Alexza Pharmaceuticals Management Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 8.13 | About: Alexza Pharmaceuticals, (ALXA)

Alexza Pharmaceuticals (NASDAQ:ALXA)

Q2 2013 Earnings Call

August 08, 2013 5:00 pm ET

Executives

Mark K. Oki - Chief Financial Officer, Principal Accounting Officer, Senior Vice President of Finance and Secretary

Thomas B. King - Chief Executive Officer, President, Director and Chairman of Finance Committee

Analysts

Charles C. Duncan - Piper Jaffray Companies, Research Division

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

Operator

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

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

Mark K. Oki

Good afternoon, and thank you for joining us today. On the phone with me is Tom King, Alexza's President and CEO. Today, we will review the company's financial results and discuss Alexza's recent accomplishments and ongoing activities before opening the lines for your questions.

I would like to remind you that the matters discussed in this call contain forward-looking statements that involve risks and uncertainties, including our ability, along with our partners, Teva Pharmaceuticals and Grupo Ferrer, to commercialize products; the timing of the commercialization of products; our projected revenues and expenses; our ability to support operations, based on our available cash resources; and the valuation of our right to borrow under the Teva note and resulting impact, if any, on our reported financial results. Actual results may differ materially from the results predicted and recorded results should not be considered an indication of future performance. These and other risk factors are more fully discussed in our quarterly report on Form 10-Q that was filed with the SEC on May 14, 2013, most particularly under the caption Risk Factors. Alexza disclaims any obligation to update or revise any forward-looking statement made on this call as a result of new information or future developments.

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

Clinical and corporate milestone guidance is as of today, August 8, 2013, financial guidance relating to our current cash, cash equivalents, marketable securities and other possible sources of cash, is based upon balances as of June 30, 2013.

With that, I would now like to summarize the financial information for the second quarter of 2013. We recorded preliminary revenues of $40.8 million for the quarter ended June 30, 2013, and $41.6 million for the 6 months ended June 30, 2013, compared to $0.7 million and $2.6 million for the same period in 2012. In the second quarter of 2013, we recognized $40 million of licensing revenues resulting from the upfront payment by our U.S. commercial partner, Teva. We also included in our 2013 second quarter revenue is the amortization of the upfront payment from the Ferrer agreement and transfer pricing of units shipped to Ferrer. Revenues in 2012 represents the amortization of upfront payments earned under our agreements with Ferrer and Cypress Bioscience. We are evaluating the revenue recognition of our right to borrow under the Teva note. We believe that the value of this right, if any, would result in an increase to the reported revenues and total assets in the second quarter of 2013, and a corresponding decrease to the reported net loss. We plan to record the value, if any, of the right to borrow under the Teva note as an asset that would be amortized as interest expense over the 2-year period in, which we may draw down the Teva note. Any changes to the reported results will be noncash items and will not increase or decrease our available cash, cash equivalents or marketable securities.

We believe we will have the final valuation of the right to borrow asset, if any, available when we file our quarterly report on Form 10-Q for the period ended June 30, 2013. Because of the revenue numbers reported in our earnings release are preliminary, they may change materially before they are finalized.

GAAP operating expenses were $12.6 million and $22.9 million in the 3 and 6 months ended June 30, 2013, as compared to $7.9 million and $14.2 million in the same period from 2012. The increase in operating expenses year-over-year was attributable to early commercial efforts relating to our commencement of activities following the approval of ADASUVE in both the U.S. and EU, including pre-commercialization and marketing costs, Teva deal transaction cost and the start of ADASUVE commercial manufacturing.

During the second quarter, we began to classify certain manufacturing, supply chain and quality expenses as cost of goods sold. These expenses were previously classified as research and development expenses. The $3 million of cost of goods sold number in the second quarter of 2013 primarily consist of manufacturing startup costs and manufacturing variances as a result of the low volumes produced compared to the projected capacity of our factory.

Research and development expenses were $4.8 million in the 3 months ended June 30, 2013, and $11 million in the 6 months ended June 30, 2013, as compared to $5 million and $10 million in the same period in 2012. As I just mentioned, research and development cost in the second quarter of 2013 were impacted by the classification of certain manufacturing-related costs previously reported as R&D expense, which are now classified as cost of goods sold.

In addition, we initiated several projects in R&D during the period as a result of our efforts to address the post-approval commitments required with our recent ADASUVE approval.

General and administrative expenses were $4.8 million and $8.9 million in the 3 and 6 months ended June 30, 2013, as compared to $2.9 million and $4.1 million during the same period in 2012. As mentioned previously in my discussion of total operating expenses, the G&A increase in 2013 was partially due to an uptick in pre-commercialization activities, such as market research, including pricing and market segmentation studies, following the FDA approval of our ADASUVE NDA in December 2012, and deal-related expenses which we spent finalizing our U.S. commercialization strategy.

In the first quarter of 2012, general and administrative expenses were reduced by $1.4 million in a noncash accounting reversal as a result of the termination of one of our building leases and related subleases in March of that year. We ended the second quarter of 2013 with cash, cash equivalents and marketable securities of $35 million. With the available cash balances at the end of the second quarter, we believe we have sufficient capital resources to meet our anticipated cash needs into the third quarter of 2014. This guidance is based on our cash, cash equivalents and marketable security balances at June 30, 2013, and also incorporates estimated product revenues, royalties and milestones associated with the sale of ADASUVE in the U.S. and the EU, available proceeds from the Teva notes and our expected cash usage. As always, changing circumstances may cause us to use capital at a faster or slower rate than currently anticipated or to alter our operations.

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

Thomas B. King

Thanks, Mark, for those comments. Good afternoon and thanks to all of you for joining our conference call today. Our second quarter continued the momentum we established earlier this year with the U.S. and EU approvals of ADASUVE. Much of our recent activity has been shaped by commercialization activities devoted to getting ADASUVE ready to launch. Today, I'm very pleased to report on several key accomplishments, particularly for the work that we have started, and in some cases, completed for the commercialization of ADASUVE.

As most of you know, ADASUVE was approved in the U.S. and in the EU for the treatment of agitation in patients with schizophrenia or bipolar disorder. Market research teaches us that nearly all patients with these diseases experience agitation episodes. For these patients, agitation is characterized by feelings of being out of control, including panic, cold sweats, poor impulse controls, shaking, and escalating severity of symptoms. Agitation can escalate rapidly and unpredictably, creating an unstable and potentially dangerous situation for patients, their caregivers and treating physicians and staff.

We have also learned that approximately 50% of total agitation episodes occur in the hospital setting, that is the medical emergency department, the psychiatric emergency department and in the inpatient psychiatric unit, which is the target patient population for ADASUVE in both the U.S. and the EU.

The most exciting news since our last update is that our partner, Ferrer, has launched ADASUVE in their territory, with the first sale of ADASUVE in Germany. This is a remarkable milestone for us, as it represents the first commercial sale of ADASUVE in the world. With this first sale in Germany, we received a milestone payment of $1.25 million.

Ferrer plans to continue the rollout across its territory based on product approval, finalization of pricing and reimbursement, and completion of distribution agreement. We expect more product launches in the EU during the remainder of 2013, and for Ferrer to continue ADASUVE's rollout into 2014.

As Ferrer initiates sales in ADASUVE across the EU, we will receive milestone payments for first country sales and certain other countries, and anticipate recording some of these additional milestone payments in 2014.

A key component to our bringing -- our goal of bringing ADASUVE to healthcare providers who treat patients suffering from agitation was finalizing and executing on a very strong U.S. commercial strategy. In May, we are very pleased to announce that we had entered into an exclusive license and supply agreement for ADASUVE in United States with Teva Pharmaceuticals. Teva brings a strong commitment to CNS, and an established commercial presence in the hospital and psychiatric markets, which are exactly the settings for use of ADASUVE.

Further, ADASUVE is an excellent fit with the Teva Select Brands group who has primary commercial responsibility for ADASUVE, and Teva's overall new therapeutic entity strategy, which is sometimes called the NTE strategy. We are confident in Teva's ability to deliver commercial success for this important new product. We have been quite impressed with our interactions with our counterparts at Teva, their enthusiasm for ADASUVE and the effort they are making on many fronts. We currently anticipate that Teva will launch ADASUVE in the U.S. early next year, and we're working with them on various prelaunch activities.

To support the development and continuity of ADASUVE's global brand, we have also formed an ADASUVE global commercial team, which combines individuals from Teva, Ferrer and Alexza. This team meets at regularly scheduled times and has the charter of assuring a consistent global commercial message across the world for ADASUVE.

We have recently strengthened our management team with the addition of Dr. Mike Holfinger as our Vice President, Manufacturing and Global Supply Chain Management. We're also very pleased to announce 2 internal promotions, that of Kelly Seither to Vice President of Global Strategic Marketing and New Product Planning, and Dr. Tatjana Naranda to Vice President of Business Development and Global Alliance Management. These 2 individuals bring more than 17 years of combined work at Alexza, and played key roles in the U.S. and EU commercial strategies work over our past year.

Commercial manufacturing. If you were to visit Alexza today, you would now see a factory that is making commercial product. This is the ultimate reward for a development stage company, to see a new idea developed, reviewed and approved, and finally moving into the hands of physicians who can help patients they treat. Commercial manufacturing brings many changes to a company. As investors, you see it in the changes we have in our P&L and balance sheet. Indicative of this transition we are undergoing, our quarterly reporting over the next few quarters may be difficult to predict with multiple variables in play. Product flow will be low initially, growing over time, and product shipments, which we do in full pallet quantities, will translate into sales over subsequent quarters. Lastly, revenue recognition is increasingly complicated in today's world. We will attempt to provide visibility into our revenue numbers to the extent possible, and look forward to reporting to you in the coming quarters.

Internally, we think this commercial change with creating finished products, and as that leaves our shipping dock to either Ferrer or Teva, we know it will end up being used to treat an episode of agitation. It's a task that we take very seriously from all aspects of manufacturing. We look forward to providing quarterly updates on our progress, both in terms of inventory building and the selling of finished products to Teva and Ferrer.

Now that we received approval for ADASUVE in the United States, and the EU, we will look forward to reinvigorating our product pipeline, and advancing additional products based on our Staccato platform to address areas of important medical need.

As we have previously disclosed, our first such product candidate is being developed to treat acute repetitive or cluster seizures, sometimes abbreviated as ARS. We plan to study AZ-002, which is Staccato alprazolam, initially in this ARS patient population.

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

According to the Epilepsy Foundation, epilepsy affects approximately 3 million patients -- 3 million Americans, making it the third most common neurological disorder in the United States. ARS is a seizure that are serial, clustered or a crescendo, and distinct from the patient's usual seizure pattern, despite treatment of their antiepileptic drugs.

ARS occurs in a small subset of patients with epilepsy who regularly experience these breakthrough seizures or flurries despite the treatment with their regimen of normal course drugs.

ARS is a serious unmet medical need and we believe there is a great promise for our products, such as AZ-002, to improve patient outcomes.

In May, Dr. Jim Cassella, our Executive Vice President of R&D, and our Chief Scientific Officer, presented this innovative product concept at the Antiepileptic Drug and Device Trials Conference, where they were highlighting advances in the treatment of epilepsy. We look forward to advancing this candidate by initiating in a Phase II proof of concept study later this year.

In summary, it is a very exciting time in our history, as we are in the midst of transforming Alexza from a development stage company to a commercial company. ADUSUVE is now being sold in Europe, and plans are well underway for additional country launches in 2013 and 2014. We have secured a strong partner in Teva for ADASUVE in the U.S., and couldn't be more pleased with the outcome of our commercial strategy process. Our manufacturing facility is up and running to supply this global launch over the coming quarters. We are stronger financially than we have been in a long time, we continue to strengthen our management team and we're putting AZ-002 from our Staccato-based pipeline back into development.

We look forward to updating you as we continue to make progress against our objectives to commercialize ADASUVE and also to advance our pipeline of Staccato-based products. And as always, we fully appreciate your support of Alexza.

With those prepared comments, we would now like to open today's conference call for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Your first audio question comes from Charles Duncan, Piper Jaffray.

Charles C. Duncan - Piper Jaffray Companies, Research Division

Tom, so quick question regarding Ferrer, I know that they've only been in the market for a short amount of time but wondering if you had any feedback in terms of that first sale and use of the product over there and what is your strategy for targeting prescribers in Germany?

Thomas B. King

Certainly. The one thing that I had the chance to do over last month was actually travel to Germany and participate in the launch meeting with their field organization consisting of people, both their sales reps and MSLs, and also meet their medical team and their commercial team. It's being sold by a company called Trommsdorff, which is a wholly-owned subsidiary of Ferrer, and they've got a team of 10 people in the field that's fully dedicated to nothing but ADASUVE. The German government keeps impressive statistics in terms of behavioral emergencies. Way that better than the data that we have in the United States. And of the 1,000 hospitals that basically are in Germany, there are 351 that represent greater than 96% of the behavioral emergencies, top to bottom. And so these 7 sales reps and 3 MSLs are focused solely on those 351 hospitals, there are 7 sales districts in Germany, the MSLs tag team more than one sales district obviously. The MSLs also spend time on their risk management program, all of the EU has a risk management program, it's quite a bit different than the REMS in United States, but it still has to be -- information has to be provided to each hospital. And they're also working on local and regional key opinion leaders speaking. The sales reps are out on the field, they have demonstration units, placebos, they have the ability to place samples, which is different than, again, in United States. And there's a high level of enthusiasm and initial feedback from physicians about the product. The process has only been running for a handful of weeks since, so we don't have any what I would call verbatims back from doctors and experiences. We look forward to being able to provide those, it will be a very exciting, I think, precursor to what we would expect to see both in the rest of Europe and United States. But other than the enthusiasm and the fact that they're out making calls and starting to get the process flowing, I don't have any verbatims back from doctors yet, Charles.

Charles C. Duncan - Piper Jaffray Companies, Research Division

So it sounds like this is very much a knowledge-based sale and it's not at all a distribution agreement, if you will, these folks are really prepared to sell the product benefits?

Thomas B. King

Very much so. In EMEA, one of the most interesting things about the team they've put in place is the national sales manager at Trommsdorff who the 7 field organization report to. That's been on the commercial side for let's say 7 to 10 years or so but he was a German psychiatric clinical nurse. So for the first 10 years of his career, he was actually an individual that treated these patients. And he is -- has great passion for what he thinks ADASUVE can do in the improvement of these patients. My German is not terrific, but his impassioned presentation at the sales meeting was really, really compelling in terms of his experiences as a nurse and talking to these individuals about what treatments were, what his issues were and how this product is going to change that. So this is absolutely a group of individuals that are doing nothing but selling ADASUVE, they've got great passion for the product, they view this as transforming for their company within Germany, and I expect great things from him.

Charles C. Duncan - Piper Jaffray Companies, Research Division

And I assume that some of the feedback that will eventually gather from use in the field is going to be part of what can be translated for this global ADASUVE team, and hopefully could catalyze Teva's success in the market?

Thomas B. King

Yes, one of the reasons we have a global team is that while we have these strange borders and distances between countries, the practice of psychiatry isn't all that different, and so it ties in the key opinion leaders, it ties into global and international meetings where we all work together and also taking nuances of the messaging. If you look at the promotional materials that they have for Germany, the concept is not that much different if you write it, but the graphics that they use are different because the European market is different. But in a sense, we're getting to test drive ideas realtime, what works, what doesn't work. And it goes from simple brochures to something that's very cool and sort of sexy on an iPad and everything in between. So they'll have the benefit of that. We'll see it rollout in several more countries, with different languages over the course of the next 2 or 3 months, and then all of that information is available for Teva through this global commercial team that they can extract learnings from that, they can extract key opinion leaders to speak from that. So I think it actually is a great symbiotic relationship between the companies.

Charles C. Duncan - Piper Jaffray Companies, Research Division

And then, my last question is regarding the pipeline. Tom, I assume you're going to give us more details on that proof of concept study later on this year, but could you see data from that study coming yet in 2014?

Thomas B. King

Jim's projection is he thinks that this study will take about 12 months to run. So historically, we've brought studies in a little bit ahead of time but you don't know until you start to study about what the pace is of those -- of the patient enrollment. And the final protocol is still being evaluated. There's a couple of different views about what would be the best way to assess inpatients with ARS. Jim is working with a couple of the leaders from the American Epilepsy Foundation. There are several leading key opinion leaders, I guess, would be the best way to talk about them, that lead the thought in this patient population and they're enthusiastic about doing a clinical trial. So we would look forward to completing the study in 12 months, and it would be great to think about having data by the end of 2014.

Operator

And your next question comes from the line of Steve Brozak, WBB Securities.

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

Well, listen, I will come to the point. Obviously, a lot has been talked on the KOLs and how strong advocates they are for you. But I'd like to know one thing, how strong are the KOLs in terms of advocating for the product and also going out there and saying, here are the advantages, specifically for reimbursement or specifically for the payors that have come out there and say that this is an absolute win-win situation? And I'll hop back in the queue.

Thomas B. King

The key opinion leaders are, I think, consistent both in United States and in international in terms of their view of what this product can do. And I parenthetically say that because the key opinion leaders are mostly psychiatrists. And to a large degree, over the last 10, 15 years, psychiatry has had a lot of new products of which sometimes they haven't brought the promise of what they were initially supposed to do. And so as a result, our observation is that this group of physicians have some degree of skepticism just is in general about products. And so the exciting thing about the launch in Germany, for us, is getting the product into the hands of doctors, they certainly could read the clinical data and they're impressed with what we've observed from an efficacy profile on the onset. But I think having 10 or 15 patients under your belt and that experience you have with you and your clinical team and your nurses is going to be a big difference. And I think, I can't wait to have physicians say, "I thought this beforehand, but now having 10 or 15 patients worth of experience, this what I believe this product can do or can't do." And I think that would be very powerful. I mean, with regard to pricing, pricing is strong in Germany. The price, the launch price is EUR 70. So it's a strong price. It's in the range of what we would anticipate the product being available in the United States, and that's the way we've always modeled this opportunity, and we think the overall health economic argument for what this product can deliver will sustain that. I mean, I think another aspect is even if we had 100% market share, we're talking about 6 doses a year, and 6 doses a year times $100 a dose is $600, which is significantly less than 1 month of product of an oral product that these patients are taking. So I think it's also important to keep it in perspective of the size and scope of the total, if you will, commitment to ADASUVE as opposed to sometimes just a particular individual treatment and that specific cost. Thank you, Steven. It is exciting. It's a very transforming time for the company, while it's going to be noisy for a couple of months or a couple of quarters as we move forward with kind of working ourselves into the flow of commercial manufacturing and the flow of commercialization, it's an impressively exciting time for us.

Operator

[Operator Instructions] There are no questions waiting just at the moment.

Thomas B. King

Okay. Thank you, operator. And thank you, everyone, for your time today. We look forward to updating you as we forge ahead with our global launch of ADASUVE, and with the advancement of our product candidates. Thank you again for today and for participating and we'll talk to you soon. Have a good day.

Operator

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

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Alexza Pharmaceuticals (ALXA): Q2 EPS of -$0.21 may not be comparable to consensus of $0.09.

Revenue of $40.8M may not be comparable to consensus of $14.17M. (PR)