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Auxilium Pharmaceuticals, Inc. (NASDAQ:AUXL)

Q3 2009 Earnings Call Transcript

October 28, 2009 10:00 ET

Executives

James E. Fickenscher - Chief Financial Officer

Armando Anido - Chief Executive Officer and President

Roger D. Graham, Jr. - Executive Vice President, Sales and Marketing

Jennifer Evans Stacey - Executive Vice President, General Counsel, Human Resources, and Secretary

William Q. Sargent, Jr. - Vice-President, Investor Relations and Corporate Communications

Analysts

Marshall Urist - Morgan Stanley

Salveen Kochnover - Collins Stewart, LLC

Eric Schmidt - Cowen and Company

John Newman – Oppenheimer & Co.

Joseph Schwartz - Leerink Swann

Eun Yang - Jefferies & Company

Raghuram Selvaraju - Hapoalim Securities

Scott Henry - ROTH Capital

David Moskowitz - Caris & Company

Annabel Samimy - Thomas Weisel Partners LLC

Michael Yee - RBC Capital Markets

Operator

Good day ladies and gentlemen and welcome to the Third Quarter 2009 Auxilium Pharmaceuticals Incorporated Earnings Conference Call. My name is (ph) Esha and I would be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions)

I would now like to turn the call over to Mr. William Sargent, Vice President of Investor Relations and Corporate Communications of Auxilium Pharmaceuticals. Please proceed.

William Q. Sargent, Jr.

Thank you, operator and good morning everyone. With me today are Armando Anido, Chief Executive Officer and President of Auxilium; Jim Fickenscher, Auxilium’s Chief Financial Officer; Roger Graham, Auxilium’s Executive Vice President, Sales and Marketing and Jennifer Evans Stacey, Executive Vice President, General Counsel, Human Resources and Secretary for Auxilium.

Before we begin, I would like to remind you that we will make various remarks relating to our current plans, potential future events, and what we believe to be the prospects for the company, during this conference call that constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Today, our forward-looking statements will cover among other things, the timing of action by the FDA on the Biologics License Application for XIAFLEX for Dupuytren's contracture and the timing of the U.S. launch of XIAFLEX, if approved, the potential for XIAFLEX will be a blockbuster opportunity to commercial benefits of the publication of our pivotal XIAFLEX CORD 1data in New England Journal of Medicine are preparing just for the launch of XIAFLEX if approved. The timing of reporting top-line results from Phase IIb study for XIAFLEX for Peyronie’s disease, the impact of our sales and marketing efforts on the growth of Testim revenues and the timing of the filing of marketing authorization application for XIAFLEX for Dupuytren’s contracture in Europe by Pfizer.

Actual results may differ materially from those reflected in these forward-looking statements for a variety of reasons, including those discussed in our annual report on Form 10-K for the year ended December 31, 2008 and in Auxilium’s quarterly report on Form 10-Q for the period ended June 30, 2009. Given these risks and uncertainties, you should not rely on any such factors or forward-looking statements. While the company may elect to update these forward-looking statements at some point in the future, the company specifically disclaims any obligation to do so. Also, today’s call may not be reproduced in any form without our expressed written consent.

I am pleased to turn the call over to our Chief Executive Officer and President, Armando Anido.

Armando Anido

Thank you, Will. And good morning to all of you who are joining us today. After I make a few opening comments, Roger will provide you with an update on XIAFLEX pre-commercialization efforts and Testim performance. And Jim will take you through the financial results for the quarter. I will then come back and discuss our priorities for the balance of the year. We will conclude by opening up the call for your questions.

The third quarter was exceptional quarter for Auxilium, with multiple successes across the business. Beginning with a positive review of XIAFLEX for Dupuytren’s contracture at last month’s Arthritis Advisory Committee, we believe that the panel – panel’s unanimous 12-0 vote was great validation of the benefit-risk profile of XIAFLEX. We think that the (ph) hand and Orthopedic Surgeons on the Advisory Committee made invaluable contributions. We also believe that our proposed risk mitigation and training program for physicians was well received by the panel and we continue to work with FDA to finalize the comprehensive programs.

In our opinion, the dialog with the FDA has remained positive and we feel that we are making good progress in getting through the review process.

Now, through the commercial side, we believe we are attracting the highest quality individual for our sales force and are in final preparations for a successful launch approximately 60 days after approval.

With respect to Europe, we believe our partner Pfizer continues to make excellent progress with the regulatory and commercialization plans for XIAFLEX. During a recent conference call for the third quarter of 2009, they announced that they anticipate filing the Marketing Authorization Application for Dupuytren's contracture in Europe in early 2010. We are extremely pleased with their progress and bringing XIAFLEX to the EU.

Testim had a strong third quarter, achieving record worldwide net quarterly revenues of $40.2 million, up 25.1% versus the third quarter of 2008. The testosterone replacement therapy market continued to have healthy double-digit growth in the United States, and we are encouraged by recent comments made by the FDA regarding our Citizen's Petition on the testosterone replacement therapy class.

Finally, we enhanced our balance sheet with the addition of approximately $116 million in cash during the quarter from our recently completed sales of 3.45 million shares of common stock. With $192.3 million in cash available as we close the quarter, we believe that we have the appropriate financial flexibility as we prepared for the U.S. launch of XIAFLEX.

At this point, I will turn the call over to Roger.

Roger D. Graham, Jr.

Good morning every one. Having already completed the hiring of our XIAFLEX sales management team in our corporate and field-based reimbursement and managed market teams, we’ve now extended continued offers to the majority of our future XIAFLEX sales force. We’ve attracted some extremely talented individuals for our sales force from familiar names within the biotech space. The offers these sales reps are contingent and we intend to finalize these offers around the time of the U.S. approval of XIAFLEX. Our plans to have the sales reps trained and prepared to execute a swift ramp up and commercial launch approximately 60 days from the approval date.

Our commercial team is also very excited that we will launch with the benefit of the publication of our pivotal XIAFLEX CORD I data from the New England Journal of Medicine, one of the premier medical journals in the world.

Given the strengths of the data and the prestige of the Journal, we believe this is an extremely strong sales-through that have in our sales representatives’ hands for our U.S. launch. We continue to develop our plan for XIAFLEX with significant work ongoing in marketing, sales, reimbursement and managed care. Because XIAFLEX should be used by physicians with a certain level of knowledge and training, we are planning to train hand, orthopedic, plastic and general surgeons and rheumatologists who are very familiar with the diagnosis and treatment of Dupuytren's contracture on the proper administration of XIAFLEX. We have submitted a proposed XIAFLEX training and access program to the FDA to review.

Our proposed training highlights appropriate instructions for reconstitution, injection technique, manipulation and safety profile and we believe is a more extensive training program than what was done with investigators for the Phase III program.

This training program will be on multiple media platforms, including a video available, in CD format or through the web and print brochures. A physician will not be able to receive XIAFLEX until he or she attest to having completed the training program.

Additionally, training will be a center-piece of physician speaker meetings and we work with the respected medical society to include training at their annual meetings. One of our early launch initiatives will be to focus on ensuring proper training and attestation of healthcare providers who plan to use XIAFLEX to treat Dupuytren’s contracture.

We continue to advance the (ph) implementation of our distribution system in order to accommodate the needs of physicians’ offices and intend to contract with a select group of specialty pharmacy and specialty distribution partners in order to assure access that will meet the needs of our customers. The goal of our distribution network is to personalize whichever delivery option more compass to reach physician to assure access to and reimbursement for XIAFLEX. Our network will include a traditional distributor for institutional accounts, specialty distributors for physicians who look the buy and bill and specialty pharmacies for physicians who prefer to assign the benefit of drug reimbursement. We believe that we are building a flexible, efficient and scalable program that will meet the needs of all of our customers.

As with most biopharma product launches in the first year, we have realized that reimbursement could pose a significant headwind following approval. As a result, we have our Managed Markets team now interfacing with payers, commercial and Medicare to discuss coverage and access to XIAFLEX. At the local level we plan to leverage our reimbursement management experience to assist offices with access and reimbursement question about XIAFLEX’s launch. We believe these efforts will position us well for the successful launch of XIAFLEX for Dupuytren’s contracture.

With a majority of our planning complete, we have now turned the quarter with a laser-like focus on executing our plans. Next week we will bring our entire management team together to ensure our plans are complete and aligned across sales, Managed Markets, reimbursement, distribution and medical. These plans will be refined between now and approval at what point of time we will launch XIAFLEX.

Challenges and complexities are part of any launch campaign often bring up the best in people and there has been no different here at Auxilium. That being said, I would be remiss if I did not conclude my remarks on XIAFLEX by taking the entire organization for their amazing effort. In spite of the challenges we are sure to face, we believe this team is ready to launch and drive XIAFLEX for the blockbuster opportunity that we believe it can be.

Switching over to Testim, which continues to post double-digit growth after being on the market for over six years, IMS estimates that over a 161,000 total prescription for Testim were dispensed in the third quarter of 2009, which is an increase of 17.3% over the third quarter of 2008. This performance exceeded the 16.8% growth in the overall gel market for the comparable period by 50 basis points. Testim’s total prescription market share of the gel market at the end of September was 22.3%, which is slightly up from the end of September 2008.

According to IMS exponent data, we had a gel market share of approximately 45.1% at the end of the September 2009 with the highest prescribing urologist on whom we call, versus 44% at the end of September of 2008. One of our biggest Testim’s success stories in 2009 has been the progress we have made in the primary care space which constitutes 56% of the TRP prescriptions. We made in-roads with the highest prescribing primary care physicians on whom we call, with Testim market share achieving 32.2% at the end of September 2009, versus 31% at the end of September in 2008.

We believe the expanding gel segment within the testosterone replacement market and our increase in urology and PCP market share contributed to the record results in the third quarter of 2009, and that continuing to increase market share with the highest prescribing urology and PCP segments remains key to our Testim sales growth this year.

We are very fortunate to have two very talented commercial teams here at Auxilium leading efforts for Testim and XIAFLEX. I would like to thank the Testim team for their continued efforts to drive Testim towards achieving our 2009 revenue guidance of 155 to 165 million, and look forward to the many contributions of our growing XIAFLEX team over the coming months, as we head into a transformative year here at Auxilium.

With that, I will turn it over to Jim.

James E. Fickenscher

Thank you, Roger. I’ll be focusing my comments on the third quarter financial results, but I’ll be happy to address any questions on the year-to-date results in the Q&A section of our call today.

Third quarter ended September 30, 2009, Auxilium reported net revenues of $42.1 million, compared to net revenues of 32.6 million in the third quarter of 2008. There was 1.1 million of ex-U.S. partner milestone revenue recognition and shipments of Testim in the third quarter of ‘09, compared to 0.5 million in the third quarter of 2008. In the third quarter of ‘09, the company also recognized $900,000 in revenues related to the amortization of upfront payments related to the out-licensing of XIAFLEX to Pfizer.

The net loss for the third quarter of ‘09 was $14.9 million or $0.35 per share, compared to a net loss of 10.1 million or $0.24 per share reported last year. Net loss for the third quarter of ‘09 includes total stock-based compensation expense of 4.1 million, compared to 3.2 million for the third quarter of 2008.

Gross margin on net revenues was 77.4% for the quarter ended September 30, ‘09, compared to the 76% for the comparable period last year. Gross margin reflects the cost of product sold and royalty obligations due to the company’s licensor on the sale of Testim and the amortization of deferred costs associated with the XIAFLEX out-licensing. The increase in the gross margin rate is a result of the impact of year-over-year price increases on U.S. Testim revenues and the increase in amortization of upfront and milestone payments, partially offset by higher coupon usage in 2009.

Research and development spending for the quarter ended September 30, ‘09 was $12.8 million, slightly below 13.3 million for 2008. This reduction in overall spending was a result of a reduction in clinical development costs primarily related to the completion of XIAFLEX clinical trials that were conducted in ‘08, partially offset by increases in regulatory costs for XIAFLEX and costs at our Horsham manufacturing facility.

Selling, general and administrative expenses totaled $34.7 million for the quarter ended September 30, ‘09, compared with $21.9 million for the year-ago quarter. The increase was primarily due to investments and anticipation of the potential U.S. launch of XIAFLEX and increases in stock-based compensation costs. As of September 30, 2009, Auxilium had $192.3 million in cash and cash equivalents, compared to $80.4 million on June 30, ‘09. With the addition of approximately 116 million in cash resulting from our recent equity raise, we believe that our cash balance is sufficient to get us beyond profitability, based on our current business plans and expectations.

In addition to the cash balance of $192.3 million, we continue to have at our own disposal the $430 million revolving credit line with Silicon Valley Bank. As of September 30, ‘09, we had approximately 47.2 million shares of common stock outstanding, plus outstanding warrants for just approximately 100,000 shares of our common stock and 5.4 million outstanding options to purchase shares of our common stock.

Thank you very much for your attention. I’ll turn the call back over to Armando.

Armando Anido

Thanks, Jim. In one word, the third quarter was fantastic. We believe that we made tremendous progress towards bringing XIAFLEX to market, while continuing to drive revenue growth with Testim. With a positive FDA Advisory Panel Board and approximately $190 million in cash to support our operations, we believe that we are ready to hit the ground running upon receipt of approval from the FDA.

Over the balance of 2009 and into 2010, we plan to remain focused on meeting the key milestones for our two key assets XIAFLEX and Testim. For Testim, that means continuing to grow the prescription volume in 2009 to achieve our revenue guidance. For XIAFLEX, our goal is to deliver on the following strategic priorities: one, obtain approval from the FDA and Dupuytren's contracture; two, execute a successful launch; three, complete enrolment in the observation and long-term follow-up study; four, assist Pfizer in preparing for EU submission in early 2010; and five, release top-line results from the Peyronie’s disease Phase IIb trial in December of 2009.

Let me thank our shareholders for your continuing support of our efforts. Additionally, I want to give a special thanks to our employees for their untiring energy, spirited enthusiasm and relentless commitment to making Auxilium a success. We’re extremely excited about the prospects, opportunities and potential for success in front of us. Thank you.

We’re now going to open up the call for questions. Operator, please review the procedure for questions from the audience.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Marshall Urist with Morgan Stanley. Please proceed.

Marshall Urist - Morgan Stanley

Yeah, hi guys, good morning. Couple of things, first one just from your comments on the – on the Pfizer, Pfizer said in their call; so, is it safe to assume from that then that discussions around kind of what the filing package needs to look like, there has obviously been some concerns about additional – potential additional studies et cetera that that – that that’s been cleared away?

Armando Anido

Yeah, we have not initiated nor has Pfizer initiated any additional studies and all along we’ve been saying that we believe the package we’re submitting to the BLA was actually going to sufficient for EMEA. So, I think that they are planning on submitting in early ‘10 at this point.

Marshall Urist - Morgan Stanley

Okay, great. And then relative to your comments on sort of how finishing up the FDA review is going, can you give us any kind of sense of sort of what the kind of rate limiting steps or sort of outstanding issues are at this point – coming out of the panel?

Armando Anido

Yes, Marshall, we don’t actually comment on specific steps along the pathway relative to regular – regulatory interactions. We feel really good about where we are at this particular point and we’re working diligently with the FDA in order to get this thing across the line. I wish I had better sense on the exact timing, but I can’t give you anything else at this point.

Marshall Urist - Morgan Stanley

Okay, great. Thanks. I will get back in the queue.

Armando Anido

Great. Thanks.

Operator

Your next question comes from the line of Salveen Kochnover with Collins Stewart. Please proceed.

Salveen Kochnover - Collins Stewart, LLC

Good morning, thanks for taking my questions. On the payer front can you walk us through in detail where you stand on XIAFLEX pricing discussions and your strategy to aid physicians with reimbursement?

Armando Anido

Yes, let me start with kind of the pricing conversation at this point. The price will be set sometime after we have received approval and we will disclose that publicly once the final price has been put in place. We have done an extensive amount of market research talking to payers, physicians as well as patients in order to really kind of get a sense for what would be the optimal price that we can charge for XIAFLEX. And at some point post the approval that would be when we actually disclose the price. Roger may be able to add a little bit more color on some of the coding and reimbursement.

Roger D. Graham, Jr.

Sure. Good morning, Salveen. Excuse me. Yes, why we were doing that pricing review, obvious to do a fair amount of working in the managed markets environment as well and I think it’s fair to say that we feel good about access and what will be able to in terms of them accessing the product and their coverage of it. I think the thing that we’ll run into and we made reference to that in the script that you heard was the headwinds that we’ll face in terms of the process for reimbursement on the front end. And so that will just take time to work through.

So, obviously we’re going to launch with the miscellaneous J-code and miscellaneous CPT code that physicians will probably use, they may use some proxy codes as well in that process. And so those things will have to go through the pipes on the front end and let that water run through the pipes and so payers will have to work with those.

So, that will cause, on the front end, a little bit of headwind until we get that through the process over time. And then obviously we’re submitting for the codes and we’ll get those permanent codes as we move into 2011. But shorter those headwinds that we think we’ll face on the variability of the reimbursement process, we think that access will be pretty good.

Salveen Kochnover - Collins Stewart, LLC

And then on potential approval, I mean Dupuytren's contracture, any plans to start trials in a new indication?

Armando Anido

Yes. We have talked about potential new indications and really initiating things after we have the approval. I think that we still are planning on looking at additional indications and hopefully be able to pursue some additional indications post the approval of Dupuytren’s contracture. Obviously, Peyronie's disease, once we get the final top line results in December and release those, hopefully we’ll be on the path to moving forward into Phase IIIs and that’ll be obviously the second indication we’ll go after, but we are looking at other indications right now.

Salveen Kochnover - Collins Stewart, LLC

Thank you.

Armando Anido

Yes.

Operator

Your next question comes from the line of Eric Schmidt with Cowen & Company. Please proceed

Eric Schmidt - Cowen and Company

Good morning and congratulations on the progress over the last three months.

Armando Anido

Thank you.

Eric Schmidt - Cowen and Company

You’ve spoken a fair bit of detail about the training program you hope to implement and the types of physicians who would be available for training. I assume that means that you’ve had some discussions with the FDA on this front and that you expect for example to have rheumatologists included in the group of appropriate prescribing physicians?

Armando Anido

Yes, we at the actual panel meeting, Eric, really did present on all of the information relative to who we think are appropriate candidates for it, and there are ongoing conversations about that. Nothing final at this particular point; we believe they are the ones that actually understand how to diagnose and treat the disease and we believe they are the appropriate physicians to use it.

Eric Schmidt - Cowen and Company

Okay. And then on Testim, given that franchise, looks they’ll have maybe greater longevity than you might have hoped few months ago and that you’re making some inroads in the primary care side of the business, should we expect to see additional resources to go there, would that be value add?

Armando Anido

I think that we constantly evaluate whether or not we have the right effort behind Testim, and at this particular point we think that our effort is pretty good. I think that in order for us to really step up the primary care effort would require a fairly large undertaking, and I think that’s something we – we don’t believe is something that we would do in the short term. But we keep our options open to see whether or not there is a way to get better penetration into that area and better coverage that Roger gives.

Roger D. Graham, Jr.

I think that characterizes very well.

Eric Schmidt - Cowen and Company

And last question is on Peyronie's. Obviously, the upcoming phase II study uses a novel and some of its objective endpoint. I’m just kind of wondering, assuming the data aren’t perfect, you get some nice signals from the trail but maybe not everything you hope, what might be your prospects for moving that forward into a phase III on, again, maybe phase IIb data that are less than ideal?

Armando Anido

Yeah. I think it’s hard to speculate at this particular point Eric until you actually see the data from the phase IIb. I think that we obviously have some objective endpoints in that trial that include change in angle and change in plaque size, and then we have the PRO that is somewhat more subjective, and we’ll have to pull all of that together and I think sit with the FDA and really determine what the appropriate next steps would be in order to help us get into phase III.

Eric Schmidt - Cowen and Company

Thanks a lot.

Armando Anido

Thank you.

Operator

Your next question comes from the line of Annabel Samimy with Thomas and Weisel [Thomas Weisel Partners]. Please proceed.

Annabel Samimy - Thomas Weisel Partners LLC

Hi, thanks for taking my call. Just going back to the training question, are there any specific changes that you need to make – that you needed to make to the training program that was submitted to the panel that you’ve been sort of implementing as your – being your discussions with FDA on these sort of give us some color on.

Armando Anido

Good morning, Annabel. Yeah with regard to that, I mean, we obviously going into that meeting, went down with a proposal and prepared it against that proposal. I think one of the things that that we’ve also looked at is look at that and continuously planning around that in terms of other things that may come with that. We haven’t commented on what those might be specifically. But what we have done here at Auxilium is as once we prepared to the plan that we’ve permitted – we have submitted, but we’ve also prepared behind the scenes some contingency work so that if something does change on that, we’re prepared to address that rather rapidly.

Annabel Samimy - Thomas Weisel Partners LLC

Okay. I guess speaking of training again, I guess in given the facts for Peyronie’s are much less combined than those in Dupuytren's, have you established a good technique for administration in a Peyronie’s indication on that could minimize any kind of (ph) adverse events that may come up?

Armando Anido

Yeah, I think we actually did some work with the – with the urology community on making sure we knew kind of how to actually; one, train them and then, two, make sure that they are appropriately using it. So we did go through some training for them prior to the initiation of the phase IIb trials. Interestingly though, somewhat different than the hand community, the urology community is actually has injected into plaque before with various other compounds. So the ability for them to understand it and learn it is probably a quicker learning curve than what we saw with the hand community.

Annabel Samimy - Thomas Weisel Partners LLC

Would there be a greater variability in terms of method of administration in that community?

Armando Anido

No, I think that actually we tried to keep it as simple as possible form and tried to keep it into a consistent pattern that they would be using across all of the different sites.

Annabel Samimy - Thomas Weisel Partners LLC

Okay. Great, thank you.

Armando Anido

Thank you.

Operator

Your next question comes from the line of John Newman with Oppenheimer. Please proceed.

John Newman – Oppenheimer & Co.

Hi guys, thanks for taking my question. Just wondered if you expected the FDA to given you an actual action date for Dupuytren's and also have you had a planned inspection yet for XIAFLEX?

Armando Anido

Yeah. John, we do have an action date, unfortunately it was August 28th of 2009. And as you know the history there that they couldn’t get the panel put in place until after the action date. The FDA has no way of actually changing the PDUFA date at this point unless there is a other action that, unexpected amendment or whatever that we would submit, and so it’s hard for us to have it. I couldn’t tell you whether or not they would ever come with one, but I don’t think there is a process for them at this particular point.

John Newman – Oppenheimer & Co.

Great. And then just one quick follow-up, what should we expect in terms of the data read-out on Peyronie's? I know that the scoring system that you’re evaluating has four different components. Should you – should we expect you to say we either hit the endpoints or we didn’t, or what kind of color might we see there?

Armando Anido

Yeah, I think that you should expect that we will give out the read-out on the objective measures, which are change in angle and the like which are fairly easy and similar to what we have done previously in the phase II studies, the 1030 and 1035 studies. I think the actual read-out on the PRO is going to be a little bit more difficult to give a whole lot of color at this particular point, because not only are we going to be looking at what the numbers are that come out of both the pre and post tests but also what the minimal clinically significant differences that – that you can read. And that may – may not be as clear for us right the day that we release.

James E. Fickenscher

And because we would need – we need to have discussions with the FDA about that, it’s not – it’s not something that’s clean cut as you know you hit a number and there you go, that’s it. It will require some discussions with the FDA so that we can determine exactly what is a primary endpoint for the phase III that (ph) change is for?

Armando Anido

And the other piece is that we will be able to release safety data as well.

James E. Fickenscher

Yeah.

Armando Anido

So, we will have good top-line safety data.

John Newman – Oppenheimer & Co.

Great. Thank you.

Armando Anido

Yes, thank you.

Operator

Your next question comes from the line of Michael Yee with RB Capital [RBC Capital Markets]. Please proceed.

Michael Yee - RBC Capital Markets

Hey, Michael Yee from RBC. A couple of questions. Going back to the reimbursement, what are the steps and mechanics of gaining reimbursement under a miscellaneous J-code? And then with regards to your own J-code, have you filed for your own J-code? And then in terms of getting your own J-code, aren’t they all released in January of each year, so we should be thinking January 2011?

Armando Anido

Yeah. Let’s take those one at a time, I guess, first is...

Michael Yee - RBC Capital Markets

Yeah.

Armando Anido

… the process. The process itself is really no different in terms of – the physician will make a clinical decision and then determine the appropriate CPT codes that they will use based on the services that they provide to the patient, and those are just driven by the clinical decision of the physician. They can use miscellaneous CPT codes on a front-end or they may use proxy codes that are somewhat similar to the procedures that they’re going to perform for Dupuytren's patients, and those – submit those on the typical forms that they do. What else can happen? So in a situation like this where they also have to submit this with a miscellaneous J-code for the product on the front-end is that rather than be electronically reviewed, they will be – they will be hand reviewed. So, they go through a more methodical process and that was really the variability that I talked about on the front-end in terms of getting the reimbursement process started and getting waters through the pipes so to speak. So, it’s more mechanical on the front-end than it will be over time, as CPT codes normalize and as the physician communities normalizes in terms of what they’re using. And then obviously once we get specific product J-code and get product-specific – diagnosis-specific CPT codes in 2011, that will obviously speed that reimbursement process so.

In terms of those codes themselves, we are on the process of submitting for those now. And – so that work has been going for some time, so we also submit for obviously a product-specific J code and then we’re working with (ph) the hand society as well as AMA and with eventually CMS with regard to the CPT codes.

Michael Yee - RBC Capital Markets

Going back to the miscellaneous J, when you said manually, how – I don’t know the answer, but how – what is the difference in timing between a manual and an automated version and does the patient have to front the cost first or they can’t come back in to get the drug until that’s been done, what are the logistics there?

Armando Anido

Yes, in terms of that process, I mean that’s the timing part, it’s a kind of a question mark going into it, and it’s tough to determine it. It’s going to be dependent – be dependent on the carrier or the payer I mean in terms of how fast they turn those around. It really should make any difference. One of the things that we’re going to offer the reimbursement service and so what we’re going to do is allow patients to access that services so they will actually be able to go in there for example (indiscernible) prior to going in so they don’t have to carry those out of pocket expenses. So, they are ways to work around that and we’re going to provide the people on the ground obviously from a reimbursement perspective, we have those people around the country that will (ph) help offices as well as a reimbursement hotline that people would be able to access for those kinds of issues.

Michael Yee - RBC Capital Markets

Yes...

Armando Anido

Yes, in addition we also have as most companies do during the first year to 18 months prior to getting a formal J code for the product, they will offer some extended dating to the distributors as well as to the physicians, as well as to the pharmacies. So, that will help to minimize any of the out of the pocket cost that the physicians or pharmacies will have to deal with.

Michael Yee - RBC Capital Markets

Okay, sounds good. And then last question. Obviously, that FDA’s probably (ph) aware that Peyronie's indication that data could be coming shortly and you probably been submitting ongoing safety data on a rolling basis. Do you – are you confident they won’t need to see any more data from that as it relates to Dupuytren’s since they’ve been getting safety data all along or how should we think about that given that the data is coming very soon?

Armando Anido

I mean, I can’t speak for the FDA at this particular point, but I think that everything seems to be focused almost exclusively on Dupuytren’s contracture from the arthritis group, the DAARP Group and I think that we do not anticipate that any of the Peyronie's data will have any effect at all on the Dupuytren's indication.

Michael Yee - RBC Capital Markets

Okay and remind me that, is that the Peyronie's is being looked at under a different group?

Armando Anido

It is. It’s been looked at the under the urology group.

Michael Yee - RBC Capital Markets

Right. Okay, thank you.

Operator

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

Joseph Schwartz - Leerink Swann

Hi, thanks, it’s Joseph Schwartz with Leerink Swann. I was wondering if you could talk a little bit about Testim first of all, the sales were up very nicely in excess of the scripts, I’m wondering if the difference has to do with any price increases or inventory?

Armando Anido

No, we think that – that’s – growth in the product that you see there and as we pointed out, one of the things that we had I think really good success with this is our growth in primary care as we pointed out and we continue to be very strong in the target audiences and who we call. And when you look at that data, we’re very close – and moving close to that 50% market share in the target audiences in neurology, so, we’re pretty proud of that 45% number. And when you look at primary care and the move that we’ve made in the last year within again the targets that we call on, we think is mix of the strength of the product and the performance in the sales organizations.

Joseph Schwartz - Leerink Swann

How about the difference between 25% increase in sales year-over-year, but the scripts were up 17%?

Armando Anido

Yeah...

James E. Fickenscher

That, it’s primarily with price. I mean, we have in the quarter about 11% impact of price.

Joseph Schwartz - Leerink Swann

Okay, great. Thanks. And as far as pricing for XIAFLEX goes and reimbursement and physicians who may or may not want to buy and build the product since this is kind of a new dynamic for a lot of hand surgeons and others who might use XIAFLEX, how are you seeking to help them with that process since it might be kind of a new – a new thing for them?

Armando Anido

Great. Great question and yeah that’s one of the things that we’re focusing with our distribution network. And so for those patients or for those physicians who choose to use (ph) buy and billing there’ll be a fair amount of those with Medicare population that we anticipate. We’ll use the specialty distributors but we’re also working with the specialty pharmacies as well. And so our intention is to contract with the number of those partners as well for the physician who wants to sign that benefit over the specialty pharmacies or that they don’t have to take on that risk. So, we’ll have a broad network and a flexible network that will allow them to meet their needs based on taking on their risk and then, as Armando mentioned, within that network on the front end we’ll look at obviously extending dating to help alleviate that concern as they go through the reimbursement process through the initial parts of the launch.

James E. Fickenscher

The other thing I would add to that as you know the sales reps that we have that were – that we made the contingent offer to, these – these are sales reps who have sold high-priced biologics previously. And we know that the call was not just a features and benefits call to the physician. It’s really a whole office call, so whether it’s our actual XIAFLEX sales reps or the field of Phase III reimbursement team, there is going to be a lot of support for both the physician in the office to get them to understand the options that they have whether they take on the ownership of the product and therefore get the benefit of the (ph) buy and bill, or if they want to assign that benefit through a specialty pharmacy make their life easy but forgo the value that they can make on the product.

Joseph Schwartz - Leerink Swann

Great. Thanks.

Operator

Your next question comes from the line of Eun Yang with Jefferies. Please proceed.

Eun Yang - Jefferies & Company

Thanks, this is Eun Yang. In addition to the orphan drug exclusivity, how significant is this pending manufacturing pack of a XIAFLEX do you think?

Armando Anido

Well, we think with the orphan drug designation we’ll receive seven years of market exclusivity and that should take us obviously into assuming an approval at the end of this year, beginning of next year, seven years out to 17 or so. In addition, there are number of bills that are being discussed at this particular point that may actually provide longer exclusivity for new products, new biologics. But now they’re talking anywhere between eight to 12 years of protection, so that may be helpful and then our patent that we submitted for manufacturing and purification and purity actually would if issued, would get us after 2027.

So, I think it helps out. At the end of the day though, it also is a – it is a biologic, it is a product that within five minutes you can’t find it in the bloodstream, so a traditional pathway for approval is under BABE standard is probably not something that folks would be able to get away with. So, they probably are going to have to do clinical work in order to show comparability to XIAFLEX and I think that offers us potentially some protection downstream.

Eun Yang - Jefferies & Company

Thank you. And then I don’t know if you mentioned this earlier on the call, but have you disclosed how many key commercial and medical personnel that you have added in third quarter? And then how many sales people have you actually hired – I mean, contingent upon approval, how many letters have gone out to those sales people?

Armando Anido

Yeah. No, we have not disclosed the actual number of folks that we’ve added. What we have said is that we do have our entire sales management team, reimbursement team and medical team that is in place right now. We have publicly stated that we are planning on hiring around 75 to a 100 sales representatives upon and around the approval of the product. And so that kind of gives you a sense and you can use some of the more traditional ratios in terms of management to sales representatives in order to get to a reasonably close number of folks.

Eun Yang - Jefferies & Company

Thank you.

Roger D. Graham, Jr.

And the majority of those sales reps have contingent offers in their hands now.

Armando Anido

Yes.

Eun Yang - Jefferies & Company

Thank you.

Armando Anido

Thank you.

Operator

Your next comes from the line of Ram Selvaraju with Hapoalim Securities. Please proceed.

Raghuram Selvaraju - Hapoalim Securities

Hi, thank you so much for taking my question. Very quickly, with respect to Testim, could you comment a little bit on the competitive landscape in 2010 if Fortesta were to be allowed on the market and what the relative advantages of Testim usage might be verus for Fortesta?

James E. Fickenscher

Yeah, we – on the last part of that we haven’t specifically talked about projections. But in terms of that being a competitive product in the market in 2010, we’ve recently heard obviously that they had to – they are going to have to spin a full response (indiscernible) for that product and they’ve indicated that that’ll be the middle part of 2010. If you put on a quick turnaround of six months you’re probably at the end of 10 or into potential 11. So, in terms of that product specifically, next year doesn’t look promising for them. So, obviously they outcome for us wouldn’t be that significant in terms of any impact

Raghuram Selvaraju - Hapoalim Securities

Okay. With respect to XIAFLEX, have you had any indication or have you previously stated what Pfizer’s intention might be regarding timing of the European application specific to whether or not Pfizer would consider FDA approval and necessary gaiting items for submission.

James E. Fickenscher

Pfizer has indicated just recently in their most recent conference call that they did a couple of weeks ago that they are planning on filing in early 2010, and that is a little bit faster than what they’ve previously talked about at 2010 submissions. So, we feel good about where they are and it appears that they would be able to file with – would be a late package that we submitted here in the United States.

Raghuram Selvaraju - Hapoalim Securities

Okay. Do we any indication as to what the reimbursement environment is like in Europe and how XIAFLEX would be marketed over there? Is there a significant difference between, for example we’ve talked about buy-and-bill, CPT-codes, a variety of issues that are specific to the U.S. market, what are the issues facing commercialization of XIAFLEX in the U.S. – in Europe?

James E. Fickenscher

Yeah, I think Ram I think it’s probably premature because they haven’t even filed or talked about any of their commercialization plans and I’d suggest that you may want to call them about those at this point.

Raghuram Selvaraju - Hapoalim Securities

Okay. Just a few very quick financial clarification questions, if Jim is still on there?

James E. Fickenscher

Sure.

Raghuram Selvaraju - Hapoalim Securities

Could you give me the end of third quarter estimated fully diluted share count please?

James E. Fickenscher

No, we don’t give that out. We just tell you what the total number of shares are at the end of the quarter. So...

Raghuram Selvaraju - Hapoalim Securities

Okay. What was that number?

James E. Fickenscher

The number was 47.2 million shares.

Raghuram Selvaraju - Hapoalim Securities

Okay.

James E. Fickenscher

It is the amount that are outstanding. We also have 100,000 warrants and 5.4 million in stock options.

Raghuram Selvaraju - Hapoalim Securities

Do you know what the weighted average, sorry, the volume weighted average strike price is, exercise prices on those options?

James E. Fickenscher

It will be in our 10-Q that we file in the next week or two.

Raghuram Selvaraju - Hapoalim Securities

Okay. Thank you very much.

William Q. Sargent, Jr.

Okay. Thank you.

Operator

Your next question comes from the line of Scott Henry with ROTH Capital. Please proceed.

Scott Henry - ROTH Capital

Thank you. I want to focus a little bit on how you think the trajectory of the XIAFLEX launch will be. There seems to be a lot of moving parts, on the positive side there could be some pent-up demand, but on the negative side you have the training aspect. So, how are you thinking about the trajectory of the launch as opposed to the absolute value?

Armando Anido

Yeah, I think Scott that’s a great question and it’s one that we wrestle with everyday I think and everyday we probably finish the day thinking that it probably goes a different direction depending on who we have talked to. If we talk to physicians that have patients that are lining up and they’re holding up on waiting for an approval, we get pretty excited about the pent-up demand scenario. On the flip side, if we talk to some folks and they’re worried about reimbursement and concerned that it may take a while before they get reimbursed and aren’t sure, then we tend to temper our enthusiasm at that particular point. So, it’s hard to say at this particular point exactly which of those pieces is, my guess is that it’s probably somewhere in between and only time will tell once we get the product on the market.

Scott Henry - ROTH Capital

Well, then I guess focusing on the training aspect, can you pre-certify physicians before the launch starts and I guess how long is the training processes, is it a day basically?

Armando Anido

The training program is actually relatively a modest amount of time. I think that it’s probably no more than a 30-minute training program. So, I don’t think that the actual ability for us to get to the target 7,000 physicians with our sales force or through the web or through other media that we’re going to employ as Roger talked about earlier is going to be a deterrent in order to get people up and running that want to use this product. And in some cases some of them will do it online, will do it ahead of a rep walking in the door to see them and they will have then once they have tested they have gone through the program will have access to the drug and be able to go with it.

Scott Henry - ROTH Capital

Okay. And at this point I guess it would be natural to assume a Q1 2010 launch, I mean given the 60 days and given today’s date, is that fair?

Armando Anido

It’s hard to say. I think all we’re saying is that we will be ready to go out the door in approximately sixty days from approval.

Scott Henry - ROTH Capital

Okay, and then just a final question. With a launch like this when we’re modeling, is there any material channel fill that we should think about?

Armando Anido

No. I think that channel fill is probably not something that, that we would encourage nor something that we think will happen.

Roger D. Graham, Jr.

It is not going to get out into the retail pharmacies network. So again we’re literally dealing with just a select number of specialty pharmacies and specialty distributor. So, no, there shouldn’t be any need for significant stocking.

Scott Henry - ROTH Capital

Okay. All right, thank you for taking my questions.

Armando Anido

Thanks, Scott.

Operator

(Operator Instructions) Your next question comes from the line of David Moskowitz with Caris & Company. Please proceed.

David Moskowitz - Caris & Company

Hi, good morning and thanks for the questions. First question is did you guys update your financial guidance? You guys were guiding for 50 to 55 million in net loss and now you have some XIAFLEX cost coming in. Are you guys planning to update that for 2009?

James E. Fickenscher

At this point we’re – we’re comfortable with our guidance. We didn’t update it at the end of this quarter. As you said, I would like to remind you that the guidance that we had that did not include any launch cost and the cost of XIAFLEX sales reps et cetera. So, I think that if we get approval and we make a change to a decision if we implement a decision to hire sales reps that could potentially be a reason for us to have to change our guidance.

David Moskowitz - Caris & Company

Okay, thanks and also the R&D was pretty low in the period and you guys gave a little color around that, but can you talk about sort of the run rate going forward. I guess at this point since you’ve only given guidance in 2009. Should we expect to see a similar run rate in the fourth quarter, I know that might depend on the phase IIb results for Peyronie’s...?

James E. Fickenscher

Yeah, we don’t.

David Moskowitz - Caris & Company

Can I get some clarification.

James E. Fickenscher

Yeah, we don’t, we don’t obviously talk about quarterly guidance, so that’s all I can say is that our full year guidance of 45 to 60 million is where we’re at right now.

David Moskowitz - Caris & Company

Okay and on the RIMS program that you talked about submitting, when did you submit that to the FDA?

James E. Fickenscher

That went with the package that we submitted somewhere between the submission and where we are right now.

David Moskowitz - Caris & Company

Okay and lastly, I didn’t see a full balance sheet in the release. Can you talk about the level of inventory that you’re carrying on your books for XIAFLEX at this point?

James E. Fickenscher

Yeah, it’s still relatively modest. It’s approximately $2 million at the end of the third quarter.

David Moskowitz - Caris & Company

Okay. Great, thanks very much.

James E. Fickenscher

Okay.

Operator

With no further questions in the queue, I will now turn the call back over to Armando Anido for closing remarks. You may proceed.

Armando Anido

Great, thanks operator and thanks everybody on the call today. Thanks for joining us. We look forward to really updating you on progress again soon. Take care now.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a great day.

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Source: Auxilium Pharmaceuticals, Inc. Q3 2009 Earnings Call Transcript
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