Research


Good morning. My name is Dixie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Inspire Pharmaceuticals second quarter 2009 financial results conference call. All lines been placed on mute to prevent any background noise. (Operator Instructions). As a reminder ladies and gentlemen, this call is being recorded, today, July 31, 2009.

Thank you. I would now like to introduce Ms. Jenny Kobin, Vice President of Investor Relations and Corporate Communications. Ms. Kobin, you may begin your conference.

Jenny Kobin

Good morning and thank you for joining Inspire Pharmaceuticals' second quarter 2009 financial results conference call. I will begin by reminding you that the forward-looking statements in this conference call are based on preliminary information and management assumption.

These forward-looking statements are subject to a wide range of risks and uncertainties that could cause results to differ in material respects, including those relating to product commercialization, product development, revenue, expense, earnings and cash utilization expectations, competitive products, adverse regulatory developments, results of clinical trials, the need for additional research and testing, funding, and the timing and content of decisions made by regulatory authorities, including the US Food and Drug Administration.

Further information regarding factors that could affect our results is included in our press releases and filings with the Securities and Exchange Commission, including our most recent 10K, 10-Q and 8-K. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements.

On today's conference call, we have President and CEO, Dr. Christy Shaffer; and CFO and Treasurer, Tom Staab. For today's call, Christy will begin with a corporate overview and program updates, and Tom will conclude with a review of the second quarter 2009 financial results and 2009 financial guidance.

I would now like to turn the call over to Christy.

Christy Shaffer

Thank you Jenny and good morning everyone. We had a productive second quarter, and I'm pleased that Inspire is well positioned to continue this momentum from several different perspectives.

First, we generated solid revenue growth, and contained our expenses, and therefore we are on track to meet our guidance for the full year. Second, enrollment in all of our clinical programs is progressing very well, and we expect to have top line clinical results for each of our late stage programs in rapid succession, which could result in three potential US regulatory filings in the future.

I would now like to provide you with a development update on each of our clinical programs beginning with our ophthalmology programs, where we have made recent substantial progress.

Starting with our late-stage program; our Phase 3 dry eye trial with Prolacria. As of last Friday, July 24, we had approximately 345 of the 450 projected patients enrolled. We have experienced rapid enrollment since initiating this trial in late January, and now expect the trial to be fully enrolled this fall.

Based on this timing, we expect results to follow after all patients have completed a six-week treatment period, and data has been collected and appropriately analyzed. We believe that Prolacria remains well positioned to serve patients in this large dry eye market, which is currently underserved, particularly with novel prescription product.

Next, I would like to provide you with an update on the AzaSite Phase 2 program for a potential new indication for blepharitis. At the last earnings call in May, we had just initiated two Phase 2 clinical trials, a two-week trial, and a four-week trial, both evaluating the signs and symptoms of blepharitis along with safety and tolerability.

Enrollment in both these trials has been proceeding rapidly as well, and as of July 24, we had approximately 90 of 300 patients in the two-week trial, and 130 of 300 patients in the four-week trial.

Therefore, we have enrolled over one-third of the patients in this program in just a few months. Our expectation is for enrollment to be complete in both of the AzaSite blepharitis trials in the first quarter of 2010.

Moving now on to our early-stage glaucoma program, enrollment and dosing are complete in both Latrunculin B and the Rho kinase inhibitor Phase 1 trial, and we expect to have top line clinical results from both of these trials in the third quarter this year.

We will be determining next steps at that time, which may include discussions with several interested potential partners. I will conclude the clinical program update with a progress report on denufosol for cystic fibrosis.

We continued to make very good progress in TIGER-2, with over 75% enrollment now completed as of July 24, with a total of 350 of 450 projected patients now enrolled. As a reminder, TIGER-2 is our second Phase 3 trial, which is a 48-week trial with a one month follow-up period.

With approximately 100 clinical sites involved in TIGER-2, we expect enrollment to be completed by the end of this year. Patients who complete this study, TIGER-2, have the option to continue in a separate protocol, which is a 48-week open-label trial of denufosol only.

To-date, 41 out of 47 or more than 87% of eligible patients have elected to participate in this separate trial which of course will provide additional long-term safety information. However, I do want to be clear that the results of this third trial are not expected to be required for the NDA submission.

We recently presented new data at the American Thoracic Society annual meeting, and the European CF conference based on additional post-talk analyses of the placebo-controlled portion of TIGER-1, and we refer you to various posters from these conferences, which are available on our website at

We are also pleased that we have the safety data from the open-label extension of TIGER-1 now, and we've also completed the FDA required two-year inhalation carcinogenicity study of denufosol in rodents, which we reported in our press release this morning.

Importantly, there was no evidence of carcinogenicity in the two-year inhalation CARC study in rodents. Finally, we continue our discussions with potential ex-North American corporate partners for the denufosol program, and we will provide you with an update when appropriate.

That completes our detailed program update. I would like to address another announcement that we made today that I've have informed the Board of Directors of my personal decision, the plan to step down after nearly 15 years at Inspire, and over a decade as CEO.

As you all know, I'm a scientist by training, and as a scientist, I've enjoyed enabling our platform of science to lead to our innovative pipeline, which has helped Inspire grow from a small entrepreneurial company to a public company with a strong integrated commercial infrastructure as well as our development activity.

I believe the company is now at the appropriate stage for this transition, given our current portfolio of marketed products, and the late-stage nature of our clinical programs nearing potential approval, launch and global commercialization.

As a Board, we have developed a solid succession plan, and initiated a search process which is now well underway, and I'm confident that we will bring in a seasoned executive who understands and importantly shares the company's strategic vision, and can execute on those related plans.

To give you a bit of a sense of what we're looking for, the ideal candidate will possess extensive global commercial experience launching innovative products, have a proven track record in developing business strategy, and hold an in-depth knowledge of managing a business in the face of a rapidly changing healthcare environment.

However, I do want to assure you that I've committed to continue to lead the company until my successor is in place, and there is an appropriate transition period.

So in conclusion, we will continue to focus on our late-stage program, and our commercial efforts in order to deliver on our strategic plan, including reaching important milestones in all of our clinical programs, which will be occurring in the coming months, and through the next two years.

At this time, I would like to turn the call over to Tom Staab for the financial review.

Tom Staab

Thank you Christy and good morning everyone. I am pleased to provide you with an overview of our second quarter 2009 financial results. We were pleased with our second-quarter results, whereby product, co-promotion and royalty revenues continued to increase, and achieving an 11% increase from the second quarter of last year.

Our R&D expenses have also been successfully focused on progressing our key late-stage programs, those that have the potential for creating significant value and ROI in the next two years.

Furthermore, based on the first six months of operations, we are reaffirming all aspects of our 2009 financial guidance. For the quarter ended June 30, 2009, we incurred a net loss of $9.5 million or $0.17 per share, as compared to a net loss of $6.4 million or $0.11 per share for the second quarter of 2008.

Total revenue for the second quarter of 2009 was $23.1 million, compared to $22 million in the second quarter of 2008. As mentioned earlier, when comparing the second quarter of 2009 to 2008 in an apples-to-apples comparison, product, co-promotion and royalty revenue increased 11%.

I will remind you that we recorded $1.25 million of collaborative research and development revenue in the second quarter of 2008 associated with a development milestone received from our Asian diquafosol partner, Santen Pharmaceuticals.

When breaking down 2009 revenue into its individual components, we recorded $7.6 million in AzaSite revenue in the second quarter of 2009, an 86% increase compared to $4.1 million in the second quarter of 2008.

AzaSite had solid quarterly performance with prescriptions increasing 11% over first quarter 2009 levels. The continuing increased prescription growth with the existing bacterial conjunctivitis label and the current enrollment rate in our AzaSite blepharitis trials support our overall commercial expectation for AzaSite as well as our previous market research.

With regard to AzaSite's portion of the single agent ocular antibiotic market, AzaSite is averaging approximately 8% market share for 2009 in our target audience of eye care specialists, and approximately 3% market share as you look at all prescribers.

Moving on, aggregate co-promotion and royalty revenue was $15.5 million in the second quarter of 2009, as compared to $16.7 million in the second quarter of 2008 or down approximately $1.2 million.

Going into the detail, we recorded $8.9 million in royalty revenue from Restasis and $6.6 million from Elestat in the second quarter of 2009. The decrease in co-promotion and royalty revenue is related to a decrease in recognized revenue for Elestat, for which, the majority of this decrease is attributed to our revenue recognition policy.

Accordingly, when you evaluate the Elestat recorded revenue in conjunction with deferred revenue at the end of the respective second quarters, Elestat revenue decreased less than $0.5 million or less than 5%.

As I've mentioned in previous conference calls, and as indicated in our press release this morning, we defer a certain portion of Elestat co-promotion revenue until we achieve our contractual annual sales minimum for the product.

Our Elestat revenue recognition policy required that we defer $3.3 million of revenue from net sales of Elestat, which occurred during the first six months of 2009 compared to $2.6 million of deferred revenue for the same period in 2008.

We continue to make progress on satisfying the 2009 annual contractual minimum, and expect to do so by the end of the fourth quarter, thereby allowing recognition of all currently deferred Elestat revenue.

Now, let's move down the income statement for a discussion of our operating expenses. In the second quarter of 2009, operating expenses were $31.9 million, as compared to $27.9 million incurred in the second quarter of 2008.

This increase was primarily due to higher R&D expenses related to four relatively large ongoing clinical trials associated with our key late-stage programs. As you review our R&D expenses in detail, you'll notice the benefit of our Q1 restructuring, whereby we have eliminated drug discovery and early R&D expense, and approximately 90% of our total R&D is now attributable to our key late-stage programs.

As a reminder, beginning in the third quarter of 2009, our cost of sales will increase as a percentage of revenue due to the contractual AzaSite royalty rate increasing from 20% to 25%. The 25% rate will be in effect through the remaining term of our AzaSite licensing agreement.

Moving onto the balance sheet, we ended the second quarter with approximately $43 million in cash and investments, and $18 million in working capital. Our net cash burn for the second quarter of 2009 was approximately $12.6 million, down from $17.8 million in the first quarter of 2009.

We expect our existing cash and investments to provide liquidity through the first quarter of 2010. In addition, we expect to bring in additional capital by the end of 2009 to provide the necessary liquidity to fund our key clinical programs going forward. We would expect this additional capital to be raised from a corporate financing and/or a denufosol partnership.

In summary, we remain secure with our financial position and our plans and ability to have significant data events on our key development programs over the next two years.

In conclusion, as I mentioned on the onset of the call, I would like to reaffirm all aspects of our 2009 financial outlook as outlined in our press release issued earlier this morning.

Dixie, now we would like to open the call to questions.

Question-and-Answer Session


(Operator Instructions). Your first question comes from the line of David Amsellem with Piper Jaffray.

David Amsellem - Piper Jaffray

Hi, thanks. Just a quick question on denufosol. Can you talk about what if any new data you may be presenting at the North American CF conference this September?

Christy Shaffer

Yes. We are hoping to present some additional data. Jenny, would you like to describe that?

Jenny Kobin

Yes. We haven't specifically said what it is, but we do have an abstract accepted and as the time grows closer, we would talk about that.

David Amsellem - Piper Jaffray

Okay and then on the ex-US partnership discussions for denufosol. Can you discuss what if anything has changed surrounding your discussions, and give us a sense of whether you are in advanced discussions with any parties?

Tom Staab

Good morning, David. Yes, we have been in conversations with various parties since the fall of last year, and we continue those conversations. However, we are not going to go into specifics in regards to partners and timing, and any other type of specifics that would be surrounding the partnership.

David Amsellem - Piper Jaffray

Then on Prolacria, can you remind us if you will be in a position to file on the ongoing study positives, and when you plan on doing so? Also, what other considerations does the FDA need to explore in any future NDA review?

Christy Shaffer

That's a great question, David. So, as I mentioned, the enrollment is going very well, and we expect to have enrollment completed in the fall of this year. It is a six-week trial. So, once the patients have completed the six-weeks, we will be gathering the data and analyzing the data, and announcing top line results; and importantly, putting together an NDA of the data if positive.

We believe that we will continue to maintain priority review. We don't have any reason to believe otherwise which would mean a six-month review process. As you probably have noticed, the majority of new ophthalmic products for which NDA's are being submitted are going to advisory panels. In fact, there was a recent advisory panel on a product called Rejena by Lantibio which is licensed by Alcon. So, we would expect potentially to have a panel as part of this.

We do have this protocol under a special protocol assessment. So we've agreed on the primary endpoint, and various aspects of it. However, as we've mentioned before, we believe that the FDA is going to look at the entire body of evidence for Prolacria, not just this particular study.

So, we have very good safety information on it. We've studied a very large number of patients, but ultimately they will look at the totality of the data as they review it. Again, I think it's relatively likely that we would go to panel. However, the good news is, we expect to likely retain our priority review status.


Your next question comes from the line of Liana Moussatos with Wedbush.

Liana Moussatos - Wedbush

Thank you. Could you review what is known pre-clinically about the glaucoma candidates, intraocular pressure lowering, dosing, anything? Can you give us any details?

Jenny Kobin

We do have Ben Yerxa here, our Head of Research and Development.

Ben Yerxa

Yes, I think that in general, the two compounds we're studying reduce intraocular pressure by increasing outflows. So, mechanistically, they're in a very interesting class. Both compounds have been shown to reduce intraocular pressure in primates. So, we've have done quite a bit of pre-clinical work.

I think what we really need to do is stay tuned for the clinical study results which is the Phase 1 study, although it's in subjects with high intraocular pressure. So, it should be interesting results that will give us some proof-of-concept in that.

Christy Shaffer

Liana, one more thing to mention is that this technology was licensed from WARF, and from Dr. Paul Kaufman and Dr. Benjamin Geiger, who are really world renowned leaders in glaucoma research. So, a lot of the pre-clinical work was initially done in their labs and it's been published.

Jenny Kobin

We expect to have that data in the third quarter of this year.


Your next question comes from the line of Joseph Schwartz with Leerink Swann.

Joseph Schwartz - Leerink Swann

I was wondering about the two AzaSite studies in blepharitis. They each seem pretty large, around 300 patients. I was wondering if there's any reason why they couldn't be used as registration studies. Are they non placebo-controlled or there are other reasons?

Christy Shaffer

Good morning. Joe, I think that's a very good question. They are in fact placebo-controlled trials. We wanted to design them sufficiently so that we would have a very clear answer from both the two-week and the four-week trial. We will have to discuss with the FDA whether they could ultimately serve as Phase 3 trials. It will depend on the results obviously, but we're looking at a number of different end points in those two trials. Importantly, they are very importantly placebo-controlled.

Joseph Schwartz - Leerink Swann

Okay, great. If I can just ask a follow-up about your CEO search. I noticed that you mentioned that you had someone in mind or you would target someone with global commercial biopharmaceutical experience. Does that imply that you are now contemplating more than before bringing denufosol to market on your own overseas as well as here in the US?

Christy Shaffer

Let me address that question. First, I want to clarify one thing. I didn't indicate that we have a specific person in mind. What I was trying to do was characterize the profile of the candidate that we are seeking through a search firm. We are very interested in someone with global commercialization experience, and that would be whether or not we have a partner or not with cystic fibrosis.

I think it's very important as we've engaged in these discussions to have global expertise because there are a lot of things that happen with global pricing, and things that you do in one territory that can impact on another territory. So, it's not necessarily to do it on our own as much as it is to have that very strong expertise, and to provide us with options for not only denufosol but obviously for any product that we develop in the future.

Joseph Schwartz - Leerink Swann

Great. Thanks for the clarification and good luck to your successor. He'll have some big shoes to fill.

Christy Shaffer

Thank you, Joe.


(Operator Instructions). Your next question comes from the line of Jon Stephenson with Summer Street Research.

Jon Stephenson - Summer Street Research

In terms of AzaSite, it looks like the AzaSite trends were tracking a little bit below what was implied by the IMS data. I don't know if there was any change in stocking patterns during the quarter?

Tom Staab

As you may remember from the Q1 call, there actually has been a change in the stocking pattern because the wholesaler inventory levels at Q1 were actually much lower than what we would typically expect. I hope you remember those conversations.

What has happened in Q2 is the wholesaler stocking has actually gone back to its normal levels, which are generally between 2.5 and 3.5 weeks. So, what you saw is, the wholesalers replenishing their inventory levels from a previous low at the end of Q1.

Jon Stephenson - Summer Street Research

Was there any change in the ASP as I was coming up with higher demand actually?

Tom Staab

When you say higher demand, you would expect higher revenue?

Jon Stephenson - Summer Street Research


Tom Staab

Right. I think when you look at the IMS data, the revenues are tracking pretty close to what we would expect, accounting for that increase in the wholesaler inventory levels.

Jon Stephenson - Summer Street Research

Just to follow-up on Prolacria. Once you get the data in hand, how long should it take to analyze that data?

Ben Yerxa

Typically it takes anywhere from 6 to 12 weeks, but I think in this trial, it's fairly focused, so it will probably be more in the middle of that range.

Jon Stephenson - Summer Street Research

Okay, great. Last thing on the glaucoma franchise, do you expect the data to be coming out simultaneously or consecutively because those there's programs there? Then also, what's the likelihood that you would actually keep that in house?

Tom Staab

The data will come out all together. So, the trials pretty much finish up around the same time. So, we will come out with all the results for both trials. Then we'll look at the data and we will determine what our next steps are.

Christy Shaffer

However, I will point out that we don't have anything in the budget at the moment for glaucoma beyond getting this data. There have been several parties that have expressed a lot of interest in the program. So, we would be likely to discussing it with partners.

Jon Stephenson - Summer Street Research


Christy Shaffer

You are welcome. Thank you very much for your continued interest and support in the company, and we look forward to updating you on our progress on multiple fronts as more information becomes available. Have a great day.


Thank you for participating in today's Inspire Pharmaceuticals' second-quarter 2009 financial results. You may now disconnect.

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