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Alimera Sciences (NASDAQ:ALIM)

Q4 2013 Earnings Call

February 27, 2014 4:30 pm ET

Executives

Richard S. Eiswirth - Chief Financial Officer, Principal Accounting Officer, Chief Operating Officer, Vice President, Treasurer and Secretary

Charles Daniel Myers - Co-Founder, Chief Executive Officer, President and Director

Analysts

Simos Simeonidis - Cowen and Company, LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter 2013 earnings conference call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Rick Eiswirth. Your -- Call is yours.

Richard S. Eiswirth

Thank you. Good afternoon, everyone, and welcome to the Alimera Sciences conference call to update you on our progress with ILUVIEN, our sustained-release intravitreal implant for chronic diabetic macular edema and to review our fourth quarter and full-year 2013 results. A press release regarding these results was issued this afternoon and is available on our website.

On the call with me today is Dan Myers, our President and Chief Executive Officer; and Philip Ashman, our Senior Vice President and European Managing Director.

Before we begin our prepared remarks, I would like to remind you that various statements we make during this call about the company's future results of operations and financial position, business strategy and plans and objectives for Alimera's future operations are considered forward-looking statements within the meaning of the Federal Securities Laws. Our forward-looking statements are based upon current expectations that involve risks, changes in circumstances, assumptions and uncertainties. These risks are described in the risk factors and management's discussion and analysis of financial condition in the results of operations sections of Alimera's annual report on Form 10-K for the fiscal year ended December 31, 2012, which is on file with the SEC and available on the SEC's and Alimera's websites.

Additional factors may also be set forth in those sections of our annual report on Form 10-K for the year ended December 31, 2013, to be filed with the SEC in the first quarter of 2014. We encourage all investors to read these reports and our other SEC filings. All the information we provide on this conference call is provided only as of today, and we undertake no obligation to update any forward-looking statements we may make on this call or on account of new information, future events or otherwise. Please be advised that today's call is being recorded and webcast.

Additionally, the non-GAAP financial measures of adjusted cost of goods sold, adjusted gross margin, adjusted net loss and adjusted net loss per share will be discussed on this conference call. A reconciliation of these measures to GAAP can be found in our press release, which is available on the SEC and Alimera's website.

Now we'd look -- now I would like to turn the call over to Dan Myers, our President and Chief Executive Officer. Dan?

Charles Daniel Myers

Thanks, Rick. 2013 was a pivotal year for Alimera. In the fourth quarter alone, we achieved important milestones, both with regard to the commercialization of ILUVIEN in Germany and the U.K., and the commencement of labeling discussions with the U.S. Food and Drug Administration. Rick will get into further financial details in a moment, but it's important to note that we grew revenue 23% sequentially in the fourth quarter, primarily through sales of ILUVIEN in Germany despite the typical holiday seasonality effect. Through the end of 2013, approximately 90% of our revenue is generated in Germany.

Although our expansion in Germany has been limited by market access constraints, we continue to gain momentum. A growing number of accounts have placed multiple orders as the response they are seeing in their patients continues to be positive. But the majority of patients today have required the securitization of funding on a patient-by-patient basis to individual funding request forms submitted by the physicians. While the statutory health funds are reimbursing ILUVIEN as it is prescribed evidenced by the 90% approval rate of individual requests, submission of these requests is a bureaucratic process for the physician. We think the time invested by the physicians speak to the unmet need that ILUVIEN is fulfilling, but market access hurdles will remain until this process is streamlined for the doctor. This streamlining occurs when ILUVIEN is included in a procedural contract between the statutory health funds and the treating ophthalmologist. Prescription volume is key in generating interest among the statutory health funds, and we believe we are now approaching the critical mass of prescriptions required to initiate their discussions with physicians about ILUVIEN's inclusion.

Already this year, we have had productive discussions with some of the largest statutory health insurance funds to facilitate this process as we develop improved approaches to targeting appropriate insurance funds and ophthalmologists.

Now turning to the U.K. As we have previously shared, the U.K.'s National Institute for the Health and Care Excellence, or NICE, published positive guidance regarding the reimbursement of ILUVIEN in the fourth quarter, removing a key market access hurdle to patient availability to the National Health Service, or the NHS, in the U.K. Patients will now have greater access to ILUVIEN.

As a reminder, NICE requires clinical commissioning groups, NHS England and NHS Wales, as well as local public health authorities to comply with the recommendations in the final guidance of the conclusion of 90 days post-publication day, which is today. Despite this period of 90 days, we began seeing initial shipments of ILUVIEN to certain NHS trusts in early January, less than 45 days from the publication of NICE'S formal guidance. In fact, monthly unit sales in the U.K. have now surpassed our highest unit-volume month in Germany. We believe this speaks to the NHS commissioners' and physicians' recognition of the unmet needs of this chronic DME population.

The first several NHS patients received an ILUVIEN implant in January with promising initial responses. We believe the initiation of sales in the U.K. is representative of market response, where reimbursement is no longer a hurdle to treating patients, and reflects what we expect to see in similar markets like France. To leverage this initial availability, our U.K. commercial team has been focusing on registering pharmacies and targeting the top retinal accounts throughout the U.K. in this first quarter.

Looking to further expand in the U.K., during the fourth quarter, we also completed a resubmission to the Scottish Medicines Consortium, and we're pleased to reiterate that on February 10, the SMC published its assessment and review of a simple patient access scheme and has accepted ILUVIEN for restricted use within NHS Scotland.

We still anticipate launching in France in 2014 and today, we have a small commercial organization to ensure that we are preparing for launch using the learning from our experience in Germany and the U.K. This group will expand the launch capabilities and the point that we have a confirmed price.

Our primary focus for 2014 in Europe is to achieve sustainable profitability in Germany, the U.K. and France. Achievement of this goal will then trigger launch preparations in other countries where we have secured or are seeking approval. Further expansion will then follow. We reported in our last update call that we have filed with the MHRA in the U.K. as a reference member state for 10 additional EU country approvals through the mutual recognition procedure. We will provide updates on this progress as we obtain more information over the next several quarters.

We see a long-term growth opportunity for ILUVIEN in Europe, and we believe we are well-positioned to meet this market need.

Now I would like to turn the discussion to our progress with the FDA. I know that for many of you, this has appeared to be an unconventional path that we have followed. We announced in October that we received a Complete Response Letter, or CRL, for our New Drug Application for ILUVIEN from the U.S. FDA. The letter identified concerns the FDA raised regarding the facility at which ILUVIEN is manufactured, and stated that the NDA could not be approved in its present form. The FDA also suggested a meeting with the Dermatologic Ophthalmic Drugs Advisory Committee to assist in addressing any of the aforementioned items the FDA deemed to be deficiencies. However, in a scheduled meeting with the FDA in December to discuss preparations for this Advisor Committee, dialogue with the FDA turned to labeling discussions for ILUVIEN and we eventually agreed that the meeting with the Advisory Committee was no longer necessary. We view these as positive signals, and have focused on preparing our response to the CRL. Our response will include the proposed label, address concerns that the FDA raised regarding the facility at which ILUVIEN is manufactured and provide a safety update on ILUVIEN, incorporating data from ILUVIEN patients and physician experience with the applicator in the U.K. and Germany.

We are very pleased with the FDA's interest in discussing and reviewing ILUVIEN, and the prospect of a possible approval of ILUVIEN in the U.S. In 2014, we're educating physicians on the benefit of ILUVIEN, leading to successful patient outcomes in those who were considered insufficiently responsive to current therapies. We look back on many more important milestones we achieved in 2013 and we look forward to achieving more in 2014.

Now I'll turn the call back over to Rick to discuss our fourth quarter and our year-end financials.

Richard S. Eiswirth

Thank you, Dan. Turning to our financial results for the quarter. We generated $935,000 of net revenue from ILUVIEN sales compared to $758,000 in the third quarter. For the year ended December 31, 2013, we achieved total net revenue of approximately $1.9 million, all from ILUVIEN sales. As Dan mentioned, 90% of our revenue came from Germany due to the delay until November 2013 in receiving NICE guidance on ILUVIEN reimbursement in the U.K.

GAAP cost of goods sold were $1.8 million for the fourth quarter of 2013 and GAAP gross margin was a net loss of $860,000. There were 2 inventory items I'd like to touch on that impacted GAAP cost of goods sold and gross margin in the fourth quarter. The first was a quality issue related to one of our suppliers that was identified during the routine manufacturing inspection that affected certain batches of work in process that were immediately removed from inventory and amounted to a write-off of $1.3 million. Despite our disappointment in incurring these costs, it is important to note that our quality systems operated effectively, and that none of this product had been released for commercial sale. Further, this item is unrelated to, and does not impact, the manufacturing challenges it creates in the CRL. Additionally, the company reserved approximately $411,000 for potential U.K. inventory expiration later in 2014 as a result of a slower-than-anticipated launch of ILUVIEN in the U.K. in 2013 due to the delay in the receipt of the positive NICE guidance regarding the reimbursement of ILUVIEN. Excluding these items, non-GAAP adjusted cost of goods sold were $42,000 and non-GAAP adjusted gross margin was $893,000.

For the fourth quarter of 2013, research and development expenses increased modestly to $2.4 million compared to $2.3 million in the prior year. For the full year ended December 31, 2013, R&D expenses increased 6% to $8.4 million compared to $7.9 million for the prior year end. This increase was primarily due to costs associated with contracting medical science liaisons to engage with retina specialists and the study of ILUVIEN in Germany, the U.K. and France. R&D expenses were also impacted by the previously anticipated FDA Advisory Committee meeting and in costs related to a multiyear post-authorization open label registry study of ILUVIEN patients treated per the label indication in Europe. These costs, however, were offset by a decrease in costs associated with the ILUVIEN applicator study, for which enrollment was completed in 2012.

General and administrative expenses in the fourth quarter 2013 increased to $2.4 million compared to $2.1 million in the prior year period. These expenses for the full year ended December 31, 2013, increased 45% to $9.6 million compared to $6.6 million for the prior year end.

Throughout 2013, we hired additional personnel, accumulated professional fees associated with the establishment of Alimera's infrastructure and tax planning in Europe and the registration of common stock underlying our Series A Convertible Preferred Stock issued in October 2012 and incurred fees related to office logistics in Europe, all of which attributed to the increase in general and administrative expenses.

For the fourth quarter of 2013, sales and marketing expenses decreased approximately $400,000 to $3.4 million compared to $3.8 million in the prior year quarter. However, sales and marketing expenses for the full year 2013 increased 119% to $16.4 million compared to $7.5 million for the prior year end. This annual increase was primarily due to costs associated with our Quintiles Commercial contract for marketing, brand management, market access, pricing reimbursement support and communication services in the EU in addition to promotional costs related to the commercial launch of ILUVIEN in Germany and the U.K.

GAAP net loss attributable to common shareholders for the fourth quarter of 2013 was $14.8 million, or $0.47 per common share, compared with a GAAP net loss attributable to common shareholders of $5.3 million, or $0.17 per common share, for the fourth quarter of 2012. GAAP net loss for the fourth quarter of 2013 was impacted by the increase in the fair value of Alimera's derivative warrant liability resulting in noncash expense of approximately $5.9 million, a noncash unrealized foreign currency gain of $308,000 and the inventory items previously noted. Excluding the noncash items and certain items that are expected to be nonrecurring, non-GAAP adjusted net loss attributable to common shareholders for the fourth quarter of 2013 was $7.5 million, or $0.47 (sic) [$0.24] per share.

GAAP net loss attributable to common shareholders for the year ended December 31, 2013, was $51.2 million, or $1.62 per common share, compared with a GAAP net loss attributable to common shareholders of $19.8 million, or $0.63 per common share, for the year ended December 31, 2012. GAAP net loss attributable to common shareholders for the year ended December 31, 2013, was impacted by an increase in the fair value of Alimera's derivative warrant liability, resulting in noncash expense of approximately $12 million, noncash accretion of a benefit for conversion feature of $5 million associated with a decrease in the conversion price of our Series A Convertible Preferred Stock, a loss of $153,000 related to an early extinguishment of debt, a noncash unrealized foreign currency gain of $825,000 and the inventory items previously noted.

Excluding the noncash items and certain items that are expected to be nonrecurring, adjusted net loss attributable to common shareholders for the year ended December 31, 2013 was $33.2 million, or $1.62 (sic) [$1.05] per common share.

As of December 31, 2013, we had cash and cash equivalents of $12.6 million compared to $49.6 million as of December 31, 2012.

In January, we completed a $37.5 million private placement of our common stock, which we believe will provide us with the perfect working capital to support the continued commercialization of ILUVIEN in Europe.

Now I'll turn the call back over to Dan for closing comments.

Charles Daniel Myers

Thanks, Rick. We believe we're well-positioned to expand our top line growth in 2014. In 2014, we have complemented our growth in Germany with full access in the U.K., and we begin -- we expect to begin selling in France later this year. We also look forward to updating you regarding the submission of our response to the CRL during this first quarter.

And I'll now turn it back over to the operator for any potential questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Simos Simeonidis from Cowen & Company.

Simos Simeonidis - Cowen and Company, LLC, Research Division

Could you let us know how many units were sold in this past quarter?

Charles Daniel Myers

It's -- the guidance we're giving on the units would be different because of the difference in price in the U.K. and Germany, but I think we would just stick with the revenue number that we had. I think Rick had said, between all the countries, that the average net pricing would be between EUR 3,500 and EUR 5,500. I can tell you that our average cost realized during the quarter was at the upper end of that. So you can do some of the math there, but we were -- we -- those units -- that revenue number is driven by average realized price at the upper end Simos, so most of that EUR 3,500 to EUR 5,500 price span.

Simos Simeonidis - Cowen and Company, LLC, Research Division

Okay. And then turning to the U.S., I guess, it's grating you that I'm asking this question, but what would be the type of commercial efforts or resources you would -- you think you would need to launch ILUVIEN in the U.S. once approved?

Charles Daniel Myers

Right. I think it's just look at the total headcount needed for a U.S. retinal unit. It's approximately 50 people. That would include the back office, sales operations as well as field management and, of course, the reps in the field. Speaking of just reps, when you look at the retinal spinners that are out in the country, we think you can get average -- adequate coverage with anywhere between 28 to, perhaps, 32 sales representatives. So we would envision probably 4 field management into 4 areas or district, regions, whatever you want to call them, and somewhere between 7 to 8 representatives per region. In addition, we would have 4 medical sales liaisons -- medical science liaison personnel supporting those 4 regions, 4 payer, account managers, helping from the managed care standpoint, and as I said sales managers. So it's a pretty traditional -- look, it's interesting, I don't think that the physician count has changed that much since our days at Novartis, and this was a very similar structure that we had when we launched Bezodine [ph] in our prior experience.

Simos Simeonidis - Cowen and Company, LLC, Research Division

All right. And finally, in terms of the potential population you may be approved in Europe -- in, sorry, in the U.S. Are we talking about the similar label as in Europe? Or is there any differences that you might go after?

Charles Daniel Myers

As you can expect, we aren't comfortable, at this point, discussing what the specific label would be because well, until we file the CRL and know that it has been accepted, I'm not comfortable there. I think you'll see labeling, when we do finalize it, that will relate somewhat to the concerns around the safety that we saw in Europe. There will be some level of restriction. In some regards, I think it might be not quite as onerous as the European labeling, but I think, in general, what we have looked at is just if you take the number of diabetics and clinically significant -- roughly about 60% of those patients, we think, would still be available to us even with this restrictive labeling. So while we do understand there's a bit of a compromise in our proposed label, we don't think it's going to be a strong hit to our commercialization opportunity in the early years.

Operator

[Operator Instructions] And I'm not showing any other questions at this time. I'd now like to turn the call back to Dan Myers for closing remarks.

Charles Daniel Myers

Thank you for listening to today's call. We look forward to updating you on our progress in the coming months, and operator, we will now conclude the call. Thank you.

Operator

Thank you. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a good day. Speakers, please stand by.

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