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Sucampo Pharmaceuticals, Inc. (NASDAQ:SCMP)

Q3 2013 Earnings Call

November 5, 2013 05:00 pm ET

Executives

Ryuji Ueno – Chairman, Chief Executive Officer & Chief Scientific Officer

Cary Claiborne – Chief Financial Officer

Stan Miele – Senior Vice President, Sales and Marketing & President, Sucampo Pharma Americas, Inc.

Taryn Joswick – Vice President, Clinical Development

Greg Deener – Senior Vice President, Global Marketing and Strategy Implementation

Silvia Taylor – Senior Vice President Investor Relations, Public Relations and Corporate Communications

Analysts

Irina Rivkind – Cantor Fitzgerald

Ed Arce – MLV & Co.

Christian Glennie – Edison Investments

[Jason Aureay – JA LAA Equities]

Operator

Good afternoon and welcome to Sucampo’s Q3 2013 Financial Results and Operating Highlights Conference Call. For opening remarks and introductions I would like to turn the call over to Silvia Taylor, Sucampo’s Senior Vice President of Investor Relations, Public Relations, and Corporate Communications. Please go ahead.

Silvia Taylor

Thank you, Operator, and good afternoon everyone. Thank you for joining us today. The earnings release and its attachments announcing Sucampo’s Q3 2013 financial and operational highlights was distributed this afternoon. For those of you who have not yet seen it, you will find it posted in the Investors section of our website at www.sucampo.com. We also plan to file our 10(q) this week, and once filed a link to that document will also be posted on our website.

The agenda for today’s call is as follows: Dr. Ryuji Ueno, Chairman of the Board, Chief Executive Officer and Chief Scientific Officer will provide an overview of the quarter. Stan Miele, President of Sucampo Pharma Americas, LLC, and Senior Vice President of Sales and Marketing will review developments in the US for AMITIZA and RESCULA as well as AMITIZA development in Japan and Europe.

Taryn Joswick, Vice President of Clinical Development, will review our pipeline activities, followed by Cary Claiborne, Sucampo’s Chief Financial Officer, who will review the financials. Finally, Dr. Ueno will provide closing comments just ahead of the Q&A portion of the call. Additional members of Sucampo’s team are present and available to answer your questions at that time.

Before we begin please note that various remarks management makes on this conference call and the information contained in today’s earnings release are as of November 5, 2013. The company assumes no obligation to update forward-looking statements contained in this conference call, earnings release, or the attachments as a result of new information or future events or developments.

This earnings call, earning release and the attachments contain forward-looking information about the company’s future operating and financial performance, business plans and prospects, in line products and product candidates, and share repurchase plans that involve substantial risks and uncertainties. Please review the “Forward-Looking Statement” in the 10(k) found on our website for additional risk factors affecting our forward-looking statements.

Now I will turn the call over to Dr. Ueno. Please go ahead, Dr. Ueno.

Ryuji Ueno

Thank you, Silvia. Hello, everyone. Thank you for joining our conference call today. I’d like to begin today’s call with a brief overview of our Q3.

As you may have seen from our press release which we distributed earlier this afternoon, Q3 was a very productive one for Sucampo. Net sales of AMITIZA increased 3.5% to $204.1 million for the first nine months of 2013 as reported to us by our co-development and commercialization partner Takeda for royalty calculation purposes. We are also seeing early growth due to increased opioid induced constipation physician targets.

We are excited by the positive sales trends of our flagship product and we believe that these results confirm the potential for AMITIZA’s continuing growth. Also as we announced today, to help accelerate AMITIZA’s growth we are exercising the co-promotion option in our commercialization agreement with Takeda for AMITIZA in OIC in adults with chronic non-cancer pain. We look forward to beginning co-promotion efforts early next year.

AMITIZA sales in Japan are also encouraging as they continue to exceed our internal forecasts. Sucampo’s revenue from sales of AMITIZA to Abbott Japan grew 58.2% this quarter versus Q2 to $5.2 million. In Europe we continue to see increasing sales of AMITIZA for chronic idiopathic constipation, CIC, in Switzerland which is encouraging as we plan for expansion in the UK and other European markets.

We also continued discussions this quarter for a strategic alliance for AMITIZA for other global markets outside of the US and Japan, including Europe, China, Latin America and other emerging markets. Stan Miele will talk more about AMITIZA progress later on in the call.

Turning now to RESCULA, our second marketed product, today we announced changes to the commercial strategy for RESCULA unoprostone isopropyl product for the lowering of intraocular pressure in patients with open-angle glaucoma or ocular hypertension. We remain confident in the value that RESCULA offers to patients and believe these changes, which Stan will go over in more detail, will provide a better balance of investment and revenue.

At the same time we are looking forward to the future with unoprostone isopropyl. Taryn Joswick will share the progress our development partner R-Tech Ueno has made in its Phase III clinical development in retinitis pigmentosa, or RP.

Finally, this quarter we also continued to make progress in lifecycle management of our existing compounds and in advancing our pipeline of prostone-based candidates. We initiated a pivotal trial of a liquid formulation of lubiprostone and we continued to make progress in our plans to initiate our Phase III program in pediatric functional constipation for AMITIZA in which we expect to enroll the first patient this quarter. And as I just stated, R-Tech Ueno made progress in its ongoing Phase III trial of unoprostone isopropyl for RP.

Clinical development for our prostone drug candidates continued this quarter with several compounds progressing: first, our proprietary ion channel activators for the treatment of lumbar spinal stenosis, LSS; and second, cobiprostone, our compound for prevention and/or treatment of oral mucositis.

We have completed the treatment phase of our Phase II-A double-blind, placebo-controlled study of the intravenous version of our ion channel activator for LSS and we are currently in the data analysis phase. The next phase of development for an oral version of our ion channel activator for LSS remains on track to begin in Q1 2014. Additionally as we reported today our Phase I-B study for an oral spray formulation of cobiprostone has begun last week.

Before I turn the call over to the team I want to reiterate Sucampo’s goals of delivering medicine that bring value to patients and healthcare providers, and to delivering long-term shareholder value. As you will hear on this call, Sucampo made great progress across our value drivers this quarter and we are working to invest capital across the business drivers that will enhance our overall value.

At the same time we have made significant improvements on the expense side. G&A expenses excluding the impact of pharmacovigilance costs decreased approximately 29% in Q3 and about 26% for the nine months of 2013 compared to those of last year.

As you will hear from the team during this call, as a result of significant expense reductions and increases in revenue today we are raising our earnings guidance for 2013. Cary Claiborne will discuss our new guidance in more detail later in the call.

I will now turn the call over to Stan Miele for an update on our commercial developments in the United States, Japan, and Europe. Stan?

Stan Miele

Thank you, Dr. Ueno. Good afternoon, everyone, and welcome to the call.

This was a strong quarter for AMITIZA. For the quarter, net sales of AMITIZA were $72.5 million for royalty calculation purposes as reported by our partner, Takeda. For July, IMF reported TRX or total prescriptions were 113,000, the highest ever reported month. This positive trend continued with prescriptions up 5.6% year-over-year for Q3 this year. Also, for royalty calculation purposes AMITIZA net sales increased 3.5% year-over-year to $204 million through September.

Helping to buoy the strong sales of AMITIZA was continued market growth. Year-to-date the prescription constipation market has continued to grow, which means more patients are entering the market for prescription therapies. Our partner Takeda continued to call on additional OIC targets this quarter.

As background, we believe that there is significant opportunity for AMITIZA in OIC because AMITIZA is truly unique as the first and only oral prescription product currently approved for OIC. And as a reminder, our internal estimates place the OIC market at around 2.0 million to 2.5 million moderate to severely constipated patients based on studies stating that 40% to 80% of patients on chronic opioids will suffer from OIC which we believe is a conservative estimate.

The results of adding new OIC targets are encouraging. Overall, for new, high-riding opioid targets added in pain management, rheumatology, surgery, and anesthesiology Takeda saw growth across the majority of all of these specialties. Putting that in context of total prescriptions, we saw an increase of 26.5% in total prescriptions for these new targets for the first full quarter post-launch of the OIC indication as compared to before the launch of the new indication.

For non-specialist high-riding opioid targets we have seen more modest growth. However, these growth trends speak to the potential OIC holds for continued AMITIZA growth. While we are encouraged by the early results in OIC we want to reiterate that we believe that we have still not seen the full benefits of the OIC launch. We expect the full effects to be seen in the coming months and into next year as we continue to reach prescribers with the messages that AMITIZA can and should be a first option for the millions of patients suffering from OIC.

We are pleased with Takeda’s efforts so far to capitalize on all three indications for AMITIZA, and given the significant opportunity that remains in OIC Sucampo has decided to exercise our co-promote option. Sucampo will begin our own incremental sales effort for AMITIZA and deploy a contract sales force on OIC targets.

What this means is that the combined Takeda and Sucampo sales organization will target an even greater proportion of the opportunity for AMITIZA growth. Takeda will reimburse Sucampo based on details to healthcare prescribers and we expect Sucampo’s contract sales representatives to be in the field starting in January of next year. I will speak more about the contract sales organization in just a few moments.

Outside of OIC we are pleased that we have not seen significant erosion in what we call the base business – chronic idiopathic constipation and irritable bowel syndrome with constipation. We believe that our preferred managed care position and established safety profile have been critical success factors.

AMITIZA’s TRX share continues to grow in Medicare Part D plans. As shown in the Wolters Kluwer data or source data AMITIZA also has a significantly lower patient co-pay at $18.70 versus the competition in Part D, and is also lower for commercial and the federal panels as well. This is clearly an area of opportunity for AMITIZA that Takeda and we will seek to maximize.

Finally, we continued discussions with Takeda this quarter to explore commercializing AMITIZA in Canada and we plan to meet with Health Canada on the best ways to proceed with AMITIZA registration in this market in the near future.

Turning now to RESCULA, this quarter we continued to see growth in RESCULA sales. We also continued to get feedback from eye specialists who have prescribed RESCULA that the product is meeting or exceeding their expectations in terms of intraocular pressure lowering, and that they are finding a place for RESCULA in their prescribing armamentarium.

Despite this during our Q2 earnings call we discussed the fact that our early uptake curve has not met our initial expectations and this quarter, while we saw growth in RESCULA prescriptions total prescriptions continued to not meet our expectations. As a result we announced today that we are making changes to our RESCULA commercialization strategy, and moving forward we will prioritize our efforts on current RESCULA prescribers.

In an effort to better match investment with revenue, effective today we will no longer make in-person sales calls to healthcare providers who have not yet prescribed RESCULA. We will also begin to utilize a limited mix of inside sales and other promotional tactics including digital to reach the current non-prescriber base in an effort to increase prescribers and sales of the product.

Even with the focus on current RESCULA prescribers we plan to reduce RESCULA commercial expenses by approximately 75% moving into 2014 as compared to 2013. Commensurate with the fact that we are decreasing the amount of face-to-face sales calls on RESCULA and with a goal of executing our RESCULA commercial efforts as efficiently as possible we have made the decision to eliminate Sucampo’s in-house sales team.

As I discussed earlier, Sucampo will be moving to a contract sales organization whose primary responsibility will be to sell AMITIZA to OIC targets. This team will also execute sales calls on current RESCULA prescribers. Having a contract sales organization will provide us with maximum flexibility and our ability to scale our commercial efforts while balancing costs.

In addition, based in part on the fact that we have seen lower than anticipated sales of RESCULA this quarter we have recorded a noncash write-off of RESCULA inventory and samples which you will see in our quarterly results. Cary Claiborne will go into more detail on this later in the call.

We continue to maintain our belief in the value that RESCULA can provide to patients with glaucoma and ocular hypertension and we believe that the changes we are making today will ensure patient access while at the same time allow us to focus our investment of capital on the opportunities where we see the greatest potential for shareholder return with AMITIZA.

Turning now to our global markets, beginning with Japan AMITIZA sales continued to be above our original projections. In the quarter our sales to Abbott in Japan were up 58.2% to $5.2 million compared to $3.3 million in Q2.

We are pleased with Abbott’s continuing efforts to market AMITIZA in Japan. A disease awareness campaign pilot that Abbott conducted in June showed that it can be an effective means to motivate Japanese patients to ask their doctors about AMITIZA. As a result, Abbott plans to conduct a targeted consumer awareness effort.

In addition, as we discussed in Q2 the two-week limitation on prescriptions that is generally applied to all new approvals of products for the first year after approval will be removed in early December. This is an opportunity which Abbott anticipates will increase AMITIZA sales. We look forward to continued growth in the Japanese market.

In Europe we showed sequential quarterly sales growth for Switzerland and we saw an increase in the number of gastroenterologists prescribing AMITIZA after efforts to increase awareness in that target group. We also plan to make AMITIZA available in the United Kingdom later this quarter.

Our priority in Europe is achieving regulatory approval for AMITIZA for OIC in the United Kingdom and Switzerland for which we filed during Q1 this year. Our discussions with regulators in support of those approvals have been progressing well and we believe we are on track for first half of 2014 approval in both markets.

In the meantime the MHRA began its assessment report for CIC earlier this year as part of the mutual recognition procedure and is expected to finalize its report following OIC approval. In the United Kingdom we continue to work on securing NIHCE endorsement for AMITIZA and we are working with local payers and key opinion leaders to gain their understanding of the cost effectiveness of AMITIZA when used prior to costly hospital referrals and other interventions.

Finally we also continue partnership discussions for strategic alliances for AMITIZA for global markets outside of the US and Japan, including Europe, China, Latin America and other emerging markets. We are pleased to have garnered extensive interest in AMITIZA by both global and regional pharmaceutical companies and look forward to the possibility of extending AMITIZA’s reach into untapped markets.

I’d now like to turn the call over to Taryn Joswick to discuss our clinical development and pipeline activities.

Taryn Joswick

Thanks, Stan, and good afternoon everyone. I’d like to begin by updating you on lubiprostone lifecycle management.

In October, Sucampo initiated a pivotal randomized placebo-controlled double-blinded multi-center study of the pharmacodynamics, pharmacokinetics and tolerability of a liquid form of lubiprostone in adult subjects 18 years of age or older with a confirmed diagnosis of chronic idiopathic constipation. We believe that physicians are interested in additional dosing options for their patients and our goal in developing this liquid form of lubiprostone is to provide an alternate treatment formulation for patients who prefer not to take a capsule.

The trial is expected to enroll 152 patients with CIC at eleven sites in the United States. Our partner Takeda is funding 100% of the costs for the liquid formulation development program in lubiprostone. Upon reviewing the results of the trial which we anticipate to end in the first half of 2014 we plan to file a new drug application for approval. We will continue to update you on the trial as it progresses.

We also continue planning for our Phase III development program for pediatric functional constipation which we expect to initiate in Q4. Constipation is one of the most common gastrointestinal complaints in children and adolescents with worldwide prevalence estimated at approximately 18% and accounting for 3% to 5% of pediatric outpatient visits. There are currently no prescription treatment options labeled for youth and those under the age of 18, leaving millions of these patients suffering from chronic constipation, a condition that has been shown to remain severe in up to 50% of children for years after initial diagnosis.

If approved, AMITIZA would be the first and only prescription product for chronic constipation in children which is a significant opportunity for the product and would be a differentiator versus the current competition. Sucampo has already completed an open label study of AMITIZA in 124 patients age 3 to 17 years. Some of these results were shared at the October, 2013, annual meeting of [NAFGAN]. Additionally, the full study results were published online in October in The Journal of Pediatric Gastroenterology and Nutrition.

In Q4 we plan to initiate our Phase III pivotal program that builds upon this successful open label study and consists of two well controlled pivotal studies with parallel design, one in younger patients aged 6 months to under 6 years and another in patients 6 to 17 years of age. We also plan to evaluate the long-term safety of AMITIZA in these pediatric patients. Our partner is funding 70% of the clinical development costs for this pediatric application.

Further to our goal of increasing access to AMITIZA for patients around the world we are continuing to evaluate development of lubiprostone in China. We look forward to updating you on our progress in the coming months.

Turning now to development of unoprostone isopropyl, we announced last month that our development partner R-Tech Ueno completed enrollment in a Phase III trial in Japan for unoprostone isopropyl for the treatment of retinitis pigmentosa, a condition for which there are no approved prescription medications. R-Tech is conducting the clinical trials at 38 medical institutions in Japan.

The randomized double-blinded placebo-controlled study will evaluate whether unoprostone isopropyl ophthalmic solution improves central retinal sensitivity as determined by Humphrey Field Analyzer in patients with RP. Interim one-year results will be available in early 2015.

In the meantime Sucampo intends to work with regulatory authorities in the United States and the European Union where unoprostone has been granted orphan drug status in order to determine the incremental data that will be necessary to form application packages for each region.

This study is being funded through an agreement established in February between R-Tech Ueno and the Japan Science and Technology Agency, the governmental agency responsible for the implementation of science and technology policy in Japan. Of note, Sucampo is not responsible for any development costs for the Phase III RP trial in Japan.

For our pipeline we’ve recently completed the treatment phase of the Phase II-a double-blinded placebo-controlled study of the IV form of our ion channel activator which is under development for the treatment of moderate to severe lumbar spinal stenosis, a common degenerative disease of the lumbar spine. We plan to announce top line results once they are available sometime before the year-end.

We are also continuing our progress on the Phase I trial of the oral form of another ion channel activator for treatment of mild to moderate lumbar spinal stenosis and we expect to initiate the next clinical phase early next year. There are currently no approved prescription medications in the United States or Europe for LSS and in Japan there is only one approved medication over which we believe our product will have a distinct safety advantage.

We also believe that prostone technology has the unique ability to target several aspects of the disease, and we look forward to continuing to update you on the progress of our clinical programs for both the oral and IV compounds. In addition to LSS we are also considering the oral version for development in new therapeutic areas and will update you as those plans develop.

Finally, we also continued progress in our development program for the oral spray formulation of cobiprostone. I am pleased to announce that we initiated the Phase I-b trial on October 31. This product is under development for the prevention and/or treatment of oral mucositis, a debilitating side effect that often results from radiation and chemotherapy in cancer patients. While there are a few compounds available to address the individual aspects of oral mucositis there is currently no comprehensive treatment available to address multiple aspects of this disease. As we reported earlier this year the Phase I-a trial of cobiprostone demonstrated that the compound was generally well tolerated.

And now I’d like to turn the call over to Cary Claiborne for a financial update.

Cary Claiborne

Thank you, Taryn. Good afternoon, everyone. I’d like to review the financial highlights of the quarter with you.

Total revenue for Q3 2013 was $21.2 million compared to $15.5 million in Q3 2012, a growth rate of 37%. Total revenue for the first nine months of 2013 was $65.1 million compared to $46.6 million for the same period in 2012 – a growth rate of 40%.

R&D revenue for Q3 2013 was $2.0 million compared to $0.7 million during last year’s Q3. The increase in R&D revenue for the quarter was primarily due to the continued planning for the commencement for the pediatric study for AMITIZA. R&D revenue for the first nine months of 2013 was $16.3 million compared to $6.4 million in the same period last year. The increase in R&D revenue for the nine-month period was primarily due to the receipt of the $10 million milestone payment from Takeda in Q2 of this year following the launch of OIC.

Product royalty revenue for Q3 2013 was $13.6 million, a slight decrease of $0.3 million from $13.9 million in last year’s Q3. Product royalty revenue for the first nine months of 2013 was $37.3 million, an increase of $0.8 million from $36.5 million in the same period last year. For the quarter, the decrease in product royalty revenue was primarily due to a $0.5 million true up of royalties received from our partner in Q3 2012 that did not reoccur in 2013. Excluding the impact of the true up, product royalty revenue actually increased $0.25 million or 2.0% year-over-year for Q3, and $1.30 million, or 1.6% for the first nine months of this year.

Product sales revenue for Q3 2013 was $5.4 million compared to nil in last year’s Q3. Product sales revenue for the first nine months of 2013 was $11.0 million compared to nil in last year’s first nine months. For both periods the increase in product sales was primarily due to the commencement of sales of AMITIZA product to Abbott in Japan which launched in Q4 2012. Sucampo’s product sales to Abbott crossed the $10 million mark on a year-to-date basis in Q3 this year.

One notable reduction in our net revenue this year is in co-promotion revenue. This line item represents a reimbursement by Takeda for a portion of the costs of our sales force for co-promoting AMITIZA in the US to long-term care providers. Co-promotion revenue for Q3 2013 was nil compared to $0.7 million in last year’s Q3. Co-promotion revenue for the first nine months of 2013 was $61,000 compared to $3.3 million in last year’s first nine months. The decrease for both periods was driven by a shift of our sales force from selling AMITIZA, which had been partially reimbursed by Takeda, to selling RESCULA which is fully funded by Sucampo.

In line with the announcement at our press release today and Stan’s earlier comments, next year Sucampo will once again record co-promotion revenues as we start co-promoting AMITIZA in January in the US for OIC in adults with chronic non-cancer pain.

And finally as it relates to revenues, US net sales of AMITIZA as reported to us by our partner Takeda for royalty calculation purposes increased 1.4% to $72.5 million for Q3 2013 compared to $71.5 million for Q3 2012. Net sales for the first nine months of 2013 increased 3.5% to $204.1 million compared to $197.2 million for the same period in 2012.

The slide before you provides some additional detail from our P&L for Q3 results. I’ve already covered our revenue drivers so I’ll go right to cost of goods sold and operating expenses on this slide.

Cost of goods sold was $6.3 million for Q3 2013 compared to nil for Q3 2012, an increase of $6.3 million. Cost of goods sold was $9.5 million for the first nine months of 2013 compared to nil for the prior year period, an increase of $9.5 million. The increase in cost of goods sold relates to drug product sales of AMITIZA in Japan and Switzerland as well as RESCULA in the United States.

During Q3 2013 Sucampo recorded a noncash write off of its RESCULA inventory in the amount of $3 million to reflect excess quantities of dated product. The excess inventory was largely a result of the necessity to preorder product in advance of FDA label approval due to a planned change in manufacturing facility and lower than anticipated sales within the useful life of the dated product.

R&D expenses were $4.5 million for Q3 2013 compared to $5.6 million in last year’s Q3. The decrease was primarily due to lower costs associated with our unoprostone isopropyl development program and a lower provision associated with our Numab collaboration partially offset by higher costs associated with the clinical development of our lumbar spinal stenosis program and higher indirect costs including regulatory fees.

R&D expenses for the first nine months of 2013 were $14.5 million compared to $14.2 million in the first nine months of 2012. For the first nine months of the year the increase in R&D expense was primarily due to higher costs associated with the clinical development of our lumbar spinal stenosis program and higher indirect costs including regulatory fees. These increases were partially offset by lower costs associated with our development programs for cobiprostone and unoprostone isopropyl.

G&A expenses were $5.4 million in Q3 2013 compared to $7.3 million for the same period of 2012, a decrease of $1.8 million or 25%. G&A expenses were $18.6 million in the first nine months of 2013 compared to $22.6 million in last year’s first nine months, a decrease of $4 million or 17.5%. For both periods the decrease in G&A expense was primarily due to lower legal, consulting, and other professional expenses as a result of the conclusion of certain legal matters in 2012, as well as expense reductions from 2013 productivity initiatives.

These decreases were partially offset by a $0.3 million and $1.9 million increase in pharmacovigilance costs associated with the launch of AMITIZA in Japan for the Q3 and nine-month period respectively. Excluding the impact of pharmacovigilance costs, G&A expenses decreased 29.2% in Q3 and 26.1% for the first nine months of 2013.

We have continued to make solid progress in lowering our cost structure as evidenced by the 26% year-over-year reduction through Q3 I just mentioned. We’ve accomplished this by doing things like leveraging our internal resources more efficiently across the company on a global basis, utilizing IT systems to make us more productive and get more done with less, reducing the use of consultants and then several other small initiatives that begin to add up collectively.

Selling and marketing expenses were $6.0 million in Q3 compared to $4.3 million in last year’s Q3. Selling and marketing expenses for the first nine months of 2013 were $16.0 million compared to $14.5 million for the prior year period. The increase in selling and marketing expenses relates primarily to launch costs for RESCULA and a $1.5 million noncash write off recorded for excess RESCULA samples partially offset by nonrecurring pre-commercialization planning activities for both AMITIZA and RESCULA that occurred in 2012 but did not occur in 2013.

Let’s look at income next. For Q3 2013 loss from operations was $1.0 million compared to a loss of $1.7 million in Q3 2012. Income from operations for the first nine months of 2013 was $6.5 million compared to a loss from operations of $4.6 million in the same period last year.

For Q3 2013, Sucampo recorded net income of $1.3 million or $0.03 per diluted share compared to a net loss of $5.9 million or $0.14 per diluted share in Q3 2012. Sucampo’s net income for the first nine months of 2013 was $4.3 million or $0.10 per diluted share compared to a net loss of $8.7 million or $0.21 per diluted share in the same period last year.

For Q3 2013 Sucampo’s net income excluding special items was $4.0 million or $0.09 per diluted share compared to a net loss of $5.9 million or $0.14 per diluted share in Q3 2012. For the first nine months of 2013 net income excluding special items was $7.0 million or $0.16 per diluted share compared to a net loss of $8.7 million or $0.21 per diluted share in the first nine months of 2012. Special items for Q3 and first nine months of 2013 exclude the RESCULA inventory and sample noncash write offs we talked about earlier, which totaled $4.5 million on a pre-tax basis.

Let’s move on to the balance sheet. As of September 30, 2013, cash, cash equivalents, restricted cash, and investments were $91.0 million compared to $91.4 million at December 31, 2012. As of September 30, 2013, notes payable were $57.9 million compared to $52.9 million at December 31, 2012.

The authorized amount of our share repurchase program remains unchanged with the company being authorized to buy back up to $5 million of our common stock. During the first nine months of 2013 Sucampo repurchased approximately 68,000 shares at a cost of $0.3 million.

And finally today we are announcing that we are raising our 2013 earnings guidance from our previously stated range of approximately breakeven to an updated full-year range of $3 million to $5 million of net income excluding special items or $0.07 to $0.12 per diluted share excluding special items.

One additional special item that we will have in Q4 will be the severance costs related to the elimination of the in-house sales force we just announced today. These costs will be in our Q4 results. We also plan to be profitable in 2014 as we’ve stated previously, and we’ll provide more specific guidance for 2014 on our Q4 earnings call.

I’d now like to turn the call back over to Dr. Ueno for concluding remarks before we go on to Q&A. Dr. Ueno?

Ryuji Ueno

Thank you, Cary. We have set the following key value drivers for the year that we believe will increase shareholder value.

I am pleased that we have achieved eight out of thirteen value drivers in the first nine months of this year which are as follows: approval of the OIC indication for AMITIZA in the US; receipt of a $10 million milestone payment from our partner Takeda following the commercial launch of AMITIZA for OIC; growth of our AMITIZA sales in Japan which continue to be above our expectations; fighting for approval of AMITIZA in the treatment of OIC in the UK and Switzerland; beginning active marketing of AMITIZA for CIC in Switzerland; launching RESCULA in the US; completing our oral mucositis Phase I-a trials for cobiprostone in Q2 2013 and initiating a Phase I-b trial for cobiprostone.

In addition we have achieved another important value driver for 2013 recently. We initiated the pivotal liquid formulation study for lubiprostone which will make AMITIZA accessible to patients who will not take a tablet. We are on track to achieve our remaining 2013 value drivers which are achieving first patient, first visit in our pediatric functional constipation Phase III trial for lubiprostone and engaging in discussions for a strategic alliance for AMITIZA for all indications in new territories outside of the US and Japan, including Europe, China, Latin America and other emerging markets; and in the UK fighting for National Institutes for Health and Care Excellence endorsements for CIC and OIC and launching AMITIZA in the UK; submission of filing for AMITIZA in other European markets and completion of our Phase II-a double-blinded placebo-controlled trial for the IV formulation of our ion channel activator for the treatment of lumbar spinal stenosis.

In addition as we have discussed Sucampo is actively engaged in the search for a new Chief Executive Officer. We are looking forward to updating you on our progress in the future.

As you have heard today, Q3 this year and Q4 thus far have been highly productive. We’ve furthered our mission to increase the number of patients who have access to AMITIZA through capitalizing on new indications and making progress in new geographic markets. We made important changes to our commercial strategy for RESCULA and AMITIZA for OIC and w continued the development of our pipeline with three programs in Phase III clinical development – a liquid formulation study for lubiprostone, the pivotal program in pediatric functional constipation for lubiprostone, and the retinitis pigmentosa study for unoprostone isopropyl. For the pivotal Phase III pediatric program for lubiprostone we are looking forward to enrolling the first patient before the end of this year.

I thank you for your continued support as we advance our mission of delivering medicines for patients while increasing shareholder return. We are now ready to start the Q&A portion of the call. Operator, please open up the lines for questions.

Question-and-Answer Session

Operator

(Operator instructions.) Your first question comes from the line of Irina Rivkind with Cantor Fitzgerald. Please proceed, ma’am, your line is open.

Irina Rivkind – Cantor Fitzgerald

Thanks for taking the questions and apologies because I missed the first half of the call. Can you delve a little further into the sales restructuring? You have ophthalmic reps now and then you’re switching to GIs and how will that work? And also it says here in your press release that Takeda’s going to reimburse you for some of these details, so do you expect the expense associated with the OIC promotion to be about the same as the RESCULA promotion, less, or more? Thank you.

Stan Miele

Hi Irina, this is Stan. I’m sorry you missed the first half but we feel that we are definitely making progress across all of the value drivers. And so as we look to restructure let me try and add some context. The sales reps themselves will be trained on AMITIZA and we will have some legacy people in the leadership role. And 80% of the time will be dedicated toward OIC and the AMITIZA indication on agreed-upon targets with Takeda.

As it relates to RESCULA as we mentioned in the call there will be a 75% overall reduction in costs as we look at commercial expense related to the promotion of RESCULA. So the majority of our promotional costs with respect to AMITIZA will be covered by the collaboration and licensing agreement by Takeda.

Irina Rivkind – Cantor Fitzgerald

And then in terms of expectations for RESCULA next year can you comment on your progress of managed care discussions? And what kind of drove you to this decision to scale back promotions and how we should think about the drug going forward, thanks.

Steve Miele

Well we certainly aren’t going to be giving any specific guidance with respect to RESCULA but I think it’s fair to say that we’re simply revising the overall strategy. So managed care is still coming online. We are just being more focused and so we will be having a higher priority on the physicians who have already prescribed RESCULA; and then we’ll be enhancing our non-promotional areas and then focused on digital campaigns and other means as well as continuing to be aggressive with managed care coverage.

Our intent from a timing standpoint was just to make sure that our overall expense from a commercial standpoint was somewhat commensurate with what we were seeing overall from a spend standpoint, so from our perspective the timing was optimal to do this now as we lead to 2014 and drive to be more efficient yet increase in overall value to our shareholders.

Irina Rivkind – Cantor Fitzgerald

Thank you.

Operator

(Operator instructions.) Your next question comes from the line of Ed Arce with MLV & Company. Please proceed, sir, your line is open.

Ed Arce – MLV & Co.

Hi, thanks for taking my questions. I wanted to ask about your new effort in OIC, both the extra spend with the reps and also your co-promote that’s going to start in Q1. If you could just discuss that and what you think about the particular targets a little more in detail.

Stan Miele

Ed, this is Stan – good to hear from you. So as it relates to the targets these were agreed upon targets by a good analysis by both Sucampo and Takeda, with a heavy emphasis on those that have high potential for the OIC indication. We are essentially keeping the same amount from a personnel standpoint on the Sucampo sales force side, so with the majority of our expenses being reimbursed by Takeda this is a win where we have increased reach to a dedicated group of targeted physicians. And we also believe financially we’ll have an effect on increased sales but also there’s better reimbursement for Sucampo.

Ed Arce – MLV & Co.

Okay, great. The other question I think was already answered on looking at RESCULA going forward. In terms of your discussions ongoing, I know there’s probably little that you can say but how are you thinking about the types of partners that are most attractive from your standpoint?

Stan Miele

Well, I think we’re looking at all types. And so as we mentioned in the talking points, whether they are global, large pharma partners or regional partners we’re evaluating both. And as we also stated there are some extensive conversations happening in both types of potential partners.

Ed Arce – MLV & Co.

Alright, thank you Stan.

Operator

Your next question comes from the line of Christian Glennie with Edison Investments. Please proceed, your line is open.

Christian Glennie – Edison Investments

Good afternoon. Just on the potential severance costs in Q4 is it possible to give a sense for the level of those costs?

Cary Claiborne

We don’t, as you know Chris, we don’t give specific guidance but a ballpark I would say is in the $400,000 to $500,000 range of expenses you would see in Q4. And again we will carve that out as a special item.

Christian Glennie – Edison Investments

Okay, thanks. And on the partnering side of things just to follow up on the last question, are there any specific triggers? Obviously there’s a few regulatory developments in Europe that might help to obviously facilitate a deal or sort of move things along there – anything we should be aware of or thinking about on that side of things?

Greg Deener

Hi, this is Greg Deener, the SVP in Marketing. But I just wanted to add a couple of things on Europe from our perspective. As Dr. Ueno and Stan both stated during the call we are pursuing the OIC indication in the UK and we’ve publicly stated that we expect to see that sometime in the first half of 2014 but it could be earlier. So once we get approval from the MHRA for OIC then we would proceed with the MRP across Europe, and that would certainly be something that from a partnership standpoint would be attractive.

I also think we’ve gotten a lot of very positive feedback upon the success in Japan that we’ve seen which we discussed on the call, so that’s another thing that partners are monitoring. And then people have been impressed at the fact that with the launch of Linaclotide in the US that we’ve been able to grow sales behind the OIC indication.

So we do continue to have a lot of good discussions with potential partners. There are a few triggers and things that they are watching going forward and we’re going to continue those talks throughout the balance of this year. And then we’ll update you appropriately on the next quarter’s conference call.

Christian Glennie – Edison Investments

Okay, thanks. Lastly on the pediatric study and sort of linked into the liquid formulation study, could you talk to us a little bit about the opportunity or sort of need as it were for a liquid formulation ? I noticed that that study will be in adults. I was under the impression it would (inaudible) might also be a great benefit to pediatrics – but that’s another study I now see. And then also linked into the pediatric study will actually be a capsule so there won’t be a liquid formulation in that study.

Taryn Joswick

Hi, this is Taryn, Christian. Thanks for your question. With respect to the liquid formulation study, yes, the study that recently initiated is a study in adults with CIC and that’s to establish the equivalence of that formulation to the current capsule formulation. And we intend to file that in order to make that new formulation available to adults in the market before it’s actually available for pediatrics. The pediatric program as I mentioned during the earlier call notes is a parallel program with two clinical studies, one in older children aged 6 to adolescents aged 17 and one in younger children ages 6 months to 6 years. The older children and adolescents will employ the capsule formulation and the protocol in younger children will utilize the liquid formulation.

Christian Glennie – Edison Investments

Right, okay. Great, thanks.

Operator

(Operator instructions.) Your next question comes from the line of [Jason Aureay with JA LAA Equities]. Please proceed.

[Jason Aureay – JA LAA Equities]

Hey, just Stan if you can give us a little bit more guidance around the co-promote and how Takeda is compensating you. Obviously you’re going to use the reps both for RESCULA and AMITIZA so I would assume that if it was just used for AMITIZA it would be fully compensated by Takeda, but it’s only partially or mostly because you’ll be using it somewhat for RESCULA. Is that fair?

Stan Miele

Right. Roughly 80% of the time we would be reimbursed, but our reimbursement remember contractually there’s a cap on the amount that we can be reimbursed – and we’re actually reimbursed based on details. So it more than meets our expectations from a co-promote revenue standpoint but more importantly it’s the appropriate amount as agreed upon by Takeda and Sucampo. So it’s an appropriate fit at this point in time.

[Jason Aureay – JA LAA Equities]

Okay. So is it fair to say though that if you chose not to co-promote RESCULA at all through it you would get 100% reimbursement?

Cary Claiborne

No. This is Cary, Jason, and as Stan said the reimbursement of Takeda is on a per-detail reimbursement, so it’s based on how many details we do. But there’s a limit in the contract in terms of how much they will reimburse, so any details that he’s giving to RESCULA is not taking away from anything we could be receiving from Takeda regarding AMITIZA.

[Jason Aureay – JA LAA Equities]

So then Cary, what you’re saying is the RESCULA decal is really a free decal.

Cary Claiborne

I wouldn’t go that far. The reps are still going to be getting paid so I wouldn’t look at it as a free detail from our standpoint.

[Jason Aureay – JA LAA Equities]

But I mean it’s not additional costs on top of what you would be paying them and basically getting most of it reimbursed from Takeda – is that fair?

Cary Claiborne

Well the reps are going to be paid a fulltime salary. They’re a contract sales force so they’re paid a fulltime salary but then we get partially reimbursed for that through Takeda based on the detail they do on AMITIZA.

[Jason Aureay – JA LAA Equities]

Okay, I think I understand it. Well let me just say I commend you. This was the best quarter I’ve seen out of the company. I think you’re doing a lot of things the right way here. I commend you for giving up on your own internal sales force and stopping the self-promoting of RESCULA. I think that was absolutely, as you know I think that was the right move and I commend you for taking that action. And I commend you also for getting so many of these other studies reimbursed by third parties. I think that’s great and I think you all are making a big positive turn in running this in a very shareholder-friendly way. So I commend you for those changes.

Ryuji Ueno

Thanks a lot.

Operator

(Operator instructions.) We have a follow-up question from the line of Christian Glennie with Edison Investments. Please proceed, sir, your line is open.

Christian Glennie – Edison Investments

Hi, just confirming on the economics of the Takeda deal in terms of you will be reimbursed on the sales force but ultimately it’s in terms of royalties, the tiered royalties… I mean there’s nothing additional that flows in there as is going for the (inaudible).

Stan Miele

No, there’s a reimbursement that is based on the sales force activity, the Sucampo sales force activity. There’s no change to the royalty structure as outlined already in the collaboration and licensing agreement but the expectation is that we would improve sales of OIC which should ultimately lead to increased royalty revenue.

Cary Claiborne

From a modeling standpoint you’ll see co-promotion revenue again. If you look at 2012’s P&L for instance through September we had $3.3 million of revenue that was from the same kind of structure we’re going to have going into 2014 with Takeda, where that number is a reimbursement based upon the number of details that were done back then. It’ll work the same way in 2014.

Christian Glennie – Edison Investments

Okay great, thanks. And then just quickly on Canada, I may have missed this – is that also a partner with Takeda in Canada?

Stan Miele

Yes.

Christian Glennie – Edison Investments

Great. And so they would be driving, sort of the getting regulatory approvals side of things. And what are the sort of potential timings for maybe filing or something in Canada?

Taryn Joswick

Christian, this is Taryn. So we would be working together with Takeda on that filing. Obviously Sucampo takes the lead generally with respect to development and regulatory submissions and we’re working with them currently to move forward with the Canadian filing at this point.

Christian Glennie – Edison Investments

Okay, thank you.

Operator

We also have a follow-up question from the line of Irina Rivkind with Cantor Fitzgerald. Please proceed, your line is open.

Irina Rivkind – Cantor Fitzgerald

Yes, sorry about the sales force questions again but just to understand it – so before you had about 40 reps that were your own RESCULA reps, and you were spending, let’s ballpark it at $10 million on the sales force. And so when you reduce the expense by 75% should we then expect that your commercial SG&A spend is going to be about $2.5 million to promote both AMITIZA and your remaining efforts on RESCULA in ’14? Or should we assume that you’re going to maintain similar levels of about $10 million later and then just increase promotion some way on AMITIZA and just sort of reinvest that money? Thanks.

Stan Miele

So Irina, I think it’s important to put this in context to take a look at 2013. So if you’re looking at sales and marketing expense, that number is different than what you’re discussing. And so as we break out, if we annualize 2013 and what the projected budget was for sales and marketing it’s inclusive of medical affairs, and that’s global – that’s a global number as well. But if we look at everything sales and marketing the reduction will be on the RESCULA side roughly 75%.

Cary Claiborne

But from a much higher number than the amount of dollars you’re using.

Stan Miele

Correct.

Cary Claiborne

It’s a lot more than just the 40 reps when we talk about the number we’re reducing from.

Irina Rivkind – Cantor Fitzgerald

So it’s going to be a significantly higher reduction in costs and there’s not going to be any kind of replacement of those costs next year it sounds like.

Cary Claiborne

Well, the replacement costs will be the costs of the outside sales force that you’ll see in the selling and marketing expense line. But then you’ll also see a reimbursement for a portion of that up in the co-promotion revenue line.

Irina Rivkind – Cantor Fitzgerald

Of 80%.

Cary Claiborne

No, not of 80%. Again, it works differently. The revenue works on a per-detail basis that we get reimbursed. The cost is whatever it costs us to put that sales force out, and what we’re saying is we’re going to put that sales force out at much reduced costs from how we did in the past.

Irina Rivkind – Cantor Fitzgerald

Alright, thank you.

Ryuji Ueno

The purpose of payments on a detailed basis are getting the royalty basis revenue up as well.

Cary Claiborne

We hope to drive more revenue as a result of this. So we expect it to be a positive ROI with this effort for AMITIZA OIC by doing this – additional royalty revenue from the promotion of it, the reimbursement revenue from Takeda, but you will see expenses on the selling and marketing line for putting this sales force out in the field. But because we’re using a contract sales force we expect them to have a better use of capital to do this than us trying to do it ourselves like we have in the past.

Irina Rivkind – Cantor Fitzgerald

Thank you.

Operator

This concludes the question-and-answer portion of our call. I would now like to turn the call back over to Ms. Silvia Taylor for closing remarks.

Silvia Taylor

Thank you, Patrick, and thank you everyone for joining us this evening. If you have any follow-up questions please do be in touch with us.

Operator

Ladies and gentlemen, that concludes today’s conference. Thank you for your participation; you may now disconnect. Have a great evening.

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