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INSYS Therapeutics, Inc. (NASDAQ:INSY)

Q3 2013 Earnings Call

November 12, 2013 11:00 a.m. ET

Executives

Mike Babich - CEO

Darryl Baker - CFO

Lisa Wilson - President, In-Site Communications, Inc.

Analysts

Jason Butler - JMP Securities

Rohit Vanjani - Oppenheimer

Michael Faerm - Wells Fargo

Robert Sussman - Bentley Capital

Chris Brown - Aristides Capital

Operator

Good morning and welcome to INSYS Therapeutics’ Third Quarter Results Conference Call. This call is being recorded. At this time, I would like to turn the call over to Lisa Wilson, Investor Relations. Please go ahead.

Lisa Wilson - President, In-Site Communications, Inc.

Thank you, Diana. Good morning and welcome to INSYS Therapeutics’ third quarter 2013 operating results conference call. This is Lisa, Wilson, investor relations for INSYS. With me today on today’s call are Mike Babich, Chief Executive Officer and Darryl Baker, Chief Financial Officer of INSYS.

This morning the company issued a press release detailing third quarter 2013 financial results. This can be accessed through the investor relations section of the INSYS’ website at www.insysrx.com. And you can also access the webcast of the call from there.

Before we get started, I would like to remind everyone that any statements made on today’s conference call that express a belief, expectation, projection, forecast, and anticipation or intent regarding future events and the company’s future performance may be considered forward-looking statements as defined by the Private Securities Litigation Reform Act. These forward looking statements are based on information available to INSYS management as of today and involve risks and uncertainties including those noted in this morning’s press release and INSYS’s routine filing with the SEC on Form S1, 10-Q and 8-K. Such forward looking statements are not guarantees of future performance. Actual results may differ materially from those projected in the forward-looking statement. INSYS specifically disclaims any intent or obligation to update these forward-looking statements except as required by law. Also a replay of the call will be available shortly after today’s call completion through Tuesday, November 18. You will find dial information in today’s press release. The archived webcast will be available for one-year on the company’s website at insysrx.com. For the benefit of those who may be listening to the replay or archived webcast, this call was held and recorded on November 12, 2013. Since then INSYS may have made announcements related to these topics discussed. So please reference the company's most recent presses and SEC filings.

And with that, I will turn the call over to INSYS CEO, Mike Babich.

Mike Babich

Good morning and thank you, Lisa. Thank you for joining us today on our third quarter 2013 earnings conference call. This marks our third consecutive quarter of profitability driven by the rapid growth in sales of Subsys fentanyl sublingual spray since our very successful product launch just six quarters ago. This growth has enabled us to achieve record net revenues of $29.2 million during the third quarter of 2013, which is up more than 50% from the immediately preceding quarter and an EPS of $0.51 per diluted share.

I'm going to discuss our current business opportunities and opportunities for future growth in greater detail, after Darryl Baker, our Chief Financial Officer reviews the financial results. Darryl?

Darryl Baker

Thank you, Mike. Total net revenue for the third quarter of 2013 was $29.2 million, an increase of 515% as compared with $4.8 million for the third quarter of 2012. The key driver was Subsys, which generated $28.4 million in net revenue during the 2013 quarter. This compares to $2.6 million in Subsys revenues in Q3 of 2012. A more meaningful comparison is that Subsys revenues increased 53% sequentially as compared to $18.5 million in the second quarter of 2013.

Dronabinol SG Capsule generated $800,000 in net sales during the third quarter compared to $2.2 million in the same period last year. Since Mylan handles the distribution of Dronabinol SG Capsule, net revenue from sales of this product are likely to fluctuate on a quarterly basis.

Gross margin was 89% for the third quarter of 2013 compared with 59% for the third quarter of 2012, primarily a result of the significant increase in revenues from Subsys, which is a higher margin product. Sales and marketing expense was $8 million during the third quarter of 2013 compared to $2.9 million for the third quarter of 2012. The increase was primarily due to variable sales compensation expenses and incremental product marketing expense associated with the increase in sales of Subsys.

R&D expense was $1.7 million for the third quarter of 2013,up $618,000 as compared to $1.1 million for the third quarter of 2012. The increase primarily reflects an increase in R&D personnel and ongoing product development costs.

General and administrative expense was $4.3 million for the third quarter of 2013 compared to $2.3 million for the third quarter of 2012. The increase was primarily a result of additional administrative infrastructure needed to support the growth of Subsys and higher corporate costs related to operating as a public company.

Operating margin for the third quarter of 2013 was 42%, up from 28% in the second quarter of 2013. As Mike mentioned, this was our third straight quarter of profitability. Net income for the third quarter of 2013 was $11.6 million and diluted earnings per share was $0.51. This compares to a net loss of $4.3 million and diluted loss per share of $0.46 for the third quarter of 2012.

Cash, cash equivalents and restricted cash were $32.1 million at September 30, 2013 compared to $361,000 at year-end 2012. We have no debt and $47.6 million in stockholders’ equity on our balance sheet at the end of the third quarter of 2013. Our strength in financial position enables us to expand our Dronabinol manufacturing capacity, as well as invest in research and development and sales and marketing efforts to drive future growth opportunities.

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

Mike Babich

Thanks, Darryl. Our strong financial results were driven by increased prescriptions written by medical professionals for Subsys. This proprietary single unit dose device delivers an opioid analgesic for transmucosal absorption underneath the tongue. Subsys has the most rapid onsite of action of any transmucosal immediate release fentanyl or TIRF products. Its rapid five-minute onset is an important feature to the increasing number of opioid tolerant cancer patients for whom Subsys prescribed to alleviate breakthrough pain.

Patients can administer Subsys in less than one minute, another significant advantage over the currently marketed products. And we also offer the widest range of doses from 100 to 1600 mcg. Currently the Actiq brand, which is widely generic, is the only other product in this class that offers the 12,00 and 1500 mcg doses.

Just 18 months post launch, Subsys has already captured over 30% market share of the transmucosal immediate-release fentanyl market. Our repeat patient use has been increasing steadily and we have tier 3 coverage under nearly all major insurance plans. Importantly, we recently won the only TIRF branded products for United Healthcare formulary that will be approved.

Today we promote Subsys through our US based sales force, focused on supportive care and high private prescribing physicians of fentanyl. We use an incentive based model that employs a pay structure where a significant component of compensation is in bonuses based on performance. We believe this is the most effective way to motivate our sales team. The over 50% revenue growth from Q2 to Q3 is a strong testimony to the success of this approach. There are a high level of motivation and the market’s highly positive response to our Subsys product. We aim to drive further growth in the approximately $400 million TIRF market through the execution of our sales and marketing strategy.

Turning to research and development, our lead product candidate is the Dronabinol oral solution, a proprietary orally administered liquid formulation of the synthetic cannabinoid Dronabinol. During the third quarter, we completed the clinical dossier for this product. We're engaged in an ongoing dialogue with the FDA regarding the DEA’s potential scheduling classification for the Dronabinol oral solution.

Based on data generated in the clinical trials, we believe that our oral solution product has substantial potential advantages compared to the Marinol capsule, including more rapidly detectable blood levels and a more reliable absorption profile. We believe these clinical benefits will enable our Dronabinol oral solution to penetrate and expand the Dronabinol market assuming FDA approval.

We’re planning to launch this product with our own internal sales force, capitalizing on the significant synergies between the prescribers of Subsys and Marinol to maximize the market potential. Our proprietary spray technology is suitable for many different molecules in our target markets. We are developing multiple preclinical products using known molecules under the 505(b)(2) pathway, which we believe will enable us to bring marketed innovative products that meet the unserved or underserved patient needs. I look forward to disclosing details on these projects upon filing of the INDs in the near future.

With that, we’d like to open the call for questions. Operator, please go ahead and give instructions.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take our first question from Jason Butler with JMP Securities.

Jason Butler - JMP Securities

First off, can I just really quick ask Darryl, if you could tell us what the gross to net adjustment in the quarter was and was the gross sales for Subsys in the quarter?

Darryl Baker

Sure, Jason. Our gross to net was approximately 80% in the quarter.

Jason Butler - JMP Securities

And then for Mike, can you just talk about the growth we saw overall in prescriptions for the class for the quarter and I guess the evolving competitive landscape, what you're seeing out there, what you're hearing, has anything changed in your view? Do you expect sustained growth in the sort of class?

Mike Babich

Sure, Jason. This class has been one, our thesis was always that with the implementation of the REMS, it was a declining class in terms of number of scripts for a number of years. And what we have seen so far in 2013 and in particular in Q3, 2013 is finally a start of rising scripts in this class. And I think that what we've done and hope to do is we turn the generic market back into a branded market, and obviously with more companies out there promoting products in this class, you do tend to see an uptick of scripts and we have seen a small increase in the number of overall prescription and overall class in Q3 2013 and we would expect that, that trend continues upward in a slow manner.

Jason Butler - JMP Securities

And then just last question, I know you guys see prescription data from your REMS program. The prescription data that we see through [indiscernible] looked like there was a very steep drop off this week. Can you maybe talk to why that may have happened or do you believe that is real, or if it’s a data collection issue?

Mike Babich

I would classify it as a data collection issue on their end. We also get Walters Score [ph] IMS data and do a comparison and we do not see that as matching with our internal REMS numbers that we received. So I would definitely consider that in there.

Operator

We will take our next question from Rohit Vanjani with Oppenheimer.

Rohit Vanjani – Oppenheimer

Regarding the oral Dronabinol – ongoing dialogue with the FDA and DEA. Is that because of their belief that it should be a schedule I or schedule II compound, or what is the nature of that dialogue, can you say?

Mike Babich

Sure, Rohit. This is Mike. All clinical aspects of the application are complete. We’re engaged in an ongoing dialogue with the FDA, regarding the DEA’s potential scheduling classification for the product. And as you know any product that gets approved, it must be at least a schedule II and therefore our continued interaction is Marinol to schedule II, we continue to work with the DEA. We want to make sure that everything that is submitted and make sure that we have the proper classification for the drug once we go get approval for that, and once we have more updates, we will definitely update the market on that.

Rohit Vanjani – Oppenheimer

Can you say do you anticipate it as a 1Q, ’14 at least or –

Mike Babich

No, we don’t have any comment on timing at this time.

Rohit Vanjani – Oppenheimer

And then the deferred revenue portion of the deferred revenue on patient discount liability line, do you know what that was? I am just trying to get a sense of the inventory build or drawdown in 3Q?

Darryl Baker

Sure Rohit, on the balance sheet attached to the earnings release, there’s about $3.1 million in deferred revenue and patient discounts as of September 30, that compared to $5.3 million at year-end.

Rohit Vanjani – Oppenheimer

I was just looking for the deferred revenue portion, I think it was 2.8 million in 2Q –

Darryl Baker

Yes, it was about 1.5 million.

Rohit Vanjani – Oppenheimer

So there was a drawdown in the quarter.

Darryl Baker

Yes.

Rohit Vanjani – Oppenheimer

And then is there any update on the lawsuit on the INSYS patent state from the former officer?

Mike Babich

No, there is no update on that again. All employees is the person who had filed the lawsuit – it’s a signed documentation that any patents or any ideas that come out of INSYS, whenever an employee signs those, they have the right to INSYS. So we don’t consider that a concern.

Rohit Vanjani – Oppenheimer

And then the last question for me was on the patient discounting. I guess I thought that would trickle back up in the quarter, it doesn’t seem to be the case. Can you kind of talk to that or explain what happened there? Was it an issue of repeat patients staying on INSYS or Subsys or is it something else?

Mike Babich

No, I think it’s something that we are going to see fluctuations just based on – in order for us to continue to grow market share and expand our base business, new patients are going to be a part of that. And we do provide the patient physician starter packs for their patients to get going. So I think it’s actually a reflection of our continued growth in market share rather than anything financially related.

Operator

We will take our next question from Michael Faerm with Wells Fargo.

Michael Faerm - Wells Fargo

Good morning. Thanks for taking the question. First question is a follow-up to the Dronabinol questions. As you are proceeding with the dialogue with FDA, have you continued along the path of starting construction on the plant? And if so, is that still in line for our 2014 completion

Mike Babich

Absolutely, we've not – we sent a couple million dollars in Q3 on capital expenditures so that you see in the new plant. We did announce in an 8-K that we did sign a lease for our new facility there. So while we are going full steam ahead with the plant, despite this discussion with the DEA at this point. And as a summary, there is a 53,000 square-foot facility, we've ordered a number of pieces of the equipment and we’re continuing full steam ahead with our development plans down in Round Rock, Texas.

Michael Faerm - Wells Fargo

Okay. My next question is regarding R&D. You had mentioned that you will give more specifics as you file INDs. Just in a broad sense, could you give us an idea of how that might evolve, sort of what general timing, what sort of inflection in R&D spend might we expect to see over time?

Mike Babich

Absolutely. What we've done over the past quarter is nearly doubled our headcount of R&D staff. One of our biggest opportunities long-term is our sublingual spray platform technology. I think when you look at the characteristics of this sublingual spray compared to other delivery systems, whether they be films or tablets, oral delivery, what Subsys represents I think is a great summary of what other drugs can do, which is a better bioavailability, potential faster onset of action, and potential lower side effect profile for a multiple molecules. And so goal one of this R&D expansion was to hire folks to execute on that. In addition, our facility that is our corporate headquarters right now will over the next year just be converted into a full R&D building. We have both GMP and non-GMP labs in the facility and that we will continually accelerate the number of sublingual spray products that we work on going forward. So the ramp up in personnel is nearly complete and we would anticipate being able to increase our capacity of the number of sprays that we can bring to preclinical and to phase 1 very shortly.

Michael Faerm - Wells Fargo

Just in a general sense, would you expect to start filing INDs this year? 2014? Any color would be helpful?

Mike Babich

Yes, absolutely. You are going to see numerous INDs in 2014.

Operator

We’ll hear next from Robert Sussman with Bentley Capital.

Robert Sussman - Bentley Capital

Congratulations on an outstanding quarter. Are these margins sustainable going forward? I know R&D will ramp up on the other hand, as Subsys keeps growing. You are showing terrific leverage on those sales. How does that wash out? How does that come out in the mix over the next year or two?

Darryl Baker

Hi Robert, this is Darryl. We believe that the gross margin from Subsys is sustainable over time. As you mentioned and as we mentioned, we will be making further investments in R&D. So operating margins will fluctuate over time. But we do believe that the gross margin from Subsys is sustainable.

Operator

And we’ll take next from Chris Brown with Aristides Capital.

Chris Brown - Aristides Capital

Can you talk about your tax rate for 2014?

Darryl Baker

Sure, this is Darryl. Yes, in 2013, being our first year of profitability, we've been able to utilize net operating loss carryforwards to offset the taxable income. So we’ve essentially only been subject to AMT, alternative minimum tax, in ‘13. As we move into 2014, we expect that we will have exhausted all of our available net operating loss carryforwards. And accordingly we will be taxed at full rate taxation in 2014 moving forward. So you should see an effective tax rate for 2014 somewhere in the 35% to 40% range.

Chris Brown - Aristides Capital

And on the Dronabinol situation with the DEA, can you comment at all as to whether it's a matter of category I versus category II? Are we talking about category II versus category III?

Mike Babich

It’s a category II versus category III in scheduling.

Operator

I show there are no further questions at this time. I would like to turn the call back over to Mr. Mike Babich for closing remarks.

Mike Babich

Appreciate everyone’s time this morning and joining us with me to our Q3 results and look forward to speaking to you all in the future. Thank you very much.

Operator

This does conclude today’s conference. We thank you for your participation. You may now disconnect.

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