Penwest Pharmaceuticals Q2 2009 Earnings Call Transcript

Penwest Pharmaceuticals (PPCO)

Q2 2009 Earnings Call

August 7, 2009 11:00 am ET

Executives

Jennifer L. Good - President, Chief Executive Officer, Director

Frank P. Muscolo - Chief Accounting Officer, Controller

Analysts

David Watson - private investor

Scott Henry - Roth Capital

Timothy Chian - FTN Midwest Securities

Presentation

Operator

Good morning ladies and gentlemen my name is Laura and I will be your conference operator today. At this time I would like to welcome everyone to the Penwest Pharmaceuticals Second Quarter 2009 Financial Results Conference Call. (Operator Instructions).

The Safe Harbor for Q2 earnings call August 7, 11:00 am Eastern Standard Time ten west forward-looking statements:

The matters discussed herein contain forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties, which may cause the actual results in future periods to be materially different from any future performance suggested herein. For this purpose any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements without limiting the foregoing: the words believes, anticipates, plans, expects, intends, potential, appears, estimates, projects, targets, may, could and similar expressions are intended to identify forward-looking statements.

Important factors that could cause results to differ materially include the following: risks relating to the commercial success of Opana ER, including our reliance on Endo Pharmaceuticals Inc. for the commercial success of Opana ER and risks of generic competition; the need for capital, regulatory risks relating to drugs and development, including the timing and outcome of regulatory submissions and regulatory actions; uncertainty of success of collaborations; the timing of clinical trials whether the results of clinical trials will be indicative of the results of future clinical trials and will warrant further clinical trials; warrant submission of an application for regulatory approval of or warrant the regulatory approval of the product that is the subject of the trial, whether the patents and patent applications owned by us will protect the Company’s products and technology; actual and potential competition, and other risks as set forth under the Capital Risk Factors in Penwest’s quarterly report on Form 10-Q filed with the Securities and Exchange Commission on May 11, 2009, which risk factors are incorporated herein by reference.

The forward-looking statements contained in this press release speak only as of the date the statements made. Penwest disclaims any intention or obligation to update the forward-looking statements and these statements should not be relied upon as representing the Company’s estimates or views as of any date subsequent to the date of this release.

TIMERx is a registered trademark of Penwest. All other trademarks referenced herein are the property of their respective owners.

Ms. Jennifer Good, you may begin your conference.

Jennifer Good

Thank you, Laura. Good morning. Welcome to our review and discussion of Penwest results for the first quarter and six months ended June 30, 2009. Joining me on the call today is Frank Muscolo, Penwest’s Corporate Controller, and Chief Accounting Officer.

I will take a few minutes to provide an update on the various aspects of our business and the progress we are making against our 2009 goals. Frank will then discuss the financial results for the quarter and six-month period and I will make some closing remarks. We will then open up the call to answer questions that you may have.

The second quarter was a good one for us, which resulted in demonstrated progress against the focused goals we set for ourselves for 2009. The following are the four key goals of our business plan: Maximizing the value of Opana ER with our partner Endo Pharmaceuticals; advancing the development of A0001, our promising compound for mitochondrial diseases; monetizing the value of the Company’s proven drug delivery technologies and drug formulation expertise, and aggressively managing the Company’s overhead and other costs.

Let me begin with maximizing the value of Opana ER. For the second quarter of 2009 we recorded royalty revenue from this product of $4.4 million. Net sales for the second quarter of 2009 for Opana ER were $40 million compared with $37 million in the second quarter last year, representing an increase of 8%. Underlying demand for the product has remained strong. According to IMS the TRX data for the second quarter of 2009 was approximately 150,000 scripts for the quarter. This represents an increase of 48% from the scripts in the second quarter of 2008 and an increase of 15% sequentially from the first quarter of 2009.

Market share for Opana ER has also continued to increase steadily with share recently exceeding that of Avinza and nearing that of Kadian. The significant selling and marketing effort by Endo, as well as the managed care coverage they have put in place, continues to drive these increases. We believe this will translate into increased sales growth through the second half of the year.

We are also working closely with Endo to expand the revenue stream from Opana geographically. In June we announced a licensing deal with Valeant Pharmaceuticals for the Opana franchise in Canada, Australia, and New Zealand. We ran a highly competitive process in Canada with many mid-size and Big Pharma companies showing interest in the products. We estimate the current market size in Canada for this segment of pain to be approximately $400 million. Endo and Penwest selected Valeant for this partnership because of the competitiveness in the overall deal economics and importantly Valeant’s presence and capabilities in pain in Canada from both the sales and regulatory perspective. We expect Valeant to file the NDS in Canada by the first quarter of next year.

Licensing Opana ER outside the US continues to be a priority for us this year and we are working with our colleagues at Endo to identify partners to develop and commercialize the product in the relevant territories. We are currently pursuing deals in three additional territories around the world. As a reminder, we jointly own these rights with Endo and the economics of any deal will be split between us 50/50.

Now turning to A0001, the Company’s lead internal development program, we also took an important step to advance the development of this program during the quarter. As we have discussed previously the near-term goal for A0001 is to establish proof of concept both for safety and biological activity. We completed the Phase Ib trial in June establishing the proof of concept of safety for the compound. This trial was designed to evaluate the safety and tolerability of A0001, as well as to characterize the pharmacokinetic profile following peak dosing. We enrolled approximately 40 healthy male and female subjects and they were dosed for up to 14 days. The drug was well tolerated and there were no serious adverse events reported. We saw a dose dependent increase in the exposure of the drug following repeat dosing and established a maximum tolerated dose. Based on these results we are advancing A0001 into Phase IIa studies in patients.

Our clinical team has been busy working with experts in this field to design the Phase IIa program. We currently plan to initiate two Phase IIa studies in patients in the second half of this year with data analysis of both trials expected to be completed in the first half of next year. The two patient groups we plan to study are in Fredericks Ataxia and in patients with the MELA syndrome. Based on our findings regarding the pharmacokinetics of A0001 we intend to dose the compound with bid oral dosing.

We have designed these trials to measure bioenergetic end points, which we view as a signal of biological activity and potential efficacy. Based on the data of these two trials we will make decisions regarding the next steps in the program. If the studies are successful we believe we have a valuable asset in A0001; we will have various paths forward to consider. If the studies are not successful in demonstrating biological activity we will terminate our efforts.

Under our agreement with Edison, our collaborator for A0001, we were entitled to the selection of an additional NCE. Edison recently presented us with the NCE that has been identified by our joint teams. We are completing final evaluation of the proposed molecule and anticipate making a decision on its selection during the third quarter.

Our third goal is expanding and executing on our drug delivery collaborations, thereby further monetizing our drug delivery technology. We also made tangible progress on this front during the quarter, having reached our third deal with Otsuka Pharmaceutical. This has become a very fruitful relationship and our scientific teams are working well together. I am very pleased with how this business is progressing and contributing not only to the increasing revenues of the Company, but also to our scientific knowledge. We have four ongoing collaborations, three with Otsuka, and one with Cobalt Laboratories which was recently acquired by Watson. The development work on all of these agreements has advanced nicely. Our work on Otsuka 1 is complete and that drug is in the clinic. We are completing the formulation work on both Otsuka 2 and 3, we have also completed the formulation work for Cobalt and that project is now in their hands to advance.

Our business development team continues to be active in discussions on additional opportunities in both the US and Europe. In our goals we have committed to two deals this year and with on completed we are actively pursuing the second.

Before wrapping up I want to spend a few minutes talking about the financial discipline with which we are continuing to manage the Company, which I believe is clearly reflected in our financial results. This is the fifth straight quarter in which we have demonstrated a meaningful reduction in our operating costs compared with the year ago quarter and I would note that we accomplished this despite incurring approximately $1.1 million in costs on the proxy contest and related litigation this quarter. We are challenging every aspect of our spending and are working diligently to offset the unplanned costs of the proxy contest and the related litigation with additional savings.

Finally, since our last conference call we welcomed Joe Edelman and Kevin Tang to the board and we are working together on our efforts to do what is best for the Company and its shareholders.

I will now turn it over to Frank to discuss our financial results for the quarter in more detail. Frank?

Frank Muscolo

Thank you, Jennifer, and good morning everyone. I will spend a few minutes reviewing our financial results for our second quarter ended June 30, 2009.

The net loss for the second quarter of 2009 declined significantly to $2.1 million or $0.07 per share compared with a net loss of $6.9 million or $0.22 per share for the second quarter of 2008. The decrease and the loss primarily reflects the increased revenue from Opana ER as well as a reduction in our total operating expenses of $927,000.00 compared to the second quarter of 2008. I will now review each of these components in more detail.

Total revenues in the second quarter 2009 were $5.3 million compared with $1.3 million for the second quarter of 2008. This increase in revenue is primarily due to the $4.4 million of royalties recognized from Endo on its net sales of Opana ER. Slightly offsetting the increase in royalties was a decrease in revenues recognized from collaborative licensing and development compared to the second quarter of 2008 which is primarily due to timing as in the second quarter 2008 we recognized a significant portion of our development fees in connection with one of our drug delivery technology collaborations we had in progress in that quarter.

As a reminder, our royalty from Endo is currently being paid at an 11% rate, ½ of our contractual royalty rate, while we paid down the $28 million of unfunded development costs Endo is entitled to recover.

As of quarter end there was approximately $14.2 million remaining of unfunded development costs and based on Endo’s sales projections we continue to expect that by year-end 2009 Endo will have recovered substantially all of that amount. Royalty calculations will then revert to the full royalty rate in our agreement which ranged from 22% to 30% based on annual net sales of Opana ER.

Selling general and administrative expenses for the second quarter were $3.3 million compared with $3.1 million for the second quarter of 2008. The increase of $212,000.00 is attributable to

approximately $1.1 million of costs we incurred in connection with this years proxy contest and related litigation. Partially offsetting these increased costs the lower salary and benefits expenses as a result of the staff reductions we implemented in the first quarter of 2009 and lower share based compensation expenses.

Research and product development expenses for the second quarter were $3.4 million compared to $4.5 million for the second quarter 2008. This decrease of $1.1 million reflects the second quarter 2009 Penwest made no contractual payments to Edison under our collaborative agreement with Edison as that contractual obligation is complete as noted last quarter.

The decrease in the second quarter also reflects that Penwest incurred no expenses related to the development of nalbuphine ER and lower compensation expenses primarily as a result of the staff reductions we implemented in the first quarter of 2009 and increased allocations of internal R&D costs related to our drug delivery technology collaborations for the cost of revenues. These decreased in R&D expenses were partially offset by increased expenses for preclinical and clinical work on A0001.

The net loss for the six months ended June 30, 2009 declined significantly to $3.1 million or $0.10 per share compared to the net loss of $17.2 million or $0.61 per share for the six months ended June 30, 2008. The decrease in the loss primarily reflects the increased revenue from Opana ER as well as a reduction in our total operating expenses of $5.8 million compared with the six months ended June 30, 2008.

Total revenues for the six months ended June 30, 2009 were $10.5 million compared with $2.1 million for the six months ended June 30, 2008. The increase in revenues was primarily due to $8.8 million of royalties recognized from Endo on its net sales of Opana ER. Partially offsetting the royalties on Opana ER were lower royalties from Mylan Pharmaceuticals on Mylan net sales of Pfizer’s 30 milligram version of Procardia XL and lower product sales of formulated TIMERx material to Endo, which is due to a lower selling price which is effective for 2009 as previously disclosed.

Selling general and administrative expenses for the six months ended June 30, 2009 were $5.6 million compared with $7.4 million for the six months ended June 30, 2008. The decrease of $1.8 million was primarily attributable to lower share-based compensation expenses largely due to a credit recorded first quarter of 2009 that resulted from the forfeiture of stock options held by former employees in connection with our first quarter 2009 staff reductions. The decrease also reflects the $1 million reserve established in the first quarter of 2008 in connection with a $1 million loan the Company made to Edison.

Partially offsetting these decreased expenses were $1.3 million in costs we incurred in connection with this years proxy contest and related litigation. We do believe that we incurred all of the costs for this years proxy contest and do not anticipate additional costs in the second half of the year.

Research and product development expenses for the six months ended June 30, 2009 were $6.4 million compared to $10.9 million for the six months ended June 30, 2008. This decrease of $4.5 million reflects that in the first six months of 2009 we made no contractual payments to Edison under our collaboration agreement with Edison. In addition, for the first six months of 2009 we incurred no expenses related to the development of nalbuphine ER and have lower compensation expenses primarily as a result of staff reduction implemented in the first quarter of 2008 and increased allocations of internal R&D costs relating to our drug delivery technology collaborations to the cost of revenues. These decreases in our R&D expenses were partially offset by increased expenses for our pre-clinical and clinical work on A0001.

I will now take a moment to discuss our cash position as of quarter end and highlights of the cash flows for our first six months of 2009.

At quarter end June 30, 2009 we had cash and investments of $12.7 million compared with $16.7 million at December 31, 2008. For the first six months of 2009 our net cash used in operating activities was $1.5 million compared with $15.1 million of net cash used in operating activities for the first six months of 2008. Cash used in financing activities in the first six months of 2009 included $2.7 million in principle payments on our term loan payable with Judy Capital compared with principle payments of $1.2 million in the first six months of 2008, as our scheduled principle payment increased in January 2009 in accordance with our loan agreement. At quarter end June 30, 2009 we had $6.9 million of principle remaining on our term loan which is expected to be fully paid off in September of 2010.

In connection with the licensing agreement with Valeant Pharmaceuticals as of June 30, 2009 we recorded a receivable from Endo in the amount of $764,000.00 for our share of the up front payment Endo received which we recorded as deferred revenue. We received this payment in July and in accordance with the revenue recognition standards we don’t expect any significant revenue to be recognized on the signing fee during the remainder of 2009.

We are reiterating our prior guidance for 2009; however due to the costs we incurred relating to the proxy contest and related litigation we now expect 2009 SG&A expense to be in the high end of our range of $9 million to $10 million and our net loss for 2009 to be in the high end of our range of $1 million to $3 million. As Jennifer mentioned, we are doing what we can to cover the $1.3 million of unplanned proxy contest and litigation costs to keep our expense within our guidance.

Now let me turn the call back to Jennifer for some closing remarks.

Jennifer Good

Before Frank and I take your questions I would just briefly sum up by saying that as we promised back in January we were going to spend this year executing on a focused business plan with well defined objectives. I think the first six months of this year have demonstrated good progress on those goals by our team. We are right on schedule with our plans for the year and believe we can execute on the remaining deliverables. We believe that executing on our plan builds value. The Company is financially sound, is operating at close to break even, and we expect to be profitable for the full year of 2010.

In the second quarter we completed additional deals around our assets, including both drug delivery technology collaborations as well as the international licensing of Opana ER; advanced A0001 to Phase II and continued our efforts to decrease costs.

I want to quickly give credit to the senior leadership team who kept their eye on executing our plan despite the distraction of the proxy contest. Mr. Paul Hayes, our VP of Strategic marketing who worked closely with our colleagues at Endo to complete the transaction with Valeant; Dr. Anand Baichwal our Senior Vice President of Licensing who completed the deal with Otsuka; and Doctors Tom Sciascia and Amale Hawi who have been working very hard this year with their teams completing the Phase I program for A0001 and preparing to initiate Phase IIa.

I look forward to working with the entire Penwest team to complete our deliverables for the year and reporting to you on our successes. Frank and I will now be happy to open the call to any questions that you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from David Watson a private investor.

David Watson - private investor

I am wondering if you can talk a little bit about, I know there was a set of patents that were rejected last year and I know you guys have been getting a better patent coverage for your Opana. Can you discuss that a little bit, when you expect to hear anything on that?

Jennifer Good

Yes, I am happy to do that that is obviously an important value drive in the Company. There is broadly about 12 or 13 additional patents being prosecuted by both Penwest and Endo. The most near-term news I think that is very meaningful is the Endo patents that are being prosecuted. Those also break down into two buckets: there is a set of patent applications that are on expedited review that Endo is taking into the appeals board of the PTO. Endo expects a decision on those patents in the fourth quarter of this year. There are also four or five other patents that they have also filed on appeal that they expect decisions on through out next year.

Then our incremental TIMERx patents that are being prosecuted, there is nothing we expect final decisions on this year, but we should start getting office actions around particularly some of our alcohol abuse resistant claims.

So, there is a lot of activity and I think the first set of Endo’s clinical patents we should have decisions by the end of this year.

David Watson - private investor

Okay and on A0001 can you tell me about when you would expect that would actually be able to be marketable and then what the size of that market is?

Jennifer Good

Yes, so the one that can be marketed, I hate to give the answer it depends, but at the end of Phase II we will go meet with the FDA and in this orphan drug space these development plans can look like a lot of different things. For instance, depending on the data sometimes you can only have to run one pivotal trial, you will get conditional approval; you may have to run two whether we run them in parallel or not. I think if everything went according to plan and we sort of kept this program moving I think we would be looking at the earliest this drug could be marketed is 2012; so, some kind of submission in 2011.

As far as the market size each of these indications we’re looking at in these mitochondrial respiratory changes, these have 10,000 to 35,000 patients roughly each. What you hope to have in this area is meaningful efficacy, so you can obviously have some kind of premium pricing. If you look at what, actually Idebenone is a drug that was approved for Santhera in Canada and their average treatment price is about $92.00 a script I think and so if you multiply that out at some of these patient sizes it would indicate a market of about $300 to $400 million. As you can hear from that there is a lot of estimates built into that, but it gives you a sense at least of what we believe the sizes are.

I think importantly, if we see good efficacy in some of these diseases I think what is exciting about this area is we believe some of the underlying pathology in a lot of bigger diseases like Parkinson’s, Huntington’s, ALS, it would actually probably give you a good basis to go study this drug in some of those bigger indications as well.

David Watson - private investor

Okay, thanks.

Operator

Your next question comes from Scott Henry with Roth Capital.

Scott Henry - Roth Capital

First of all the data exclusivity expired June 22 for Opana ER and nothing happened. Do you think there was any significance to passing that date and nothing happened? I know we are on a 30-month stay right now, but I am just curious if you thought that was significant in any way?

Jennifer Good

I don’t because as you know Impact was the first to file, they did a paragraph for certification and the first 30-month stay ends in of June of 2010; so Penwest and Endo have never worried about the date exclusivity period for Opana ER.

Scott Henry - Roth Capital

Okay and then on June 10^th the shareholders voted that the board take prompt and thoughtful action to “immediately wind down substantially all of the operations of the Company”. Has the board met since June 10^th?

Jennifer Good

I am not going to comment on board meeting day. The board has met, the board meets regularly. The board is obviously aware of the approvals that initiative received a majority vote by our shareholders. I have also had detailed conversations with Kevin to understand what he views as wind down. I think that really relates more to the cost structure than sort of the strategy side of the business.

The strategy we laid out early this year and I just walked through again is a strategy that is in place. The full board, including Joe and Kevin, will continue to discuss and consider the best strategy for the Company and if there are any changes we will obviously make the appropriate disclosure. But, we are continuing with the strategy I just laid out.

Scott Henry - Roth Capital

I guess what I am really trying to understand is there was an opinion going into the meeting and then the vote happened and then things happened. I am curious if kind of the dissident positions changed, because I recognize you guys set goals at the beginning of the year, but this is the shareholders company and the word immediate and prompt are pretty specific. Are you guys taking any actions or are you just kind of pretending this didn’t happen?

Jennifer Good

No, I just told you, obviously we are not pretending it didn’t happen. The board is discussing it and not ignoring the proposal. There is no change to the strategy now, but this will be something that will be continued to be discussed and no, it is absolutely not being ignored.

Scott Henry - Roth Capital

Okay, the only request I have is if the board could put together a response, because I think shareholders have made a vote, it would be helpful to know the board’s thoughts on a pretty important issue. But, I appreciate any color you can give in the future.

Jennifer Good

Okay, thanks Scott.

Scott Henry - Roth Capital

Yes, thank you.

Operator

Your last question comes from Timothy Chian with FTN Midwest Securities.

Timothy Chian - FTN Midwest Securities

My question is really tied to your relationships with Endo; are they strengthening? Also, what can you tell us about a potential line extension strategy that you may have in the works for Opana ER?

Jennifer Good

The relationships with Endo are good. They have changed over a lot of their senior team, although that has largely been in place since last year. They are obviously a very important partner of ours. We work at multiple levels through out Endo: our licensing teams have been working together; our supply group works together, and then obviously I have a relationship with the executive team. So, I think they are strong. They have been great. We have had to collaborate a lot through the whole Valeant licensing effort, again on multiple levels. They have been very helpful and I would say relationships there are good.

As far as the line extension strategy, this is always my favorite question I get that I can never answer. Endo is really responsible for that and I think they have conveyed that they have some efforts going on there, but it is really not appropriate for me to comment on that.

Timothy Chian - FTN Midwest Securities

I know you talked a little bit about you might get some visibility on the patents. Is there some sort of detail you can provide us as to how many patents are actually sitting at the PTO being reviewed right now on Opana?

Jennifer Good

Yes and I would be happy to email you the exact list and numbers after this. I won’t be able to quote them, but I think in total there are 12 or 13 patents between Penwest and Endo still being prosecuted. The Endo patents that are on appeal, which as you know sort of bring the incremental PK blood level clinical claims, which you know really aren’t in place at all right now; there is about six or seven of the patents relate to that, but I am happy to get you that list and sort of the status of where each of those sits if you would like to get that out in email. I just can’t quote them off the top of my head.

Timothy Chian - FTN Midwest Securities

Okay, great. Thanks a lot.

Jennifer Good

Thank you for your time today. I hope you all have a nice rest of the summer and I look forward to sharing continued progress with you on our next call. Thank you.

Operator

Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation. (Operator Instructions).

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