Alexza Pharmaceuticals (ALXA) Q3 2013 Earnings Call November 6, 2013 5:00 PM ET
Executives
Mark K. Oki - Chief Financial Officer, Principal Accounting Officer, Senior Vice President of Finance and Secretary
Thomas B. King - Chief Executive Officer, President and Director
Analysts
Roy Buchanan - Piper Jaffray Companies, Research Division
Stephen G. Brozak - WBB Securities, LLC, Research Division
Christian Glennie - Edison Investment Research Limited
Operator
Good afternoon, everyone, and welcome to the Alexza Pharmaceuticals 2013 Third Quarter Financial Results Conference Call. [Operator Instructions] This conference call is also being recorded. If you have any objections, you may disconnect at this time.
I would now like to turn today's call over to Mr. Mark Oki, Senior Vice President, Finance, and Chief Financial Officer at Alexza. Mr. Oki, you may begin.
Mark K. Oki
Good afternoon, and thank you for joining us. On the phone with me is Tom King, Alexza's President and CEO. Today, we will review the company's financial results and discuss Alexza's recent accomplishments and ongoing activities before opening the line for your questions.
I would like to remind you that the matters discussed in this call contain forward-looking statements that involve risks and uncertainties, including our ability, along with our partners, Teva Pharmaceuticals and Grupo Ferrer, to commercialize products; the timing of the commercialization of products; our projected revenues and expenses; and our ability to support operations, based on available cash resources.
Actual results may differ materially from the results predicted, and recorded results should not be considered an indication of future performance.
These and other risk factors are more fully discussed in our quarterly report on Form 10-Q that was filed earlier today with the SEC, most particularly under the caption Risk Factors.
Alexza disclaims any obligation to update or revise any forward-looking statement made on this call as a result of new information or future development.
As a reminder, our policy is to only provide guidance on products, product candidates and corporate goals for the next 1 to 2 fiscal quarters, and to provide, update or reconfirm our guidance only upon issuing a press release or filing updated guidance with the SEC in a publicly accessible document.
Clinical and corporate milestone guidance is as of today, November 6, 2013. Financial guidance related to our cash, cash equivalents, marketable securities and other possible sources of cash, is based upon balances as of September 30, 2013.
With that, I would now like to summarize the financial information for the third quarter of 2013. We recorded revenue of $2.2 million and $46.5 million for the quarter and 9 months ended September 30, 2013, compared to $0.7 million and $3.3 million for the same period in 2012.
Our 2013 third quarter revenue includes the amortization of the upfront payment from the Ferrer agreement, transfer pricing of commercial units shipped to Ferrer and the $1.25 million milestone payment from Ferrer for the commercial launch of ADASUVE in Germany.
In the second quarter of 2013, we recognized $42.8 million of licensing revenue resulting from the upfront payment and the right-to-borrow asset received from our U.S. commercial partner, Teva.
Revenues in 2012 represent amortization of upfront payments earned under our agreements with Ferrer and Cypress Bioscience.
GAAP operating expenses were $12.5 million and $35.4 million in the quarter and 9 months ended September 30, 2013, as compared to $7.1 million and $21.3 million in the same period in 2012.
It's important to note that during the second quarter of 2013, we began to classify certain manufacturing, supply chain and quality expenses as cost of goods sold. Prior to the second quarter of 2013, these expenses were classified as research and development expenses. The $4 million and $6.9 million recognized is costs of goods sold in the third quarter and 9 months ended September 30, 2013, consists primarily of manufacturing start-up costs and manufacturing variances as a result of the low volumes produced compared with the projected capacity of our GMP facility.
Research and development expenses were $5.5 million and $16.5 million in the quarter and 9 months ended September 30, 2013, as compared to $4.8 million and $14.8 million in the same period in 2012. In 2013, we initiated several research and development projects, specifically related to the initiation and completion of 2 postapproval clinical studies, additional work on the other postapproval commitments and establishing the pharmacovigilance systems required with our recent ADASUVE approval.
General and administrative expenses were $3.1 million and $12 million in the quarter and 9 months ended September 30, 2013, as compared to $2.3 million and $6.5 million during the same period in 2012.
The G&A increase in 2013 was primarily due to an increase in precommercialization activities, such as market research, including pricing and market segment studies, and work on product positioning, deal related expenses related to finalizing our U.S. commercial strategy and an increase in headcount and external expenses to support the increased operational and manufacturing activities at Alexza following the U.S. and EU approvals of ADASUVE in our partnerships with Ferrer and Teva.
Note that in the first quarter of 2012, general and administrative expenses were reduced by a one-time $1.4 million noncash accounting reversal, as a result of the termination of one of our building leases and related subleases in March of that year.
In the third quarter of 2013, we received an advance of $10 million under the Teva note and ended the quarter with cash, cash equivalents and marketable securities of $32.5 million. We believe we have sufficient capital resources to meet our anticipated cash needs into the third quarter of 2014. This guidance is based on our cash, cash equivalents and marketable securities balances at September 30, 2013, and also incorporates estimated product revenues, royalties and milestones associated with the sale of ADASUVE in the U.S. and EU, and remaining available proceeds from the Teva note, as well as our expected cash usage.
As always, changing circumstances may cause us to use capital at a faster or slower rate than currently anticipated or to alter our operations.
I will now turn the call over to Tom for a review of Alexza's accomplishments and the business update.
Thomas B. King
Thanks, Mark, for those comments. Good afternoon, and thanks to all of you for joining you on -- joining us on our telephone conference call today.
As we reflect on the absolute progress we have made in the past 12 months, from where we were this time a year ago to where we stand today, it is profound. We have transformed a 44-person development stage company with uncertain future to an 87-person company with the following items: a product approved in both the U.S. and the EU; 2 committed commercial partners, Teva for United States and Ferrer for the U.S. -- I'm sorry, for the EU, Russia, Latin America, the CIS countries; a fully functional Alexza GMP manufacturing facility producing commercial quantities of ADASUVE; and another Staccato-based product candidate being prepared for Phase II clinical testing.
We are poised to move into 2014 with a solid game plan for the future. Our global commercialization strategy for ADASUVE is to secure strategic collaborations to commercialize ADASUVE, while maintaining control and primary responsibility for manufacturing. We have 2 excellent partners in Ferrer and Teva and we are seeking additional collaborations to commercialize ADASUVE outside of the Teva and Ferrer territories.
As an update on the commercial progress for ADASUVE, I'd like to update -- start with the ADASUVE EU commercial strategy and activities. In the third quarter, we achieved a major milestone in our company's history as the first units of ADASUVE were sold. Grupo Ferrer launched the product in Germany in late July. In September, Ferrer announced the commercial agreement with ADASUVE with Medivir AB in the Nordic countries, and we expect product launches in these countries early next year.
We just recently announced that Ferrer had launched ADASUVE in Australia, with partnership with AOP Orphan AG, who has partnered with Ferrer for ADASUVE in many countries in Central and Eastern Europe.
We are thrilled by Ferrer's continued progress in rolling out ADASUVE in Europe with additional European countries expected to launch in the rest of 2013 and 2014.
The Ferrer territories include countries both within and outside the EU. Within the EU, Ferrer has initiated a comprehensive launch plan based on estimated market opportunity, finding a pricing and projected reimbursement in coordination with Ferrer's distribution partners. In the non-EU Ferrer countries, Ferrer is interacting with various regulatory agencies and working on the required independent regulatory submissions to support the registration of ADASUVE. Ferrer's ADASUVE launch is based on a combination of educational activities and market conditioning and direct product promotion as its overall commercial strategy. Ferrer is actively building awareness about agitation in general and ADASUVE specifically at national and regional medical conferences. It is developing medical symposia, hosting regional educational events and exhibiting with the branded ADASUVE booth and also working with key clinicians and opinion leaders in the psychiatric field.
Also, with each product launch in each country in the Ferrer territory, a combination of both medical science liaisons and sales representatives is expected to target the key hospitals and medical settings that are believed to be the locations that treat a high volume of the patients who would be candidates for ADASUVE. While ADASUVE has only been effectively available in Germany for 2 months, Ferrer has made great strides with the product launch.
Ferrer's Trommsdorff subsidiary in Germany has made more than 3,300 calls, of which more than 1,700 have included the education required for the EU risk management plan. Germany is a heavily sampled country and sampling is regarded as a key strategic element for early clinical experience and adoption. More than 1,100 samples had been provided into the German market, and all of the 315 key target hospitals have been included in the sampling program.
Education is another key element in the German launch plan. The German sales reps and MSLs have taken part in support of 14 regional medical congresses. In addition, more than 40 educational meetings have been completed by the German MSLs, attracting more than 700 participants in those educational meetings.
In the EU, the promotion of prescription-only medical products to patients who are members of the general public, including investors, is strictly prohibited. As such, we are unable to provide specific inputs on examples of treatment of patients or comments from physicians. That being said, in general, the initial input and feedbacks we have been receiving through Ferrer have been very positive.
In the EU, Alexza specifically has the responsibility for the postapproval commitments following our European approval. To date, we have already initiated and completed 2 of these EME-requested postapproval studies from our ADASUVE EU approval. Those being the benzodiazepine interaction study and the stero QTc study with 2 doses of ADASUVE. We were very pleased with the strong results, and there were no unforeseen findings from either study. Results from these studies have been submitted to the EMA. In the 10-Q filed today, we summarized these findings from these studies, and more information is also available from these 2 studies, which can be found on the www.clinicaltrials.gov.
Moving to the ADASUVE U.S. strategy and activities, the commercial launch for ADASUVE is projected for the first quarter of 2014, which we believe will allow ample time for the FDA to review the resubmission of the labeling and the REMS program materials reflect the administrative changes associated with the transfer of the ADASUVE NDA to Teva. ADASUVE is being marketed by Teva's U.S. Specialty Pharmaceuticals business by the Teva Select brands team, which is a subsidiary of Teva Pharmaceutical Industries. Teva Select Brands markets innovative pharmaceutical products in the U.S. and has experience in hospital sales, implementing REMS programs and mental health care markets.
More than 50 people at Teva are already involved in the launch preparation activities, which include preparing for direct sales, educational programs, promotional campaigns and a field medical presence. The Teva sales team is estimated to grow by more than 50% to cover targeted hospitals most likely to use ADASUVE, and the field medical team will be scaled appropriately to support the medical inquiries.
Teva has already participated in several professional congresses and conferences related to ADASUVE and portfolio of promotional tactics are being developed. Core promotional materials are already under review at the FDA and feedback is anticipated by the end of the year. The protocol for the postapproval Phase IV study is currently under review by the FDA, with plans to initiate enrollment in the second half of 2014.
On the Alexza commercial manufacturing front, we began manufacturing commercial quantities of ADASUVE for the EU in the second quarter of 2013, and we continue with our long-term commitment to manufacture commercial product for both Ferrer and Teva.
As investors, you can see the changes we have made in our P&L on our balance sheet, as we transition from a research-stage company to a commercial entity. Indicative of this transition, our quarterly reporting of the next few quarters may be difficult to predict, with multiple variables in play. Moreover, tracking the sales of ADASUVE will not be straightforward, as this is not a prescription product and most likely will not be accurately captured in some of the traditional third-party audit data pharmaceutical sale.
To facilitate our investors ability to gauge the uptake in growth of ADASUVE, we plan to provide quarterly updates on total units shipped from our manufacturing factory. We expect product growth will be initially low, growing over time with expanded demand and uptake. And product shipments, which we do in pallet quantities, will translate into revenue over subsequent quarters as product uptake is reflected in our financial statements. Initially, because our current license and supply agreements provide our collaborators with an acceptance period during which they may reject product based on pre-agreed-upon specifications, revenue per unit shipped maybe actually recognized in a period subsequent to the period in which the units are shipped.
In the second quarter of 2013, we shipped 13,370 units of ADASUVE. In the third quarter of 2013, we shipped 14,405 units of ADASUVE. All of these units were shipped to and released by Ferrer for their EU markets. We currently have open POs for product shipments to both Ferrer and Teva for the fourth quarter.
Now that we have received approval for ADASUVE in the United States and the EU, we are expanding investments in our product pipeline and we will be advancing new products based on the Staccato platform to address areas of important unmet medical needs. As we have previously disclosed, our first such product candidate is being developed to treat a form of epilepsy known as acute repetitive or cluster seizures. We find the study AZ-002, also known as Staccato alprazolam, initially in this patient population. Alprazolam, administered through our Staccato technology, has demonstrated excellent dose proportionality, exhibited a median TMax of 2 minutes and was safe and well-tolerated in the studies completed to date. We expect to initiate the Phase IIa proof-of-concept study in the first quarter of 2014.
In summary, it is a very exciting time as we are in the midst of transforming Alexza from a development-stage company to a commercial company. ADASUVE is now being sold in Europe and plans are well underway for additional European country launches in 2013 and 2014. We have secured a strong partner in Teva for ADASUVE in the United States and we are very impressed by Teva's commitment, their resources and the professionalism as they prepare for the U.S. ADASUVE launch. Our manufacturing facility is up and running to supply product on a global basis, which is being used by clinicians to treat their patients. And we are in a significantly stronger financial position and advancing AZ-002 from our Staccato-based pipeline back into development.
We look forward to updating you as we continue to make progress against our objectives to commercialize and advance our pipeline. And as always, we fully appreciate your support of Alexza. We'd now like to open today's conference call for questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from the line of Charles Duncan.
Roy Buchanan - Piper Jaffray Companies, Research Division
This is Roy in for Charles. Just a quick question if there's going be a potential change in strategy considering that Teva CEO has departed recently?
Thomas B. King
We would expect no change in strategy specific to ADASUVE for the U.S. launch. The organization that is responsible for the launch of ADASUVE in the United States is deeper in the organization. We still fit very, very nicely into the NTE strategy of Teva in general. This is an important product for them, and for this -- for the Teva Select Brands. And so I think while we were disappointed to see Jeremy leave -- we've known him for a long time, both during his days at Teva and before at Teva -- we expect no change specific to ADASUVE and the U.S. launch and the commitment that Teva is making for the product.
Roy Buchanan - Piper Jaffray Companies, Research Division
Okay, great. And Tom, can you just restate the 2Q units again? I missed that.
Thomas B. King
Yes, certainly. So the 2Q units -- the 10-core units were 13,370 units that we shipped from our facility and the Q3 units were 14,405 units. And all of that product went to Ferrer. So that was all for European use.
Operator
Our next question comes from the line of Steve Brozak.
Stephen G. Brozak - WBB Securities, LLC, Research Division
Tom, and I'm looking forward to obviously the launch here. With anecdotal information that you've had in the past, do you have any idea of how prescribers are going to be using this? Specifically, how they're going to be going out there and using this, given the fact that you're seeing a constrained European environment for health care. And obviously, this is one where the econometrics make a great deal of difference in how the product is used. Can you give us some color on that? And I know that it's going to be a little bit lumpy in terms of integration of any new product and I've got one follow-up after that.
Thomas B. King
Well certainly, Steve. It's nice to hear your voice and thanks for taking your time today for the call. Both Germany and Austria have similar prices and actually the pricing is very strong in both of these markets at EUR 70 or higher, so the interesting aspect is what we thought was similar in the United States. This is a product that has a value based on its ease-of-use, its speed of onset and how it's used, plus it's used maybe half a dozen times a year with each patient, so the total economic impact is not as strong because it's just not used very often. As important in these markets is that, especially in Germany, there's a big push to not use restraints, to not use injections. And in fact, you can't give something to a patient against their will for the first 48 hours, unless you have a court order. So it's been frustrating over the last several years, I think for clinicians, because they want to adhere to the guidances in terms of treating them, but they're giving them oral products, which do not have a rapid onset of effect. And so the comments we're hearing from clinicians is now they have something that works faster than the IMs that they had used previously, but they can also be fully compliant to the rules and regulations in terms of sort of patients taking on something that they want to do themselves. So it actually has fit very nicely to where the medicine is moving, where the regulations are moving, and now we've got a solution that actually ties those 2 things together very, very nicely. And so today, in the countries where we actually have launched, price and the overall sort of cost of this product and this technology has not been an issue because of the advantage and the cost-effectiveness it can bring to that environment.
Stephen G. Brozak - WBB Securities, LLC, Research Division
Actually, that leads me to the follow-up question in terms of the cost of the product vis-à-vis the cost of the personnel that are required. Because obviously, if you're talking about having to physically restrain someone, that involves a very expensive manpower, or -- there's an inherent cost in that in terms of the practice you're talking about. So what kind of feedback will you be getting from the savings where you're talking about an individual that obviously is severely -- in a debilitated situation, how much of a savings could you say would now be instantaneously perceived because Europeans obviously are very cued to that.
Thomas B. King
Yes, and it's not only just the manpower piece and each country is different in how they account for that and the staff that's required around a patient. But the thing that has also been fed back to us is that the potential for physical industry -- physical injury, needlestick injury, some of these other sort of unquantifiable things. And when you talk to clinicians, that's a really important consideration, not only for the physician that asked for this product to be used, but for the nurses that go in and actually administer it to the patient. And that's such a consideration of, not direct economics, but that sort of gut feel economics. And while -- sometimes we'll say "well that doesn't matter, it doesn't fit into the spreadsheet," it's actually a really important consideration we're not hearing not only in Europe, but also in the United States. It's not something you can quantify, but it's something, I think, that will be very driving to the use of this product because it is noninvasive. And I think the other side of that, Stephen, which is very helpful with regard to the German experience is the sampling, getting product in the hands of clinicians, having product that they can try on their patients. Germany is very hierarchical, so the Herr Professor, doctor, the top of each department has to have its own experience before they can cast it out into sort of the rest of the group. So there is this process that you go through in Germany. But once we get through some of these processes, as I said, we're hearing some very early positive aspects about the product and the technology.
Stephen G. Brozak - WBB Securities, LLC, Research Division
I look forward -- when to -- one final, final. When do you start to think that you'll start to see some color in terms of transparency? And we won't hold you to it because obviously on a product launch, sometimes success can't be quantified with the first quarter, first couple of quarters because things happen with the product growth. So when do you think you're going to start to see some reliable information that you can say, "Okay, we think this is the trend" and how we're going to start to see an uptake in use? What would you say you would start to get comfortable, because I know the first couple of quarters are always lumpy.
Thomas B. King
That's one of reasons that we arrived at releasing sort of what we ship off of our dock every quarter. We require -- our agreement with Ferrer requires them to take a full pallet of product. And so the batch size of that, if you go into Austria with 5,000 units, it's going to take a while to utilize that, even if they had doubling every month of their use from 100 to 200 to 400 to 800, it's going to be a while to bleed down that 5,000 units, for example. So we go into macro, the overall success of this product is best measured just on how many units we ship every quarter. And that should grow with time, and that's indicative, I think, of the overall takeup, even though country-by-country launch will be a bit -- a little bit lumpy because of the number of SKUs and the different sort of product that is being used or shipped around Europe. I think as U.S. comes online, obviously, it's a big market with only 1 SKU, and so I think in the not too many months and/or quarters, the U.S. market will dominate that overall shipment just because it's only 1 SKU going to 1 big market.
Operator
Our next question comes from the line of Christian Glennie.
Christian Glennie - Edison Investment Research Limited
Just to follow-up on the European launches. How should we think about potential launches in some of the other key European markets in terms of the timing of those as much as you can gather at this stage?
Thomas B. King
Yes, so part of it is driven by our activity or Ferrer's activity. Part of it is driven by just working with the reimbursement authorities. I think we will see sort of Central Europe have another couple of launches before -- between now and the end of the year. Poland, Romania and the Baltics, I think, are on our target list of countries that could get done before the end of the year. I think in the first half of next year, we'll see Scandinavia come online. We'd be looking toward France, the U.K. and Spain, that's the sort of bigger markets in the first half of next year. Reimbursement in Portugal and Italy is a little bit more difficult. I know that Ferrer is working on those, in one case directly, one through an affiliate. So I would see a few more countries between now and the end of the year, and then some of the major countries coming on in the first half of next year and rolling out in sort of the rest of the Ferrer territory in Europe in the back half of 2014.
Christian Glennie - Edison Investment Research Limited
Okay, great. And then turning to 002 for epilepsy. Could you provide a little bit more detail in terms of the sort of size and scope of the study that -- the proof-of-concept study that you're proposing to start next year?
Thomas B. King
Yes, absolutely. Dr. Casella, Jim Cassella, who is our CSO, is working on the final details of that. We'd expect that study to be in sort of a 60-patient range, maybe 60 to 70 patients, in general, and be a couple of doses of AZ-002, so a low dose and a high dose compared to placebo, we think. It may be against positive control, but we think against placebo. And we'll be going into a patient population basic -- looking at the efficacy of drug versus no drug and attenuating these -- a cluster. As I understand these patients, they typically will have one seizure as the precursor to a series of seizures over 12 to 36 hours and then you intervene with drug therapy and you basically look at the intervention and does it reduce the number of seizures after you've intervened and then you compare active drug to no drug and see what's the response you get. So it's fairly straightforward. There have been several products that have been studied in this area. There's been one product that has been approved in this area. So the clinical methodology is a little bit more straightforward than in some of the other CNS studies.
Christian Glennie - Edison Investment Research Limited
Okay. And that -- so would you looking for that study to complete by the end of 2014?
Thomas B. King
Yes, that would be our current view is that we will get that study completed next year.
Operator
[Operator Instructions]
Thomas B. King
Okay, we're seeing no further questions, thank you again for your time today. We look forward to updating you as we forge ahead on the global launch of ADASUVE and the advancement of our product candidates. We look forward to updating you as learn new news. Thank you, and have a good day.
Operator
This concludes our presentation, ladies and gentlemen. You may now disconnect. Have a great day.
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