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INSYS Therapeutics, Inc. (NASDAQ:INSY)

Q2 2013 Earnings Call

August 13, 2013 11:00 AM ET

Executives

Michael Babich - CEO

Darryl Baker - CFO

Analysts

Jason Butler - JMP Securities

Rohit Vanjani - Oppenheimer

Michael Faerm - Wells Fargo

Operator

Good morning and welcome to INSYS Therapeutics Second Quarter 2013 Operating Results Conference Call. Today’s call is being recorded. The company issued a press release detailing second quarter 2013 financial results this morning. A copy of our earning release can be accessed through the investor relation section at the INSYS’ website at www.insysrx.com. Also, a replay of today’s call will be accessible on the website shortly after we conclude.

On today’s call are Michael Babich, Chief Executive Officer and Darryl Baker, Chief Financial Officer.

The format of today’s call is as follows: Mr. Babich will begin with an overview of recent corporate highlights; Mr. Baker will then provide a summary of financial results for the quarter followed by a Q&A session. Before we get started, I would like to remind everyone that statements made on the conference call today that express a belief, expectation, projection, forecast, and anticipation or intent may be considered forward-looking statements as defined by the Private Securities Litigation Reform Act. These forward looking statements are based on information available to INSYS management as of today and we assume no obligation to update these statements as circumstance change. These forward-looking statements may involve a number of risk and uncertainties which may cause the company’s results to differ materially from such statements. Risks and uncertainties could affect forward-looking statements including the failure to successfully launch new products and increase competition. Such risks are outlined in our routine filings with the SEC including our registration statement on Form S1 and our Form 10-Q filings.

Thank you and with that I’ll turn the call over to INSYS’ CEO Michael Babich.

Michael Babich

Thank you and good morning everyone and thank for taking the time out of your day to join us for our first conference call as a public company. As many of you know, we completed our IPO in early May. The company was able to raise $32.5 million in net proceeds providing us with the financial strength necessary to build upon our strong supportive care franchise.

Since the IPO, we have continued to demonstrate significant progress in all aspects of the company. We achieved our first quarterly profit in the quarter ended in March and during the second quarter, we demonstrated significant growth in both earnings and revenues, interest generated nearly $19 million in net revenue during the second quarter of 2013, an increase of approximately 70% sequentially. As a result of the sales growth, we recorded EPS of $0.26 per diluted share.

Subsys sales continue to make up the vast majority of the quarterly revenue increase, growing to $18.5 million during the second quarter from $9.7 million in the first quarter, a sequential increase from Q1 to Q2 of over 90%.

For those of you that may be somewhat new to the INSYS story, Subsys is approved for the management of breakthrough pain and cancer patients who are opioid-tolerant. The FDA approved the product on January 4, 2012 and we launched the product in the last week of March in 2012. And we market Subsys through our own U.S. based sales force approximately 60 sales professionals focused in the supportive care space. We utilized an incentive based sales model that employs a pay structure where significant component of compensation as in bonuses based on performance.

I am proud of our significant penetration for Subsys and our success has allowed us to invest heavily in research and development and sales and marketing going forward. We're very excited to accelerate our pipeline, as we believe the Subsys spray device is a tremendous platform for additional molecules. Our team has proven that there is a need for unique platform that can deliver molecules in a simple manner or convenience and onset of action is important.

I look forward to announcing our candidates in the future once they reach the IND stage. In regards to our Dronabinol franchise as a reminder we have successfully completed our pivotal bioequivalence study and our pre-NDA meetings with the FDA for our oral solution which will be branded product to compete against the generic Marinol. As a reminder we currently market our generic Dronabinol soft gelatin capsules through our distribution partner Mylan Pharmaceuticals.

Dronabinol soft gel capsule is a generic equivalent to Marinol approved as a second line treatment for chemo-induced nausea and vomiting and anorexia associates with weight loss in patients with AIDS. Based on our data and clinical trials, we believe that our oral solution product bas substantial potential advantages compared to Marinol. Some of those include a more rapidly detectable blood levels and a more reliable absorption profile. We plan to sell this branded product through our own internal sales force as there is significant synergies between the prescribers of Subsys and Marinol

Ultimately, we believe that these advantages will allow us to both penetrate and expand the current market with potential additional indications that we will work on in our R&D group. I am extremely proud to work side by side with my co-workers at INSYS as we have created an opportunity to continue to drive revenue growth while continually reinvesting in our business.

We believe that reinvesting our profits into R&D and sales and marketing will provide us a continued pathway to increasing shareholder value. At this point I would like to turn the call over to Darryl to discuss our financials in more detail. Go ahead Darryl.

Darryl Baker

The second quarter of 2013 was our second straight quarter of profitability. Net income for the second quarter of 2013 was $4.5 million, and diluted earnings per share was $0.26 compared to a net loss of $6.4 million and diluted loss per share of $0.68 for the second quarter of 2012. Gross margin was 86% for the second quarter of '13, compared with 34% for the second quarter of '12, primarily a result of the significant increase in Subsys sales. Total net revenue increased by 432% to $18.8 million for the second quarter of '13 compared with $3.5 million for the second quarter of '12, also primarily the result of increased Subsys sales.

Subsys generated $18.5 million in net revenue during the quarter, compared with $9.7 million in the first quarter of '13, sequential quarterly increase of 91%. Dronabinol soft gelatin capsule generated $300,000 in net sales during the second quarter compared to $2.3 million in the same period last year. As a reminder, the Dronabinol soft gelatin capsule is sold through an exclusive supply and distribution agreement with Mylan under which INSYS recognizes revenue upon Mylan sale of products to wholesale distributors.

The decrease in net sales of Dronabinol was primarily a result of the lingering impact of two baskets of Dronabinol SG capsule not being released for commercial sale in the fourth quarter of ’12 and subsequent inventory adjustments. Although product supply resumed to normal levels in the first quarter of 2013, demand has declined in ’13. As Mylan controls the distribution of Dronabinol SG capsule, we expect net revenue from sales fluctuate on a quarterly basis.

Sales and marketing expense was $6.3 million during the second quarter of ’13 compared to $2.9 million for the second quarter of ’12. The increase was primarily due to variable sales compensation expenses and incremental product marketing expense associated with the increase in sales of Subsys.

R&D expense increased to $1.9 million for the second quarter of ’13, up from $1.7 million for the second quarter of ’12, primarily as a result of an increase in R&D personnel. General and administrative expense increased to $2.8 million for the second quarter of ’13 from $1.9 million for the second quarter of ’12, primarily a result of increases in Administrative infrastructure needed to support the growth of subsets and an increase in corporate cost related to operating as a public company.

Cash and cash equivalents at the end of the second quarter of 2013 were $21.7 million compared to $361,000 as of year-end 2012. The increase was driven by the completion of our IPO in May as Mike previously discussed. Also in connection with the IPO, notes receivable throughout related party were converted into a into common equity and we repaid our line of credit resulting in no debt and 34.2 million in stockholders’ equity on our balance sheet at the end of second quarter of 2013.

Our strengthened financial position will allow us to execute on our plans to expand our Dronabinol manufacturing capacity as well as to invest in research and development and sales and marketing efforts to drive future growth opportunities.

And with that, I’ll turn the call back over to Mike.

Michael Babich

Thank you, Darryl. Operator, we can now open the call up for questions. Please go ahead with the instructions.

Question-And-Answer-Session

Operator

Thank you. (Operator Instructions) And we’ll take our first question from Jason Butler with JMP Securities.

Jason Butler - JMP Securities

Hi guys. Thanks for taking my questions, and congrats on a great quarter. First question, could you maybe give us a little bit more color on the Subsys growth during the quarter? Where are you seeing this growth? Is it with primarily the higher decile prescribers or you’re starting seeing more growth in the mid and lower tier decile prescribers?

Michael Babich

Hi, Jason thanks, this is Mike. In terms of the performance in Q2, I think we have done a great job of continuing to penetrate not only the high-decile prescribers but also the mid and lower as well as a broader approach that we continue to take. Obviously, we have had great success with the top deciles or the top leaders in the industry and that was part of our strategy.

However, we now continue to drive across all the prescribers in this class across the board and from a market share perspective to look at the data we achieved Q2 market share about 20% and that up from 15% in the prior quarter.

Jason Butler - JMP Securities

Are you seeing any of the mid and large decile prescribers actually increasing the overall Fentanyl use or is fact say that you’re still or I guess is there any signal that you’re seeing an uptick in the overall Fentanyl within Subsys?

Michael Babich

I think for the past year, Jason the scripts have been flat across the board and that’s a good sign because the market was about twice a size five years ago and there was a decline in the prior year, but we’ve seen definitely concrete stabilization and some upticks in certain months as well and we look forward to continuing to watch those trends.

Jason Butler - JMP Securities

Okay great and then last question for me, can you just give us any color that you can on the gross to net adjustment for Subsys during the quarter and why you may expect that to trend for the rest of the year?

Darryl Baker

Good morning, Jason. Yes, our growth in that was 79.2% in Q2 that was up from 70.8%. So we’ve made good progress during the second quarter in terms of reimbursement and in-patient discounting. We expect that kind of 79% to 80% level to be where we think we should be in as we move forward.

Operator

And next we will go to Michael Faerm with Wells Fargo.

Michael Faerm - Wells Fargo

Good morning guys, thanks for taking the questions. First question is on Subsys. Are you seeing any changes in the second quarter in your wholesale or inventory levels for Subsys?

Michael Babich

We have been tracking wholesaler demand versus retail sales and there is, we have got your point now where it’s matching up pretty well obviously with the launch of product. There is some variability however in 2013 right now, we see a very close for that.

Michael Faerm - Wells Fargo

Okay and on sales and marketing expense, could you provide a little bit more color on the drivers of the sequential increase maybe if you could give any detail on the extent of which it was driven increase in invariable compensation versus increase in marketing expense?

Michael Babich

Sure, I will start off and Darryl could add in any point that he’s seeing. Obviously, the majority of this is driven by compensation expense with our model. I (think) pay for performance, the higher the net sales the more the compensation, is I believe that our sales and marketing expense particularly on the marketing side will continue to drive higher sequentially with our net revenue number going forward and in both areas where all continually reinvest but our sales force of approximately 60 is really the ideal target for the prescribers right now in the market.

Michael Faerm - Wells Fargo

And last question on R&D, you touched on your intent to ramp up pipeline investments. When might we start to see significant investments in the pipeline and just broadly speaking how should we expect to see that play out with respect to your P&L over the coming quarters?

Michael Babich

Sure, I would expect to start to see the new R&D increase as we speak, we've been given a great opportunity now to reinvest our profits into the R&D area and we're hitting that full steam ahead at this point. We believe that as mentioned prior that the platform of Subsys (inaudible) device offers us an opportunity in many different molecules and we want to invest heavily in that area, in addition with our Dronabinol franchise as well we believe that the oral solution not only provides us an opportunity to inherent the current label of Marinol but down the road we expect to have supplements to the NDA for additional indications as well that we're working.

Operator

(Operator Instructions). We'll go next to Rohit Vanjani with Oppenheimer.

Rohit Vanjani - Oppenheimer

I was just wondering whether any increase in the units used per day per patient from 1Q to 2Q I think you were sitting at around 2 per day?

Michael Babich

Yes, we don't break out the number of units sold per day I would point you to either the WKIIMS to look at the average units per script, but we do not break out how many units a patient uses on average at this time.

Rohit Vanjani - Oppenheimer

Okay, and then have you seen pricing on Ventura? I think you said they were taking two price increases a year. This year it had only been one, anything changing on that front.

Michael Babich

No, based on the data we haven’t seen any price increases in the middle of this year but it's obviously something we monitor closely.

Rohit Vanjani - Oppenheimer

And then last question was, you talked about hiring some junior reps and sales liaisons in the second half and just want to know what the progress was there. How many individuals are you thinking about hiring?

Michael Babich

Yes, I think at this point we've had such great penetration at the 1500 doctors at this point and we continually look to reinvest in sales and marketing but have not made any decisions on expansion with our current 60 as of yet.

Operator

And there are no further questions at this time I'd like to turn the conference back over to Michael Babich for any additional or closing remarks.

Michael Babich

Thank you everyone for joining our Q2 conference call, we look forward to, we will be presenting at the Stifel conference in September and look forward to seeing you there, appreciate everyone's time.

Operator

Thank you, this does conclude today's conference we appreciate your participation.

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