Flamel Technologies' CEO Discusses Q4 2013 Results - Earnings Call Transcript

Mar.25.14 | About: Flamel Technologies (FLML)

Flamel Technologies S.A. (NASDAQ:FLML)

Q4 2013 Earnings Conference Call

March 25, 2014 10:00 am ET

Executives

Michael Anderson – Chief Executive Officer

Sian Crouzet – Principal Financial Officer

Steve Lisi – Senior Vice President, Business and Corporate Development

Analysts

Jason Butler – JMP Securities

Matt Kaplan – Ladenburg Thalmann

John Boris – SunTrust

Jim Molloy – Summer Street Research Partners

Russell Cleveland – RENN Capital

Operator

Good morning ladies and gentlemen and welcome to the Flamel Technologies Fourth Quarter and Fiscal Year 2013 Results conference call. Please note that this call is being recorded.

I would now like to turn the conference over to Mr. Bob Yedid with ICR. Please go ahead, sir.

Bob Yedid

Good morning, and welcome to Flamel Technologies’ fourth quarter and full year 2013 conference call. This is Bob Yedid of ICR Investor Relations.

Before we begin, I will start with some cautionary statements. The following presentation regarding Flamel Technologies S.A. includes a number of matters, particularly as related to the status of various research projects and technology platforms, that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The presentation reflects the current views of Flamel’s management with respect to future events and is subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements. These risks include risks that product in development stage may not achieve scientific objectives or milestones or meet stringent regulatory requirements; uncertainties regarding market acceptance of products in development; the impact of competitive product and pricing, and the risks associated with Flamel’s reliance on outside parties and key strategic alliances. These and other risks are described more fully described on Flamel’s public filings, including the Form 20-F for the year-ended December 31, 2012. Except as required by law, Flamel does not intend and disclaims any duty or obligation to update or revise any forward-looking statements contained in this presentation to reflect new information, future events or otherwise.

After the prepared remarks we’ll be opening the call to a question-and-answer period. At this time it’s my pleasure to turn the conference over to Mike Anderson, Chief Executive Officer of Flamel Technologies. Mike?

Mike Anderson

Good morning ladies and gentlemen. Thank you very much for joining us today. I’m pleased to report that Flamel has made significant progress in a number of operational, commercial and financial areas and advanced our standing as an attractive specialty pharma company with outstanding drug delivery capabilities. First of all, I’d like to give you an update with regards to Bloxiverz, our first FDA-approved version of neostigmine methylsulfate, which of course is an injectable product used in hospital operating rooms.

For the fourth quarter of 2013, Flamel did not report any sales of Bloxiverz due to requirements under U.S. GAAP that there be an established record of product returns. Clearly after less than six months in the market and as a new marketer ourselves, we didn’t have a significant history of returns at the end of December; however, I am pleased that an initial look at the first quarter of 2014 to date provides a positive picture.

As a reminder, one of the manufacturers of unapproved versions of neostigmine decided to stop shipping its unapproved version of neostigmine in early November 2013. The other two manufacturers of neostigmine went on backorder in December of 2013, meaning they were not shipping product into the marketplace, although their customers may have had some remaining inventory. Flamel took advantage of this situation and ramped up our shipments of Bloxiverz in both January and February. In February, the two competitors came back off of backorder status. Subject to our belief that we will meet GAAP accounting regulations, Flamel does expect to report revenues from our sales of Bloxiverz in the first quarter of 2014.

In light of our shipments in the first quarter to date, Flamel is maintaining a healthy pace of manufacturing through our contract manufacturer, and we hold a solid inventory position that’s sufficient to supply 100% of the market’s needs for neostigmine. We already have substantial inventory at all of the major drug wholesalers and within our own distribution facilities. Finally, we are in regular communication with the FDA about our manufacturing of Bloxiverz and the company’s ability to supply the market. With respect to our current market share for Bloxiverz, we expect to exit the first quarter of 2014 with a share that’s in excess of 20% of the market.

As we have explained in prior calls, neostigmine is a classic example of unapproved drugs that are available for use in the U.S. The FDA has a policy to encourage drug manufacturers to submit a new drug application for these unapproved products, and in turn the FDA will remove the unapproved versions from the marketplace typically within one year of NDA approval. Let me emphasize, though, that the FDA does give itself leeway on the timing of these regulatory actions. As a reminder, Bloxiverz received an NDA approval on May 31 of 2013.

In addition to our NDA approval and our communications with the FDA, Flamel has pursued other regulatory and legal actions in the last six to eight months to improve Bloxiverz’s market position. On the regulatory front, we have submitted additional correspondence to the FDA’s Office of Drug Safety, reinforcing some of the safety issues related to the dosing obstruction of the unapproved products that do in fact differ from Bloxiverz.

Bloxiverz was the first product to come out of the Eclat pipeline. Our second NDA filing out of the Eclat portfolio has a PDUFA date of April 28, 2014, the target date for the FDA to complete its review of the NDA. This is, of course, just over a month away, and we will keep our investors informed about the FDA’s actions. As consistent with our policy on Bloxiverz, the company has decided not to identify the product at this time since doing so simply discloses sensitive information to our competitors and reduces the value of these products for all Flamel shareholders; however, we will be updating investors at the appropriate time with substantial information about our products. Management is planning on filing new drug applications for the third and fourth projects from the Eclat pipeline in the first and second half of 2014, respectively, consistent with our prior communications to investors. We will announce these filings once the FDA has accepted them for review.

From a strategic standpoint, we will be using the cash flow from the Bloxiverz product, along with the proceeds of our recent equity financing that I’ll discuss shortly, to continue to fund our investment in our proprietary product pipeline. Our pipeline of innovative drugs continues to progress, and we anticipate these will provide near-term and midterm pipeline products and revenues. In each case, these product utilize one of Flamel’s proprietary drug delivery platforms that will either, a, increase efficacy of the drug; b, reduce cost versus alternative therapies; and/or c, reduce patient side effects and thereby improve patient compliance, which ultimately of course reduces healthcare costs in the longer run.

By employing our proprietary technologies, each of these compounds will have substantial patent protection. As a reminder, each of the company’s four major drug delivery platforms has patent protection in the United States out to 2025 or later. In addition as each specific pipeline product is developed, we will extend that patent protection by applying for additional compound and technology-specific patents. We would also point out that we have mitigated some risk to the R&D pipeline by using known pharmaceutical compounds where both efficacy and safety are well characterized. Of course, there are always risks to execution and timing.

As we look to the balance of 2014, we’re looking forward to the preclinical and clinical data that will be presented on our pipeline compounds, as outlined on our investor presentation which is posted on Flamel’s website. We will have a series of data presentations in the first and second half of 2014 across all four of our drug delivery platforms in several therapeutic areas. This includes: Micropump – there are currently two programs in the CNS area that will use Micropump, a flexible technology for the oral delivery of small molecules. One program is being developed for a partner and the other is an internal Flamel project. We expect clinical data on the Flamel program to be available in the first half of this year. Micropump is a proven technology and of course has been used in Coreg CR since 2006.

In terms of LiquiTime, we have one program each in pain and respiratory areas that will use our LiquiTime technology, which provides the controlled release of drugs in oral liquid form, principally for pediatric and geriatric patients. We expect to have clinical data on the pain product and on the respiratory product respectively in the first and second half of 2014. Both of these products are expected to compete in the OTC market.

In terms of Trigger Lock, Flamel has one pipeline product in pain that uses the Trigger Lock technology. Trigger Lock, of course, is specifically designed to provide abuse-resistance for long acting opioid analgesics, which as you probably are aware is a major problem in the U.S. and the subject of specific FDA regulations for new opioid pain products. Trigger Lock products are designed to be resistant to abuse by extraction and subsequent injection, crushing and snorting, as well as resistant to extraction of the drug using alcohol. As we announced last May, Flamel exercised our right to regain control of two drugs that use Trigger Lock delivery that were formerly being developed in partnership with an undisclosed partner. While we benefited from the data generated by the partnership, we have requested an IND meeting with the FDA in the first half of this year in order to plot the course for Flamel’s own clinical development program for what is now our drug. We expect to report initial clinical data by the end of 2014.

In Medusa finally, we have two products in the metabolic area that use our Medusa technology for injectables using a hydrogel depot formation. We’ve announced preclinical data on one of the programs, human growth hormone, with our first human study to begin before the end of the year. We also expect to start human clinical trials on the second product later in this year.

While this provides you with a broad outline of the data events that we expect in 2014, there are additional molecules in our near-term and midterm pipelines in various stages of R&D development. Unless it is a partnered project, the projects are under Flamel’s full control with regards to the timing of regulatory development and therefore regulatory submission.

In terms of working with partnerships with others, Flamel will continue to leverage our world-class drug delivery platforms to pursue product partnerships with large and small pharma partners where they pay for the development cost. We have a number of programs in process in both clinical and preclinical stages. Most of these projects are dependent on our pharmaceutical partners’ actions and are in some cases out of our direct control. This is an area of our business that continues to progress.

Turning from operations to financing, we’re very pleased to have completed the sale of 12.4 million American depository shares for approximately $121 million in gross proceeds. We appreciate the support of both new and existing investors in Flamel. This is an important milestone for our company that provides us with substantial financial flexibility to grow our business, and it broadens our shareholder base at the same time. We will use the proceeds to repay the $32 million in debt, support the launch of Bloxiverz, and to continue to invest in our promising R&D pipeline. After the offering, we will have approximately 38.2 million ADS’ outstanding. This excludes the two series of warrants that are held by Deerfield Capital as consideration for the acquisition of Eclat by Flamel in March of 2012. There are two series of warrants: 2.2 million warrants exercisable at $7.44 per ADS, and 1.1 million warrants exercisable at $11 per ADS.

With that, I’d like to turn the call over to Sian Crouzet, our Principal Financial Officer, for a discussion of the fourth quarter financials. Sian?

Sian Crouzet

Thank you Mike, and good morning. Flamel reported total revenue during the fourth quarter of 2013 of $6.2 million compared to $7.3 million in the fourth quarter of 2012. Revenues were lower primarily driven by lower license and research revenue due to the impact of the termination of the company’s agreement with Merck Serono in the fourth quarter of 2012 when the company recognized a remaining upfront license fee. Product sales and services revenues in the fourth quarter of 2013 of $2.2 million were comparable to the fourth quarter of 2012. Other revenues consisting primarily of royalty income from GSK on the sales of Coreg CR were $1.6 million in the fourth quarter of 2013, down very modestly versus the year-ago period.

Cost of goods and services sold for the fourth quarter of 2013 of $335,000 were down significantly compared to $1.5 million in the fourth quarter of 2012. This reduction was due principally to changes we implemented in employee compensation, moving to a plan that is performance-based from our prior plans that were based on longevity of service. This change in our compensation plan resulted in a release of payroll accruals during the fourth quarter of 2013. Cost of goods sold were also reduced due to an optimized production schedule for the fourth quarter.

R&D costs in the quarter were lower by $2 million versus the prior year period due to both the release of payroll accruals associated with the previously mentioned change in our compensation plan and timing in development costs for the company’s internal product portfolio.

Selling, general and administrative costs of $5.2 million in the fourth quarter were up $2 million versus the prior year period due to contractual severance indemnities, the company was required to record. Excluding the remeasurement income of acquisition liabilities and impairment of assets of $7.2 million in the fourth quarter of 2012, Flamel’s total costs and expenses decreased by 8.6% to $9.7 million in the fourth quarter of 2013 compared to $10.6 million in the fourth quarter of 2012.

Special interest expense was $0.6 million for the fourth quarter of 2013 due to additional debt incurred in January 2013 on the initial tranche of the line of credit drawn down in December 2013. In the fourth quarter of 2012, the company had interest income of $98,000.

Net income on a GAAP basis for the fourth quarter of 2013 was $5.1 million versus $9.1 million in the year-ago period. Earnings per share was $0.20 in the fourth quarter of 2013 versus $0.36 in the fourth quarter of 2012. In addition, management has decided it would be helpful for analysts and investors to provide certain non-GAAP data which allows investors to evaluate the company’s ongoing operations. The adjustments exclude items such as fair value remeasurements and amortization expense directly associated with the acquisition of Eclat on an after-tax basis, asset impairments, and includes items such as earn-out and royalty payments on a cash basis associated with the acquisition liabilities and royalty agreement.

Adjusted net loss for the fourth quarter of 2013 was $0.1 million versus an adjusted net loss of $1.2 million in the prior year period. Adjusted loss per share was $0.00 in the fourth quarter compared to an adjusted loss per share of $0.05 in the prior year period. For the full year, adjusted net loss for 2013 was $16.1 million versus an adjusted net loss of $17.7 million for 2012. Adjusted loss per share was $0.63 for the full year 2013 compared to an adjusted loss per share of $0.70 in the prior year.

With respect to cash and marketable securities, we ended the fourth quarter with cash and marketable securities of $7 million. Included are $5 million that we drew from the line of credit that was finalized in December of 2013. Excluding the impact of the credit line, our cash decreased by $7.2 million compared to the end of the third quarter.

With regards to our debt, Flamel had three debt obligations at the year-end 2013: a senior secured note of $12 million issued in connection with the acquisition of Eclat, the interest on the notes is 7.5%; a $50 million debt financing with Deerfield Management that has a 12.5% interest rate and a 1.75% royalty on net sales of the Eclat products that are approved; and a secured line of credit with Broadfin Capital of which $5 million was drawn and bears an interest rate of 12.5%. As a result of the draw-down of the first tranche of the $50 million line, Broadfin is entitled to a royalty of approximately 0.83% of net sales of the Eclat products that are approved. As Mike mentioned earlier, all of this debt has been retired subsequent to the closing of our equity financing, although the royalty payments on the sales of the Eclat products are due to Deerfield and Broadfin, respectively.

With that, I will now turn the call back over to Mike before taking questions.

Mike Anderson

Thank you, Sian. With the completion of an important equity financing and a stronger balance sheet, sales of Bloxiverz in the first quarter of 2014, a second PDUFA date scheduled for April 28, and a continued investment in our R&D pipeline, we believe that Flamel is poised to create significant value for its shareholders. Management’s time is spent primarily on our near-term and midterm revenue areas. We will also increase the visibility to our shareholders into our pipeline as our programs advance and meaningful updates become available.

2014 is off to a very good start with the completion of our equity offering. We have even more to accomplish in 2014 and our talented management team is very focused on the important activities that will move Flamel forward.

We appreciate your participation on today’s call, and at this point, Operator, I’d like to open the line for questions, if we could. Before we do that, I would like to take the opportunity to introduce you to a third member of our team who is with us today. Many of you may know Steve Lisi. Steve is our Senior Vice President responsible for business and corporate development, and he will be helping to address whatever questions you may have.

So with that, Operator, we’ll take any questions that may come.

Question and Answer Session

Operator

Yes sir, thank you. [Operator instructions]

We’ll move first to Jason Butler with JMP Securities.

Jason Butler – JMP Securities

Hi, yes. Thanks for taking the questions, and congrats on the progress. Just a couple questions on Bloxiverz – can you talk about any feedback you’re getting from the field, you know, hospitals, what their view of the product has been so far when they’ve been using it, whether they’ve shown any preference towards it or any limitations of using the product?

Mike Anderson

Okay, sure Jason. First of all, as you know, Bloxiverz is from a composition perspective, as best we understand, identical to the unapproved products that have been available for a period of time, so from a therapeutic perspective we’ve had no commentary on any improvement or anything associated with Bloxiverz, nor really did we expect any. What we have heard is that hospitals, for the most part, understand the FDA’s initiatives. They applaud the FDA’s initiatives. They expect to comply with the FDA’s initiatives when they have to, and even though we’ve enjoyed a boon, if you will, in our sales of Bloxiverz during Q1, this product will not reach its full potential until such a time as we’re in the market by ourselves.

The hesitancy on behalf of hospitals, quite candidly, is that there is a difference in price, and until those unapproved products are removed as per FDA mandate or otherwise, we’ll continue to enjoy less than what we would anticipate. So I hope that answers your question.

Jason Butler – JMP Securities

Yes, thanks Mike. And then just—you alluded to the FDA and removing the unapproved products from the market. Can you talk about any additional color you have, any dialogue you’ve had with FDA about the process to remove the unapproved products, what the FDA’s key hurdles are before doing that, and if there’s anything to change your view that this could happen in roughly 12 months from approval of Bloxiverz?

Mike Anderson

Right, Jason. So we’ve had significant dialogue in many different venues with the FDA on this issue. As part of the FDA’s guidance on the removal of unapproved products after someone’s approval of an NDA, they describe in the guidance their dependence on a number of different issues. Included in those issues are things such as any kind of is there a health fraud issue, is there a safety issue, is there an issue with the unapproved manufacturers having CGMP problems. Another issue that they consider that has become more dominant as of the last couple of years is, is there a supply issue with the product.

Over the past 24 months, the unapproved products have at various times been unable to supply the market with adequate inventories of neostigmine, and as a result of that in the past there have actually been cases where it’s been in extremely short supply, and we believe there have been circumstances where elective surgeries may have had to be deferred based on the availability of being able to reverse a neuromuscular block. We think that that’s one of the issues that FDA is most sensitive to, so we think that’s been—and that’s one of the reasons for our extended conversations with them about our ability to supply the market.

The reality is that we are able to supply the market. We currently in our own distribution network have approximately a little over three months’ worth of inventory on one of the strengths and five months’ worth on another, and that’s without additional receipt of product that we’re expecting over the course of the next number of months. So we feel very comfortable and we’re trying to get the FDA more comfortable with this as well.

As to the second part of your question – do we still believe that that’s doable and that the FDA will do that? I clearly can’t warrant that to you. We do believe the FDA is keenly aware of our interest in this case. They’re aware of what their policy calls for, and I also believe that the FDA is sensitive to the fact that if they are unwilling or not able to uphold their end of the bargain, that they’ll greatly reduce people’s interest in doing these. We frankly believe they will take that action, although I couldn’t tell you when that’s going to be.

Jason Butler – JMP Securities

Great, that’s helpful. And then just a couple of quick questions on the recent financing. Can you confirm that the full over-allotment option was exercised for the transaction? And then the second question is just wanted to make sure—you mentioned that you’re planning on paying down the debt. Do you plan on paying down all three separate lines of debt?

Mike Anderson

So Jason, it was completely sold as per our plans. It was over-subscribed, as you know, completely. And then in terms of the debt question, we have already paid off all the debt, including the $12 million associated with Flamel’s acquisition of Eclat.

Operator

We’ll now move on to our next caller, which is Matt Kaplan with Ladenburg Thalmann.

Matt Kaplan – Ladenburg Thalmann

Hi guys, can you hear me?

Mike Anderson

Yes we can, Matt. Good morning.

Matt Kaplan – Ladenburg Thalmann

Great. Congrats on the progress – good work. A couple questions following up on Bloxiverz. There was a complaint that you guys filed versus Westward, and I guess in February the judge granted some of the motions that—some of the complaints that you had against Westward. Can you comment on where that is in terms of that potential complaint going to court, a court case, and what the next steps are there?

Mike Anderson

Well obviously as you’re aware, and I think in the public domain now there was an action. We had filed a complaint against both Westward and APP in California, and both the defendants in this case moved to dismiss the case. The judge, as you’ve called out, has declined to do that. He has suggested that it is an issue for his court, and it will be heard.

Other than that, I cannot at this point talk about the next steps and all that sort of stuff as a typical rule. We wouldn’t talk about any active legal cases that are ongoing, but suffice it to say that – and we’ve said this all along – Bloxiverz is an important initiative to us. Our next projects from this same pipeline are also very important to us, and we’ll take the steps that are necessary to be able to realize the full potential of the value of those products for our shareholders.

So that’s part of it, Matt. Sorry we can’t go into any more detail.

Matt Kaplan – Ladenburg Thalmann

No, no. Fair enough, I understand. And then in terms of any—it seems like you’re working closely with the FDA to hopefully help facilitate the movement on their part. Is there any remaining stuff that you need to provide to them beyond the information associated with your ability to produce and supply the market that they are waiting for from you, or is everything kind of in their hands at this point?

Mike Anderson

I would say the ball is in the court of the FDA at this point. They’re not waiting on us for anything. We’ve been as aggressive as you can be at explaining to them our ability to supply the market. We will continue to do that. We continue to have communications with the FDA and I can assure you that we will continue that until such time as they remove those products from the market.

We feel—you know, if you look back at the projects that our products that have been moved from the unapproved to approved category, I don’t think you—I think you’d be hard-pressed to find one where they haven’t moved and haven’t removed the unapproved products, but clearly there are differences in the timing. We believe, as we’ve said before, in this particular case there is, in our view, a safety issue with having the same product in the marketplace with two different labels on it, one approved by the FDA and two that don’t match that. We think that’s problematic. That and the initiative in itself, we believe are sufficient for the FDA to do its thing, and we’ll continue to talk to them about doing that. They’re not waiting on us for anything.

Matt Kaplan – Ladenburg Thalmann

Good. And then kind of a broader question in terms of, call it the Eclat pipeline and then also your internal pipeline. Can you help us think about the four projects that you have, I guess including Bloxiverz, and now that Bloxiverz is absolutely gaining traction in the marketplace, the other three programs and how they potentially compare to Bloxiverz from a revenue potential point of view?

Mike Anderson

Well, we really haven’t given any guidance to that. I think what we have said—and we wouldn’t give specific guidance. I mean clearly, two of the projects aren’t even filed yet. But what we have said is, I think, the second project, I think you can think of slightly smaller than Bloxiverz, a unique, interesting kind of an opportunity. It’s got its own set of criteria associated with it, and so far as we’re aware, everything is proceeding normally. You never know until you get their letter, but we have every expectation that they’ll meet the PDUFA date and we’ll have a second approval. In terms of Eclat project numbers three and four, one of them is probably slightly larger, and the other one maybe around the same size of the potential Bloxiverz.

There are a lot of things that go into the measure of the value of the products, and those things that go into that measure, as you know, Matt, change from time to time – time goes on, market conditions change. But so far, we haven’t had significant changes since the acquisition of Eclat by Flamel, and we’re still moving forward with all of those. The original purpose of those projects was frankly to provide us with cash that would enable us to self-fund the development of additional products that would be protected by Flamel’s IP.

And with that, I’ll ask, if he would, for Steve if he wouldn’t mind interjecting and providing you just kind of a quick update on the status of the Flamel pipeline of internal projects. He’s very close to this, and he can probably do a great job, I know, of helping walk you through those.

Matt Kaplan – Ladenburg Thalmann

Perfect. That’s a great segue to my second question.

Mike Anderson

Steve, do you want to--?

Matt Kaplan – Ladenburg Thalmann

No, that essentially was my second question in terms of helping us think about the handful of little bit more projects, just maybe a couple handfuls of projects that you have internally and the opportunities there.

Steve Lisi

Yes, so like we’ve said in our presentation that’s on our website, we plan on having three data sets in the first half of the year, so we have three months left; and we plan on showing those three data sets. We’ll have our CNS product, the proprietary product that we own, we’ll have a first in man data there, and we’ll have also first in man data for our LiquiTime technology, our pain product. And then we’ll have animal data for our Medusa product that is a CV metabolic target, and all three of those data sets, we’ll present them as they come in. We’re not going to wait to have a—wait for all three of them at the same time or anything like that. As soon as it comes in, we’ll present it to everyone.

Anything further, Matt? I don’t want to--

Matt Kaplan – Ladenburg Thalmann

No, we would expect that to be released in a press release form, not in a conference or something.

Steve Lisi

That’s right – press release. Absolutely, press release.

Matt Kaplan – Ladenburg Thalmann

Very good. And then in terms of the second half of the year, any additional things we should look for?

Steve Lisi

Yeah, I think Mike alluded to it in his opening comments that we’ll have our second liquid program that will have data, first in man data in the second half of the year, as well as our Trigger Lock product will have data on that in the second half of the year as well. And for Trigger Lock, as you know, abuse deterrent opioids, we won’t just show bioequivalence data but we’ll show some studies for abuse deterrents, so things like alcohol dose dumping and crushing and extraction. We’ll have some studies there. Don’t expect a full-blown liking study that the FDA has required – that would probably come later in the development, but we’ll have some information so people can see the abuse-deterrent properties of our technology.

Operator

And as a reminder, star, one if you would like to ask a question. We’ll now move to John Boris with SunTrust.

Mike Anderson

John?

John Boris – SunTrust

Yes, hi. Can you hear me?

Mike Anderson

Yes, we can.

John Boris – SunTrust

Okay, great. Thanks for taking the questions. First of all, Mike, you alluded to having on Bloxiverz a three-month supply, five-month supply on two of the dosage forms. I guess historically based on your experience, is there a certain level of supply that makes the FDA feel comfortable with generic assets that enable them to feel comfortable that you can supply the market on a consistent year-after-year basis going forward? You alluded that there’s some additional supply coming in. How many months will that take your supply up to of Bloxiverz?

Mike Anderson

That’s a great couple of questions, John. First of all, yeah, I’m not sure I could quantify for you what’s an inventory level the FDA finds comfortable for this particular project. I think that as you’re no doubt aware, most companies wouldn’t opt to carry that kind of inventory level on a product like neostigmine, even if it were new for them; but one of the reasons we have ramped it up, and you saw those reflected in numbers over the third and fourth quarters in terms of our ability to supply them, was because we recognized that FDA was holding the bar a little higher with respect to this product.

The short answer to your question is I don’t know what their perfect expectation of enough inventory to satisfy that demand is. Clearly if every competitive vial of neostigmine was removed from the marketplace today and the only alternative was Bloxiverz, we would be able to fill every empty space on anybody’s shelf that needed it, and additionally we have product that as part of the normal course of business will continue to come in. The only thing that’s different today from what it was when we began and planned the inventory build is because the FDA has not moved as quickly as we might have expected them to. Our inventories and our receipt of goods in the coming months will even probably take us to higher inventory levels. We’re hopeful that the FDA will move and mitigate that risk.

So the answer is that we have plenty of inventory. We have shown them in very granular detail what constitutes our inventory. We have shared with them receipt of goods that’s coming in in the immediate coming months, and we just continue to hold that in front of their face in hopes that we can get them more comfortable. In my view, they are getting that way, but we’ll see.

John Boris – SunTrust

So it sounds like you’re pretty confident that there’s no additional information that you have to supply to the FDA to have other generics removed from the marketplace. I don’t want to obviously put words in your mouth, but is that the case at this point?

Mike Anderson

Yeah, in my view, there is nothing the FDA is waiting on us to provide them. In fact, I think we’ve been as proactive as a company can be at making them comfortable. We’re reporting inventories to them with a frequency that you’d be quite surprised about to make sure that they understand. We’ve had discussions with various groups at the agency, and we’ve been told on several occasions that it’s an active item under consideration and they are mindful of our circumstance. They are grateful for our having done this, and they are working at it; but clearly every letter finishes up with, as you know, there can be no guarantees.

John, I feel like we’re on the right track. I know this is—I know they will make this move, or they have a program that simply doesn’t make sense.

John Boris – SunTrust

Great. On Eclat number 2, understand that during the regulatory path event, there was a modest setback. Probability of securing approval, and do you have a launch quantities to be able to meet market demand effective April 28 on Eclat 2?

Mike Anderson

Yes. We won’t have it on April 28. As you know, one of the last things that you—one of the last discussions you have with FDA, as you know from your experience, is labeling, and to the degree that a label could change at the 12th hour, which often happens, you have to be a little bit careful about that. But suffice it to say assuming we get the approval on that date, then we’ll be ready as quickly as possible, just as we were with Bloxiverz, to furnish the marketplace. As you might expect, we won’t be able to supply 100% of the demand on day one, but it won’t be long before we are. For us, one of the take home lessons learned from Bloxiverz is that with respect to these products, and the FDA is doing something, it’s I think important for a company like a Flamel to invest in it to assure the FDA that their removing two or three or 10, or whatever the number is, unapproved products from the market is not going to create a problem in the marketplace, and I think you have to make them comfortable with that.

John Boris – SunTrust

And then just on Eclat 3 and 4, I got on the call late – I’m not sure if you reiterated your filing time line still for Eclat 3 front half, Eclat 4 back half of this year?

Mike Anderson

Yes, we’re still on target to do that. We’ll announce those filings obviously once they’ve been accepted.

John Boris – SunTrust

Great. And then just last question—

Mike Anderson

(Talkover) Yeah, sorry.

John Boris – SunTrust

Great, and then last question just for Steve – thanks for the visibility on the pipeline assets and the readouts on some of the data sets. I would assume, Steve, as you begin to get some of those readouts, at least on the business development front, especially with your balance sheet being in a much stronger position, it looks like you’re going to be pretty busy. Just your thoughts around commercialization on pipeline assets – obviously that’s a long way away versus royalty streams and your consideration for that, but just your thoughts around the pipeline and commercialization versus royalty.

Steve Lisi

Well, certain things, certain products we think we may be able to market on our own, so the criteria that Mike and I have discussed would be something less than 100 reps. I think trying to build anything more than that means we’re venturing into an area that is just not something we’d like to do, and we’ve seen many companies fail in the past when they try to build several hundred person sales forces from zero. So that’s one criteria we’re looking at.

We’re also looking for products that are differentiated and are focused in the U.S. We’re not going to be doing anything outside the United States commercially on our own. So that’s the criteria, and you can see—to make your own decisions on the Trigger Lock opportunity. Purdue is a pretty big company; they own that market. It might be tough for us to enter and go at it alone against them, but we’ll see how things progress. But right now, you would argue that a Trigger Lock would be something that we’d be shying away from on our own, but let’s see what the data shows – it could change if the data are substantially different from what Purdue offers with oxycontin.

Our CNS product is certainly something that would require a sales force of under 100 reps, so it’s something we could consider. Our liquid products are probably something we wouldn’t consider because these products are most likely, and we’ll have to wait and see what happens with our interactions with FDA and the EMA as well. But these products are most likely going to be over-the-counter, so we have no desire to go into that market. As you know, that’s a very small market in terms of the number of major players there.

And as we go forward to the Medusa programs, which are way out there, that’s kind of hard to discuss the Medusa program since we’re several years away. We don’t even have our human data on those products yet, so if anything they are biosimilars, our products will be bio-betters, and as you know, the industry has been talking about biosimilars and bio-better products needing sales forces to detail these programs, and as you can see, human growth hormone is probably something that you wouldn’t think a small company like ours would be able to market on our own.

So that gives you a general idea, but we are still far away from launching these products, and the data will drive the answers to those questions, really.

Operator

We’ll now move onto our next question from Jim Molloy with Summer Street Research Partners.

Jim Molloy – Summer Street Research Partners

Hey guys, thanks for taking my questions. Just a couple quick ones on the neostigmine, then the bigger picture for Mike. Are there any other actions—you’ve done everything you can. You filed a CP in the past. Is there another CP opportunity, or are you going to start annoying the FDA? And do you get to the point where you’ve built so much inventory, it’s a worry about writing any of it down if you aren’t able to get the whole market and move it out?

Mike Anderson

Jim, those are great questions. The first as it relates to just how far can you go, how many citizens petitions can you file, I think our objective here is to keep our issue with neostigmine in front of the Agency without being obnoxious about it, and I think that is something of a fine line. I think candidly at this point, there’s nothing that we could talk to that’s specific that would be a next step. There are things that we would do if we can’t move the product forward as we expect to, but we’re hopeful that we don’t get at that point. But I think for the time being, we’ve been pretty aggressive with it, and that’s, I think, an important criteria.

In terms of the inventory, that’s also a great question. The answer is no, today we’re not and we wouldn’t expect to get to a position where we’d have to write down inventory. If, though, in the not-too-distant future we don’t see some action from FDA, we would have to consider reducing our expectation of product receipts. We’re not at that point yet, but we’re mindful that it’s a balance and we don’t want to get to the position of writing off inventory. That’s for sure.

Jim Molloy – Summer Street Research Partners

Earlier in the call, did you give the annualized run rate that you guys did first quarter, or currently you’re running at?

Mike Anderson

What we said, Jim, is that we expect to exit the first quarter with market share in excess of 20%. As you know, there are about 5 million vials used per year, give or take. It’s running slightly under that this year, but that’s where we would expect. And that’s predicated, of course, upon the fact that the existing unapproved products have at times during Q1, and even late December, been in and out of inventory position, or in and out of being on backorder. It doesn’t necessarily mean that the pipeline was empty; it’s just simply meant they couldn’t supply it.

So clearly we picked up some business there, and frankly some of that business will stay with us even at a higher price. So that’s sort of where it sits, and hopefully that answers your question.

Jim Molloy – Summer Street Research Partners

Very much, thank you very much. And then a quick question for Steve – on the pipeline, I know you’ve got a lot going on with the pipeline to keep you busy for a while, but with cash on hand, is another acquisition like an Eclat-type acquisition, does that make sense given the experience you guys have built in doing those types of cash-generating acquisitions, or something even to augment the LiquiTime or Trigger Lock?

Steve Lisi

That’s a good question, Jim. We’ll sit back and consider that as we exit this year. I don’t think 2014 is the time for us to consider something along those lines. We want to see our data and see what the results of all six of our programs are before we make a decision like that. Some may look better than others, and maybe we’re the lucky company and we go six for six, and that would be fantastic. So we have to see what the data show and let the data drive our decision on that, so it wouldn’t be something that would happen in 2014. It would be more of a 2015 decision where we’d consider doing something along those lines. We’ll just kind of let things dictate our actions based upon the success that we have.

Jim Molloy – Summer Street Research Partners

Great. Would you think it would be something like an Eclat where these products that you bring them out, you have them for a few years, or do you think it would be something that would tie in with your longer term pipeline? Or is even too early to say?

Steve Lisi

Probably—well, I mean, Eclat can do the unapproved marketed drug strategy on its own. We don’t need to acquire anybody else to use this strategy. So looking for more short-term assets is probably not something that we’d be trying to do. We’d probably be looking for something that’s more sustainable, maybe something that we could have commercial infrastructure around, considering if some of our programs are successful and we want to market them on our own. We may want to use that money to instead of building a sales force from scratch, which is a possibility, we may want to purchase a product that already supports a sales force in a similar area. So those are the things that we would look at, I think more along the lines of sustainable products and sustainable revenue streams for more than a couple of years. But again, we’ll have to wait to see what the data look like before we make a decision on what area we want to go into.

Operator

We’ll now move to Russell Cleveland with RENN Capital.

Russell Cleveland – RENN Capital

Hello Mike and fellows. Congratulations – we’re making a lot of progress here. Most of my questions were answered, but the Trigger Lock, that is such a big area for us, and from the earlier discussion – this was my original question – we have to prove not that something is effective but really the release of the opiates under different circumstances. Is that right? A little more about how long this will take – you mentioned this year – to get into the marketplace with this area, because it’s so significant.

Mike Anderson

Yeah, well Russell, those are great questions. Long-acting opioids, as you know, are a huge problem from an abuse perspective, so FDA has become—really raised the bar with respect to these products and what it will require to get products approved in the future. What they are looking to do is to prevent anybody’s methodology for abusing these products. It is a barrier to entry – significant, obviously. We’ve seen products turned down as a result of not meeting that barrier, but at the end of the day, you’re going to have to be able to prove that no matter what somebody might do to try to extract a large amount of opioid at one time, you can prevent it. It has to be—you have to show that you can prevent the abuse associated with destroying it physically, with mixing it with alcohol, and all these other different things. And in fact even today, you have to do, as Steve alluded to earlier, you have to likability studies – you have to put your product against another product to make sure somebody didn’t enjoy it better.

It is a huge area. Unfortunately, there are a finite group of molecules, but we believe we have a very robust technology. We’re working very diligently on using the knowledge that we have from our former partnership to advance these projects into the marketplace, and I don’t want to lead you to believe that we are the only guys doing this but we think our technology is good, robust, and has a good chance of being acceptable. To that degree, as we mentioned earlier in the outset, we have requested a meeting, a pre-IND meeting with FDA to talk about a project that we have that we want to move forward with.

So we’ll have a lot more answers after that, but we believe we’re on the right track; and you’re right – it’s a huge opportunity.

Russell Cleveland – RENN Capital

Great. And also, thank you for having these calls at a civilized hour – that is great.

Mike Anderson

We did this just for you, Russell. Thank you.

Operator

It appears there are no further questions.

Mike Anderson

Okay then, well we certainly do appreciate very much your joining us on the call today, and we’ll look forward to updating you on our business in the coming months as we continue to make progress. Thank you very much for your support. Have a great morning.

Operator

Again, that does conclude today’s conference. We thank you all for your participation.

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Flamel Technologies (FLML): Q4 EPS of $0.00. Revenue of $6.2M.