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Executives

Sailash Patel - Vice President of Strategic Development

June S. Almenoff - President, Chief Medical Officer and Director

Marshall H. Woodworth - Chief Financial Officer, Principal Accounting Officer, Treasurer and Assistant Secretary

Fredric N. Eshelman - Founding Chairman

Analysts

Matthew L. Kaplan - Ladenburg Thalmann & Co. Inc., Research Division

Furiex Pharmaceuticals (FURX) Q2 2013 Earnings Call August 7, 2013 9:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Furiex Pharmaceuticals Second Quarter 2013 Earning Release and Conference Call. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded. I would now like to introduce your host for today's conference, Mr. Sailash Patel, Vice President of Strategic Development. Sir, you may begin.

Sailash Patel

Good morning. Before we begin, I would like to remind everyone that our comments today include forward-looking statements. All statements, other than statements of historical facts, are forward-looking statements, and any statements concerning revenue and financing expectations, proposed financing of existing projects, research and development and clinical development plans and timelines, regulatory approval timelines, proposed licensing or collaborative opportunities or agreements and any statement of assumptions underlying any of the foregoing. Actual results could differ materially from those projected or assumed in the forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risks and uncertainties, including the risk factors described in our annual report on Form 10-K and other SEC filings, copies of which are available from our Investor desk and on our website, www.furiex.com.

I will now turn the call over to our President and Chief Medical Officer Dr. June Almenoff.

June S. Almenoff

Good morning. Welcome to our Q2 earnings call. I'll begin with a brief business update on our pipeline and portfolio of products. Marshall Woodworth will then follow up with a financial update, then our Chairman, Fred Eshelman, will wrap up.

I'll start with eluxadoline, formally known as MuDelta. As you know, this is a novel, oral, locally active mu agonist delta antagonist that's in development for the treatment of diarrhea-predominant irritable bowel syndrome or IBS-D. We believe that dual activity on both the mu and delta opiate receptors addresses both the diarrheal as well as the pain symptoms seen in this condition, without the constipating effects intolerance that can occur with unopposed mu agonist activity.

We are in the process of completing 2 Phase III pivotal trials, each with 3 treatment arms: placebo, 75 mg and 100 mg, which are administered twice daily. Both trials have the same overall design and efficacy endpoints but differ in duration due to the need to treat and monitor safety in a sufficient number of patients to satisfy regulatory requirements.

Each study captures both the 12-week FDA endpoint, as well as longer-term efficacy data for up to 30 weeks, the latter of which might be used to support an EU regulatory submission.

We completed enrollment of the Phase III program in July 2013, having randomized 2,427 subjects across the 2 studies. We expect to have top line results for all of the efficacy endpoints for these studies during the first quarter of 2014, although the 52-week studies continue through the end of July 2014 for ongoing safety monitoring.

Phase I studies and the manufacturing work needed to support the NDA remain on track. If our Phase III studies are successful, we believe we can file an NDA with the U.S. FDA in the middle part of 2014.

On April 11, a full publication of our Phase II study was accepted and published online in the Journal of Gastroenterology. The article, entitled, Eluxadoline Benefits Patients with Irritable Bowel Syndrome with Diarrhea in a Phase II Study, can be accessed at the Journal website online. And finally, we are actively exploring both partnering and funding opportunities to support development of eluxadoline.

I have 1 brief update for our quinolone antibiotic, Avarofloxacin, which is that we published the results of our community acquired bacteria pneumonia study in the Journal of Antimicrobial Chemotherapy. The publication, which is in the June online edition of the journal, is entitled A Phase II Study of the Novel Fluoroquinolone JNJ-Q2 in Community Acquired Bacterial Pneumonia.

Now moving to our marketed partnered products. We'll start with alogliptin or Nesina, which is partnered with Takeda. It's a selective DPP-4 inhibitor that's indicated for the treatment of type 2 diabetes as a monotherapy, and also in combination with other diabetes therapies. Nesina and its fixed dose combination product with Actos called LIOVEL has been marketed in Japan for several years.

This past quarter, there was a decrease in reported sales by Takeda for the alogliptin products compared with Q1. We've reviewed the situation with Takeda and have also taken a look at publicly available IMS data. It appears to us that the drop in sales was likely driven by inventory changes in the channel of distribution. In looking at prescription data, there is an upward trend in prescriptions over recent months, and this is what Takeda has indicated in their recent earnings call.

In mid-June 2013, Takeda launched Nesina as well as 2 fixed-dose combination products, Oseni, a combination of Nesina with Actos and Kazano, a combination of Nesina with Metformin in the United States. Also in June, Takeda completed enrollment of their cardiovascular outcome study called EXAMINE and they're analyzing the results. We expect top line results of the EXAMINE study will be presented at upcoming medical conferences in the next weeks to months. The EXAMINE study will be one of the first prospective CB safety studies of a type 2 diabetes product to report complete results.

On July 26, 2013, the Committee for Medicinal Products for Human Use or the CHMP of the European Medicines Agency or EMA, issued a positive opinion on the marketing authorization applications for VIPIDIA, which is the European brand name for alogliptin known as Nesina in the U.S., and fixed-dose combinations VIPDOMET, which is alogliptin plus Metformin; and INCRESYNC which is alogliptin plus pioglitazone, for the treatment of type 2 diabetes patients who are uncontrolled on existing therapies.

This opinion is a key step toward getting marketing authorization in Europe. We believe that the EMA endorsement of the CHMP opinion, which is effectively the regulatory approval, should occur in the fourth quarter of 2013. We would become eligible for a $10 million milestone from Takeda upon regulatory approval, as well as royalties ranging 4% to 8% for sales in Europe.

Additionally, in late July, Takeda received approval for Nesina in China. Under the terms of our agreement, we're eligible for royalties ranging from 3% to 7% for sales in China.

Looking at the big picture on alogliptin, we continue to see important progress that should enable Takeda to build a strong global franchise. Specifically, the recent launch of 3 alogliptin products in the U.S., the favorable regulatory activity in the European Union and China and the completion of the EXAMINE CB outcome study.

Finally, wrapping up with Priligy or dapoxetine. This is the first and only approved oral drug for the treatment of premature ejaculation. It's now approved in 59 countries x U.S. and marketed in 18 countries in Europe, Asia and Latin America.

In May of 2012, as you know, we entered into a license agreement with Menarini under which they will commercialize Priligy in Europe, most of Asia, Africa, Latin America and the Middle East. The transition of Priligy from our former partner Janssen is ongoing, and Menarini will continue to launch Priligy in key commercial markets during 2013.

We remain eligible for an additional launch milestone from Menarini of $5 million. We believe we should become eligible for this milestone by the end of the year.

This concludes the portfolio and business update. I will now turn the call over to Mr. Woodworth for the financial update.

Marshall H. Woodworth

Thank you, June. With regard to the 3 months ended June 30, 2013, revenues for the quarter were $3 million, comprised entirely of royalty revenue from the sale of Nesina, LIOVEL and Priligy.

Royalty income was down $6.3 million or 68% from the level recorded in Q1 of 2013 and down $0.1 million from the level recorded in Q2 of 2012. The quarter-over-quarter royalty decline in Q2 2013 was primarily a result of a lower royalty tier and lower sales of Nesina and LIOVEL in Japan. There were no recorded royalties from Nesina sales in the U.S. in Q2.

Milestone revenue was down $10 million from the level recorded in Q2 of 2012 due to the fact that in May 2012, the company recorded a $10 million regulatory milestone payment from Takeda with respect to the acceptance of a Marketing Authorization Application from the European Medicines Agency for alogliptin.

Regarding Nesina, royalties associated with Nesina and LIOVEL sales in Japan decreased 71% when compared to the prior quarter and 69% after adjusting out changes in exchange rates, a result of a lower tier of royalty payments and lower product sales. Our royalty rates for these products reset each April 1, the beginning of Takeda's fiscal year, and increase during the Takeda fiscal year if cumulative fiscal year net sales reach sufficient levels. If the yen would have remained at the average daily rate of Q1, our royalty revenue would have been $0.2 million higher.

As it relates to sales of Nesina in Japan, Takeda indicated on their earnings call that while they are slow compared to plan for the first 3 months, they are seeing an increasing trend in the number of prescriptions. As June indicated earlier, we have reviewed available IMS data that appears to us that the drop in sales in Q2 was likely driven by inventory changes in the channel of distribution. Takeda's guidance of JPY 48.5 billion for the fiscal year, that's Takeda's fiscal year, for sales in Japan remains unchanged.

Regarding Priligy. During the period of Q3 2012 through Q1 of 2013, Menarini was in the process of transitioning over key countries from Janssen. Although that process continues, a major portion of the countries where the product had been marketed by Janssen, have now been transitioned and are fully under the control of Menarini, who is in the process of relaunching and repositioning the product for future sales. We are optimistic that under Menarini's stewardship, we will see an increase in sales, which will translate into future royalties for Furiex.

Total R&D expenses were $22.1 million for the quarter, including $397,000 in noncash stock compensation expense. R&D spend was slightly below the guidance provided in the Q1 earnings call.

SG&A expenses were $3.2 million for the quarter, including $1.2 million in noncash stock compensation expense. The $0.6 million decrease from Q1 2013 was primarily a result of lower stock compensation expense incurred during the quarter as a direct result of the lower quarter end stock price and those unvested stock options that are marked to market at each period end. We expect our level of SG&A, which includes all of our public company costs, to run between $2.5 million and $3 million per quarter on an ongoing basis.

At the end of the quarter, we had total current assets of $30.9 million and $7.5 million in long-term investments, for a total of $38.4 million in cash, investments and accounts receivable. The accounts receivable balance includes a $292,000 receivable from Menarini related to ongoing Priligy clinical trials.

Current liabilities, excluding current portions of long-term debt, were $18.7 million. These were comprised of accrued expenses and payables related to development of eluxadoline, as well as $292,000 related to ongoing clinical study costs to Janssen, as previously discussed.

I'll now provide limited forward-looking financial guidance. Our royalty income from sales of Nesina and LIOVEL in Japan, based on Takeda's projected fiscal year gross sales in Japan as disclosed during their Q1 earnings release of JPY 48.5 billion and using an exchange rate of JPY 100 to the U.S. dollar and historical gross to net reductions, would be approximately $26 million.

This calculation includes internally generated assumptions regarding gross-to-net reductions and relative proportions of LIOVEL sales between LD and HD dosages and other assumptions. We expect to receive royalties from sales of Nesina in the U.S. starting in Q3, as well as continuing an increase in royalties from sales of Priligy as the relaunch efforts of Menarini take hold.

Of course, we can't control or predict exchange rates or our partner's quarter or annual level sales, but if you'd like more information about Takeda's sales and future forecasts, I would refer you to Takeda's Q1, which is our Q2, earnings call and associated sales projections which can be found on Takeda's website.

Our forecasted total R&D spending for the remainder of the year is expected to run between $43 million and $48 million, comprised almost entirely of Phase III study costs, manufacturing, nonclinical and Phase I costs related to eluxadoline. Previous guidance adjusted for Q2 would have been $43 million and $53 million.

Although we have chosen not to provide guidance on revenues due to the variable nature and timing of milestones and royalties, I do want to summarize information previously disclosed in our 10-Qs and 10-K, as well as in various 8-Ks and press releases and on this call.

For Nesina, upon receipt of the first European Marketing Authorization, we're entitled to receive a $10 million milestone, as well as global sales milestones of up to $33 million. In addition to the potential milestone revenue, we are entitled to receive continuing royalties from sales by Takeda in Japan, from sales by Takeda in the U.S. and, when launched, from sales in Europe.

We don't make or endorse any other party's estimates, but if you want, you could read the various disclosures by Takeda and a number of analyst projections as far as what sales from Nesina might be. As previously disclosed, our royalty rates in Japan and Europe are 4% to 8%, 7% to 12% in the U.S. and 3% to 7% in China.

For Priligy, per the out-licensing agreement, we were eligible for up to $10 million in launch milestones and up to $40 million in sales-based milestones and tiered royalties ranging from the mid-teens to the mid-20s in percentage terms, at the completion of the marketing license transition period.

The first of these launch milestones took place in late March and resulted in a $5 million milestone, which was received by Furiex in April. We expect that the second $5 million launch milestone could occur as early as Q4 of this year.

Based on our planned level of expenditures, primarily for the completion of the eluxadoline program, we will need to raise additional capital in the near term. The capital raise could take any number of forms, including, but not limited to, additional debt, additional equity or other forms of financing as dictated by our needs and our view toward our overall capital structure.

This concludes my remarks, and I'll now turn the call over to Dr. Eshelman.

Fredric N. Eshelman

Well, thank you, Marshall. We are very encouraged. Although there were apparent inventory shifts with Nesina in Japan, prescriptions continued to trend upward, and Takeda have not changed their 2013 fiscal year forecast for the Nesina group of products.

In addition, Nesina is now launched in the U.S., pending final approval in Europe and approved in China. The eluxadoline program is right on target, with Phase III enrollment completed and NDA submission dates on track. And of course, as Marshall indicated, we expect Menarini to continue with Priligy launches around the world. So stay tuned.

June, I'll turn it back to you.

June S. Almenoff

Thanks, Fred. Operator, we now can open the line for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Matt Kaplan of Ladenburg.

Matthew L. Kaplan - Ladenburg Thalmann & Co. Inc., Research Division

Just a couple of questions. I wanted to get a little bit more clarity in terms of potential milestone payments that you expect for the remainder of the year. I know you detailed the Menarini, but a little bit more detail on the Nesina and Takeda side would be helpful. And then in terms of the cash burn and financing plans, how those royalty -- how the royalty ramp-up, and also -- in terms of Nesina, and then also the milestones fit into your thinking with respect to financing plans to complete the Phase IIIs.

Marshall H. Woodworth

So Matt, a number of questions worked in there, and I'll try and get to all of them as I understood it. But if I miss anything, let me know. So the Priligy milestone we discussed is a launch-based milestone, and we're expecting that in the fourth quarter, as early as the fourth quarter of this year. That's $5 million. For Nesina, it's based on marketing authorization approval, which as June indicated on her script, we expect as early as Q4 of this year, and that's for $10 million.

Matthew L. Kaplan - Ladenburg Thalmann & Co. Inc., Research Division

And are there any other milestones that you could receive this year? Or those are -- the $15 million is what you have visibility to right now?

Marshall H. Woodworth

Matt, those are the most likely ones that we foresee in our forecast.

Matthew L. Kaplan - Ladenburg Thalmann & Co. Inc., Research Division

Fair enough.

Marshall H. Woodworth

And then I think your second question was in terms of...

Matthew L. Kaplan - Ladenburg Thalmann & Co. Inc., Research Division

The royalty ramp-up that you have visibility to for Nesina, I guess, in Japan and then potentially in the U.S. as well, how do that -- how that combined with the milestones in the past year, your thought process for a capital raise.

Marshall H. Woodworth

Yes. So we're going to also work in all the various milestones, all the various expected milestones, as well as our forecasted ramp royalties. And those forecasted ramp of royalties not only include the Nesina milestones that we spent a lot of -- or Nesina royalties that we spent a lot of time talking about, but also the Priligy royalties from Menarini as well. So in our forecast, we've incorporated both the royalties as well as the milestones -- expected royalties and as well as the milestones that we have visibility to. Obviously, we've taken a conservative view toward that in our forecast and our understanding of cash needs. We've looked at our R&D spend for eluxadoline, and as I indicated, the guidance for the full year is down $5 million. And so we've combined all of those and looked at where we need to be in terms of some of our debt covenants and how much cash we're comfortable with running with on a specific or at any specific point in time. As you may recall, we've always had and always practiced the JIT philosophy around financing and continue to do so and will continue to do so, to balance the short and midterm cash needs of the company with our expectations of both the royalty and milestone receipts. And it's the combination of that and just-in-time financing that leads us to the conclusion that we have to raise some amount of capital between now and the end of the year to continue with our eluxadoline program. And of course, all of this is predicated on a lack of a partnership or is predicated on an assumed lack of partnership for any of our projects or any of our products. If that partnership were to come to fruition, obviously, terms differ between various partnership possibilities. But given an upfront payment or other potential milestones of a partnership, that would change and could change the landscape for financing considerably.

Matthew L. Kaplan - Ladenburg Thalmann & Co. Inc., Research Division

Can you help quantify what your thoughts are in terms of the royalty potential for Priligy?

Marshall H. Woodworth

Yes, we haven't -- Matt, at this point in time, we haven't broken that out. It's a small proportion. Currently, it's a small proportion of our total royalty stream. We are optimistic that, that will grow. I think we all realize that under Janssen, those were a very small number, that was a very small number. And we are certainly optimistic that under Menarini's launch and relaunching activities that, that number will grow in the foreseeable future.

Matthew L. Kaplan - Ladenburg Thalmann & Co. Inc., Research Division

And then just a final question in terms of numbers. In terms of the R&D spend for the remainder of the year, after the completion of Phase III, the R&D should ramp down dramatically. Is that correct?

Marshall H. Woodworth

That's correct. So in 2014, as we've discussed on prior calls, that ramp down will be considerable as we go into the NDA filing that June mentioned, in the first half of the year.

Matthew L. Kaplan - Ladenburg Thalmann & Co. Inc., Research Division

Great. And just one question on the MuDelta eluxadoline program. In terms of the Phase III data, how and when should we expect the announcement of that in terms of top line results in the first quarter? Can you give us a little bit more granularity?

June S. Almenoff

I would say based on -- obviously, there's always caveats around database closure and that type of thing, but we think sometime by the end of February.

Operator

[Operator Instructions] I'm not showing any further questions at this time, and I'll turn the call back to Dr. June Almenoff, President and Chief Medical Officer, for any concluding remarks.

June S. Almenoff

I'd like to thank everyone for joining the call today, for your interest in Furiex. We look forward to speaking with you on our next quarter's conference call. And I'll turn the call back to the operator.

Operator

Thank you. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the conference call, and you may now disconnect. Everyone, have a wonderful day.

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