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Executives

Carol Ruth – IR, The Ruth Group

Tony DiTonno – President & CEO

Stephen Ghiglieri – EVP, COO & CFO

Analysts

Andrew Vaino – ROTH Capital

Michael Higgins – Rodman & Renshaw

NeurogesX Inc. (OTCPK:NGSX) Q1 2010 Earnings Call Transcript May 11, 2010 4:30 PM ET

Operator

Greetings and welcome to the NeurogesX Inc. first quarter 2010 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator instructions) as a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Carol Ruth of the Ruth Group. Thank you. You may begin.

Carol Ruth

Thank you, operator. Joining us on the call today are Tony DiTonno, Chief Executive Officer, and Stephen Ghiglieri, Executive Vice president, Chief Operating Officer and Chief Financial Officer. Statements in this conference call regarding NeurogesX’s business, which are not historical facts, may be forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995 or the act.

NeurogesX disclaims any intent or obligation to update these forward-looking statements and claims protection of the Safe Harbor for forward-looking statements contained in the act.

Forward-looking statements may include, but are not limited to, statements regarding plan; commercialization and sales strategies; as well as the expected benefits of success strategy and the effects of strategies may have on sales and revenue expectations; expectations regarding reimbursement for Qutenza, including the receipt and timing of any product-specific; reimbursement code; the estimated usage profile of patients, that may use Qutenza and physicians that may prescribe Qutenza; sales and marketing expenses for 2010 and into 2011, including the rate of increase in the such expenses over 2010 and into 2011; the timing and scope of commercial launch of Qutenza in the United States and European Union; the roles and activities of Astellas in commercialization of Qutenza in the European Union; the timing of reentry of NGX-1998 into clinical development; the sufficiency of cash resources to fund the Company’s operations into 2011 and expected source of capital.

Actual results may differ from these discussed here today. The factors that may affect the outcome of forward-looking statements are explained in the risk factors section of our filings with the SEC, including our Form 10-K, which we filed with the SEC on March 19, 2010 and our most recent Form 10-Q for the first quarter 2010 which will be filed with the SEC later this week.

Now I would like to turn the call over to Tony DiTonno, Chief Executive Officer of NeurogesX.

Tony DiTonno

Thanks you, Carol and thank you all for joining us today. Today, we will give you an update on our first quarter 2010 activities and comment on the recent launch of Qutenza. As you know, we are just into the sixth week of launch and so far we are pleased with how things are playing out in the market. Physician interest in Qutenza has been positive. We’re building on this interest to help lay the foundation for long-term sales growth by first gaining physicians commitment to prescribe Qutenza, secondly, training physicians office on how to administer Qutenza, third, educating physician overseas on how to acquire Qutenza and finally, establishing reimbursement for Qutenza as supporting physician and patients reimbursement issues.

I will update you shortly on more of these specifics regarding these activities. Later in the call, Steve will talk more about the first quarter financials and quantify some of the metrics we’re using to gauge early adoption of Qutenza.

With the launch of Qutenza on April, the 5th of this year, we believe we have added an important end treatment option for patients suffering from PHN and, of course, for the physicians who treat them. To make this possible, we spent the first quarter of 2010 completing the build out of our commercial infrastructure.

We’re very pleased with the talented and season individuals who make up our 40% sales team of representatives and management. This team has in-depth experience selling novel physician administered products and devices and they understand the importance of customer support when it comes to training product acquisition and reimbursement.

One of the metrics early on is to track the number of target physicians that have been reached, meeting, that we have given an initial introduction to Qutenza. During our Investor Day, about 10 days ago, we reported that 845 target physicians had been reached in the first four weeks of our launch. I’m happy to say this number continues to rise and as of last Friday, May, the 7th our reach had expanded to 1008 physicians. So you can see that we continue to make progress in getting the word out about Qutenza’s availability.

The focus of this initial targeting is on the physicians who primarily treat pain; we identified our target doctors to a screening process (inaudible) high number of PHN patients and practice, physician specialty and the number of pain procedures performed. While these data are not perfect, they help identify a target pool of physicians which we then profile with our sales force to refine our targeting. We don’t expect that every physician who writes high volumes of prescriptions for PHN drugs will automatically be a prime candidate for administering Qutenza.

Qutenza has the added element of meeting a physician practice that has the space and staff available to administer Qutenza. Pain specialists are initially our primary target because they usually have both the space and the staff required.

We’re creating a network of Qutenza administering physicians to serve as referral centers for those high PHN drug prescribing physicians who may not equipped to implement the procedure in their practices.

We also spent the first quarter of 2010 establishing a network of clinical educators and reimbursement specialists to complement our sales team. As you know, our sales approach which we refer to as a “total office call” is focused on supporting the physician office with education, training and assistance in determining appropriate reimbursement. We believe this strategy will create the maximum long-term commercial opportunity for Qutenza by focusing on service and training.

Education is also an integral part of our efforts to introduce Qutenza and we have fielded a team of medical science liaisons who can assist physicians with their medical questions about Qutenza as well.

Supported by compelling clinical data the profile of Qutenza is being well accepted by physicians. They are eager to accept the locally acting solutions to treat PHN based on a product they can provide three months worth of release from a single treatment.

One of the major hurdles to successfully market a pharmaceutical product is attaining reasonable reimbursement. In this case, for both Qutenza and the treatment procedure.

We started working with CMS, the centers for Medicare and Medicaid services almost a year ago. This work continued as we received approval and we continue with the regional Medicare contractors via our reimbursement specialist. Today, our progress has been remarkable.

As we previously announced all of the Medicare Administrative Contractors or MACs that process claims on behalf of CMS have confirmed coverage for Qutenza under the Medicare Part B.

In fact, just last week, we learned CMS revive the Medicare benefit policy manual to allow for products like Qutenza to be eligible for Medicare Part B coverage. However, to match the process Medicare claims in eight states have published guidance documents on their web sites, directed by local providers detailing coverage and coding requirements for Qutenza. We’re excited to have this confirmation so soon after our request much earlier than we expected.

While obtaining coverages, the key step in the process then next an equally important step is establishing a level of reimbursement to be paid to physicians for the Qutenza treatment procedure. This is an ongoing process with some regional carriers already have established these amounts.

We’re also pleased to report ongoing progress with commercial players where we expect the reimbursement levels maybe significantly higher than what is likely to be paid by Medicare.

In addition, we continue to make progress towards getting on hospital formularies as Qutenza is on the agenda of many upcoming P&T or Pharmacy and Therapeutics Committee Meetings at several PDN institutions As we continue to make progress on this front, we expect to improve access to Qutenza for patients covered under these programs.

To coincide with Medicare Part B reimbursement, applications are under review for Qutenza-specific product codes including a temporary C-code for outpatient hospital use and a temporary J-code for use in multiple care set.

We expect that the C-code will be issued during our third quarter and that the J code will be issued in the first quarter of 2011. While we await the issuance of these codes we expect that Qutenza will be paid for Medicare at invoice or at Wholesale Acquisition Cost or WAC, plus 6% until an average selling price is established which will be in our fourth quarter.

With our U.S. launch of Qutenza off to a good start we’re also looking forward to the EU rollout during 2010. Our partner, Astellas Pharma Europe Limited has introduced Qutenza in Germany, and plans to make Qutenza in as many countries of the EUs possible before the end of 2010. We continue to be pleased with our relationship with Astellas and its dedication to maximizing the current and broader potential of Qutenza in neuropathic pain.

Regarding our internal development efforts we plan to initiate a Phase II clinical trial in the second half of this year to evaluate NGX-1998, our capsaicin liquid delivery model. We expect to enroll PHN patients to assess tolerability and safety as well as selected dose for Phase III development. As you can see the year 2010 is all about execution in the market and moving forward with broader opportunities for Qutenza and NGX-1998 in neuropathic pain.

With that, I’d turn the call over to Stephen to give you more details on the recent financing as well as our financial for the first quarter. Stephen?

Stephen Ghiglieri

Thanks, Tony. Our results for the first quarter 2010 are summarized in today’s earnings release which if you don’t already have maybe access on our Web site. In addition, we expect to file our Form 10-Q with the SEC later this week where you’ll find more detailed disclosures about our quarterly results.

Before I get into the financials, I want to quickly review our recently announced $40 million financing with Cowen Healthcare Royalty Partners. The financing creates a debt obligation which is secured by and we will be repaid through the revenue flows on the Astellas territory, coming to us from our relationship with Astellas. It’s important to note that this is not a sale of a royalty interest rather after retirement of the debt through normal repayment or through prepayment option; we’ve retained the interest on the royalties and other income from the Astellas territory.

In essence, we share the commercial risk of the Astellas agreement with Cowen while retaining the long-term value of the Astellas relationship. Until the debt is substantially repaid Cowen will receive 100% of the royalties and milestones due in NeurogesX under the Astellas agreement.

We expect this debt will have negative amortization until the proceeds from Astellas are sufficient to satisfy the interest we will be recording on the debt, which we expect to be accruing at a rate of just under 20%. For an Astellas royalties and milestone, our sufficient to meet current interest we will then begin to see the debt amortized. Of course, the timing to retirement of the debt is based upon the timing and amounts of revenue flows from Astellas.

Importantly, we’ve retained all economics resulting from the U.S. and world markets other than the Astellas territory. And Cowen is not entitled to any payment on U.S. sales or other world markets. This is a very desirable feature of the agreement and provides for future financing flexibility.

We believe the royalty financing structure provides third-party validation for the sales potential of Qutenza in the Astellas territory and significantly strengthens our balance sheet to pursue our growth strategy without diluting our current shareholders. Further details of the royalty financing agreement were announced in a press release on April 30, 2010 and can be found in our 8-K filed on May 6, 2010.

Turning to the first quarter 2010 collaboration revenue for the three months ended March 31, 2010, was 1.8 million and reflects amortization of the upfront payments received in connection with the Astellas Agreement. Amortization began in late September 2009 with the transfer of the E.U. Qutenza marketing authorization from NeurogesX to Astellas.

As previously mentioned we’re amortizing the upfront fee of approximately 49 million (inaudible) approximately seven-year period reflecting what we believe to be the longest service period under that agreement, coinciding with our participation in a joint steering committee.

Total operating expenses for the first quarter of 2010 were $10.9 million, up from $4.5 million in the year ago period. The year-over-year increase was primarily attributed to our increase in selling, general and administrative expenses or SG&A, marginally offset by a decrease in research and development.

Research and development expenses of $2.1 million for the first quarter of 2010, or 9% below the year ago period, largely due to our capitalization of manufacturing costs to inventory as a result of the FDA approval of Qutenza. These costs were previously reported as expenses prior to such approval.

SG&A expenses were $8.8 million during the first quarter 2010, up from $2.2 million in the first quarter 2009. The year-over-year increase reflected the hiring and training of our commercial team, preparation of marketing materials, and other activities related to the launch of Qutenza. During the year ago period, we funded only limited pre-commercialization activities while awaiting both U.S. and E.U. approvals of Qutenza.

Net loss for the first quarter of 2010 was $9.2 million, compared to a net loss of $4.6 million for the first quarter of 2009. Net loss per share was $0.52 per share and $0.26 per share for the three months ended March 31, 2010 and 2009, respectively, based on weighted average shares outstanding of 17.7 million and 17.6 million respectively. The weighted average shares used in computing loss per share for both periods presented exclude anti-dilutive securities, such as stock options and warrants.

Cash, cash equivalents and short-term investments were $40.1 million at March 31, 2010, compared to $50.6 million at December 31, 2009. Our cash used during the first quarter included 2.8 million of spending related to the payment of sublicense fees due to the University of California as a result of receiving the upfront payments from Astellas as well as payment of our 2009 employee bonus plan obligations.

As a reminder, our cash position at March 31, 2010 does not include a 40 million received under our royalty financing agreement. Factoring in the recent financing, our current cash position is expected to fund our operations for at least the next 12 months. Our expectation is that our cash burn over the next few quarters’ will likely average in the range of 10 million to 12 million, although our second quarter cash burn could be somewhat higher due to launch related cost.

Regarding the Qutenza launch and 2010 outlook, we remain committed to our near-term investment in the “total office call” as our strategy to ensure the highest long-term value for the Qutenza franchise.

As I mentioned on these calls before, our focus on education, training and service, which is similar to the approach used with medical devices may result in lower initial sales volumes than might otherwise be expected. As a result, we believe that revenue as a marker of Qutenza success will not be a relevant discussion until perhaps four quarters to eight quarters from launch at which time we believe that a basis may then exist to project future growth rates for Qutenza.

In particular, initial reported revenues will also be impacted by our launch program which include extended payment terms to our distributors and in turn the physicians who order Qutenza. We expect the revenue will be deferred until ultimate collection of orders placed to release June 30th and perhaps longer.

Finally, with respect to revenue, we remind you that Qutenza is not the typical pharmaceutical product. And that this is not a daily use product. One of the key benefits of Qutenza the long-lasting relief patients can experience from a single 60-minute application of Qutenza, makes a reuse pattern quite different from other pharma products.

In lieu of revenue we discussed in the past our plans to focus on non-revenue markers of our progress. The initial numbers which are updated from the Investor Day we held about 10 days ago and reflect data through this past Friday are as follows: We reached 1008 or 93% of our Phase I target account, which includes physician practices and institutions. Nearly, 500 accounts or approximately 50% of the accounts reached have requested training. Approximately 80% of those has schedule training (inaudible) completed.

With regard to benefit adjudication and the effectiveness of our efforts to ensure that patients have access to Qutenza, of all of the benefit investigations that have been initiated we’ve yet to have a coverage (inaudible) decline.

We’re pleased with the progress we’re making. Recognizing that sales is a process that can take many months or longer to bear fruit. What we’re seeing is what we expected.

In the coming quarters we expect to provide additional information related to factory sale, unique accounts ordering the product and other relevant metrics to help you understand how the launch is progressing.

Before we wrap up the call for questions, I’d like to take a minute to review our 2010 expense guidance. As previously guided, we expect to incur expenses in the mid $20 million range related to sales, marketing and reimbursement support. We expect these costs to be fairly consistent across the year. However, they may ramp up a bit towards late 2010.

We continue to anticipate these costs increasing in 2011, perhaps into the high $20 million range. But we will make adjustments as we move forward and evaluate Qutenza’s progress on the market.

In 2010, we expect to spend 14 million to 16 million under our development efforts which include moving NGX-1998 back into the clinic with a Phase II trial. Funding limited preclinical work with our pro-drug platform and supporting follow on Qutenza activities.

Finally, for general and administrative, which includes our medical affairs and commercial operations group, we expect to spend in a range of 15 million to 17 million. This is an updated number from the 8 million to 10 million G&A estimate that we shared during the Investor Day which erroneously excluded the commercial operations and medical affairs numbers for 2010.

That’s it for the financial update. We’ll now open the call up for questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question is from Andrew Vaino with ROTH Capital. Please go ahead with your question.

Andrew Vaino – ROTH Capital

Hi, thanks for taking the question. I wonder if you can comment on the number of patients who’ve actually been treated with Qutenza so far.

Tony DiTonno

Actually, we can’t comment on that. It gets a little bit fuzzy in the small numbers. What we know is what the full through is, it’s the institution and physician offices when it want to gets to patients, and it’s a little too early in the cycle for that.

Andrew Vaino – ROTH Capital

Okay. And secondly, on the Cowen debt facility, I noticed that you’ve an option to repay $76 million or $106 million. How is that decided?

Tony DiTonno

I’m sorry, how is that decided?

Andrew Vaino – ROTH Capital

How do you figure out, I mean, can you just pay the (inaudible) option or how does that work?

Tony DiTonno

As is described, there’s kind of a normal repayment cycle, which includes 100% of the money is coming from Astellas and then once we reach a certain level then it kicks down to a 5% residual interest up to the 106 million. As part of the negotiated terms, we were able to achieve lower prepayment alternative which that our option if we decided to we could buy out at that lower number. And in an M&A situation the buyout number is lower still. Those lower buyout numbers are subject to a rate of return which is specified in the agreements, but internally when we think about this transaction, we think about the obligation associated with those lower prepayment amounts because of the fairly broad disparity there. We can’t predict the future, but sitting here today I would expect that we will be focused on those earlier prepayment alternatives.

Andrew Vaino – ROTH Capital

And then lastly, my understanding is the debt facility is only secured by the future royalty stream, so there’s no other cost obligations?

Tony DiTonno

In essence, yes. So the agreement is explicitly secured by the assets that underlie the Astellas agreement down by the revenue flows that will be generated there from. If at the end of the term, the only other way that NeurogesX generally is responsible under this transaction is if at the end of the term, which is maturity, which is about ten years out, if proceeds from the Astellas transaction do not meet the original $40 million borrowed, then NeurogesX would have to make up that difference to get back to the $40 million. But that’s NeurogesX sole obligation beyond just providing the funds that are coming out of the Astellas deal.

Andrew Vaino – ROTH Capital

That’s it. Thank you.

Operator

(Operator instructions) The next question is from Michael Higgins with Rodman & Renshaw. Please go ahead with your question.

Michael Higgins – Rodman & Renshaw

Thanks for taking my call. Congratulations on the quarter. It looks like the launch is going well. My question has to do with some of the comments in your prepared remarks. You’re talking about 2010 expense projections relating to sales, marketing and reimbursement support, the mid-$20 million range going into the high 20s, possibly towards 2011. Just hoping to get some clarity as to what would cause the increase. Are you looking towards additional reps? Some of the additional costs have payments allocated later; what’s kind of the thought process there?

Tony DiTonno

The increase in costs potentially later this year which would fall within that still bracket of mid-20s, but then as we move into 2011, those numbers going maybe towards the high 20s, those are discretionary. There’s no committed increase as we move towards those numbers in 2011. They’re really reflective of an expectation on our part that we will be growing the sales force.

Michael Higgins – Rodman & Renshaw

Okay, okay, fair enough. And you’ve also discussed some spending towards some clinical development. It’s hard to quote those, but if you can give us any kind of guidance as to when you may have additional data developed, if you’re going to have more information at conferences, that kind of a thing?

Tony DiTonno

The clinical work that we’re doing relates to our Phase II program at NGX-1998 and I believe the milestones we have out there are that we should have some first stage data available to us in the first half of 2011 and we should have the top line data from that available, I believe it’s in the second half of 2011. I’m not looking at that as we speak, but –

Michael Higgins – Rodman & Renshaw

In terms of additional data for the patch, that were anything coming in the next year or two?

Stephen Ghiglieri

Oh I’m sorry, data on the patch. So Astellas is going to be working on a safety study, I’m not sure of the timing of when that data will be available. We will continue to publish and present data from work that we’ve done historically. In fact, we have a pretty robust program in front of us at conferences over the coming months. So you will see additional posters and the presentations coming out in that type of venue.

Michael Higgins – Rodman & Renshaw

Okay. I’ll look for some info this fall. I don’t know how much you want to comment on this, but I'll take a crack at. We know the gross revenues per patch we can kind of get a guesstimate in terms of the number of patches per patient. We can get some insights from docs on, if they’ve gone through all the work of getting tested, if they’re prescribing, if you can help us on the net revenues and how that may be changing from Q2 towards year-end?

Stephen Ghiglieri

Well, so, net revenues, I think in the second quarter may actually be non-existent. And the reason for that as I mentioned earlier in the prepared remarks relates to the extended payment programs that we’re running and that will have an impact we expect on our revenue recognition. So, that’s really the only impact from there. I mean net revenues will reflect the various rebates and chargeback that maybe required for such things as Medicaid and there will be a component I believe of the distribution costs which will be recorded as a net revenue, but the gross to net at this point we don’t expect to be (inaudible) the difference between gross and net to be very significant.

Michael Higgins – Rodman & Renshaw

Okay, you kind of broke up there. I’ll follow up with you afterwards. I'm not sure if that was just my phone or others. Just to follow-up on that what line are we looking for then? Typically, you look at loan to product returns on the balance sheet to see what’s not on the income statement? What lines on either the P&L or the balance sheet would we be able to get some idea of what’s been ordered? You may not have it as revenues, but somewhere along the way, you’re going to quantify for us that you had some outstanding revenues coming in.

Stephen Ghiglieri

Right. I don’t know that I have an explicit answer for you today. You’re absolutely right that you’ll be able to divine out in our balance sheet, the revenues and the reserve against those revenues. I believe there will be a balance sheet presentation but I’m going a little off the reservation just because I haven’t validated that both internally with my staff and we certainly haven’t yet validated that with our external auditors who help us think that through. So, do expect that you will be able to see it the exact geography in the financials we’ll see that in the second quarter.

Michael Higgins – Rodman & Renshaw

Okay, fair enough. We can follow up again. All right, I’ll jump back in the queue. Thanks, guys.

Operator

(Operator instructions)

Tony DiTonno

Operator, doesn’t sound like there are any further questions. So –

Operator

No questions in queue.

Tony DiTonno

Okay. This is Tony and I’ll close the call today by thanking everybody for the continued interest in NeurogesX. These are exciting times and we look forward to keeping you informed of our progress as we continue our launch of Qutenza. Have a nice day. Thank you.

Operator

This concludes today’s teleconference. You may disconnect your lines. Thank you for your participation.

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