Greetings and welcome to the POZEN Inc. second quarter 2010 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation (Operator Instructions).
It is now my pleasure to introduce your host, Stephanie Bonestell with Investor Relations. Thank you Ms. Bonestell. You may begin.
Thank you, Claudia and good morning. On behalf of POZEN, I would like to welcome everyone to today’s second quarter conference call. By now, you should have received a copy of the company’s press release. If you do not have it, you can access it on the homepage of our website at www.pozen.com where you can also access a replay of this conference call.
Before we begin, I need to remind you that various remarks that we may make about future expectations, plans and prospects for the company constitute forward-looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.
Such statements include, any observations that we may make about the expected timing and amounts of royalty payments from GlaxoSmithKline and AstraZeneca and other revenue expected from our collaboration partners. The prospects for approval or timing of approval of any of our drug candidates or the way in which the FDA may consider our new drug application or any particular trial result, future trial plans and the likelihood of results of any of our future trials, and our potential commercialization plans for our product candidates.
The adequacy of financial resources to accomplish our goals or future revenues are based on our current expectations and are subject to a number of risks and uncertainties, including our inability to know with certainty what standards the FDA will use to evaluate drug candidates and how that may change or evolve over time; how the FDA evaluates data; what the results of future trials may be, whether those trials will cost much more than we have estimated they will cost, or then they have historically cost; how the FDA weighs risks of drugs, including risks of drugs that have been in use for many years.
The decisions of our collaboration partners; our dependence on our collaboration partners for the sales and marketing of our products once approved, including our dependence on GlaxoSmithKline for the sales and marketing of Treximet; and our dependence on AstraZeneca for the sales and marketing of VIMOVO, and whether our resources will be depleted by events other than clinical trials and efforts to obtain regulatory approval, such as the expenses relating to the lawsuits we have filed against generic companies seeking to market generic versions of Treximet prior to the expiration of our patent.
Additional factors that affect our forward-looking statements are discussed in our most recent quarterly report on Form 10-Q, which is on file with the SEC, in addition, these forward-looking statements represent only the company’s expectations as of today. While the company may elect to update these forward-looking statements, it specifically disclaims any obligation to do so. Any forward-looking statement should not be relied upon as representing the company’s estimates or views as of any date subsequent to today.
With us today from management, we have Dr. John Plachetka, Chairman, President and Chief Executive Officer; Bill Hodges, Chief Financial Officer, Senior Vice President of Finance and Administration; and Liz Cermak, Executive Vice President and Chief Commercial Officer. At this point, I’d like to turn the call over to Dr. Plachetka.
Thank you, Stephanie and good morning to everyone. I’m delighted to be joined this morning by Liz and Bill on this call. As usual, I’m going to start with the highlights of our second quarter performance.
First, the FDA approved VIMOVO, our delayed-release tablet for arthritis patients at risk of developing NSAID-associated gastric ulcers in April. We subsequently transferred ownership of the investigation of new drug application, and the new drug application for VIMOVO to our partner, AstraZeneca. As a result of the FDA’s approval of VIMOVO, we received a $20 million milestone payment from AstraZeneca, making us profitable for the quarter with the net income of $16.2 million.
AstraZeneca is also continuing to make regulatory filings and managing those filings in selected countries around the world and POZEN will earn a $25 million milestone payment if VIMOVO receives approval in a major ex-U.S. market including pricing and reimbursement approval. As Bill, will detail we are maintaining a conservative financial approach here and have not included any provision for further milestones in our 2010 full-year outlook.
With that, let me turn it over to Liz Cermak to provide a commercial update.
Thanks, John. All of us at POZEN are extremely proud of the work that we did on VIMOVO and as we see the first evidence of VIMOVO promotion, we are so proud and happy that AstraZeneca is our global partner. As you know that the driving force from this point on that both companies are equally committed to see VIMOVO deliver on its significant potential. They are a great group of people to work with and we know that they are just as excited about the prospects for VIMOVO as we are.
While we are not at liberty to provide details of what was going on at AstraZeneca, we know that they are smartly working hard to secure favorable pay reimbursements and have signaled a late third or fourth quarter 2010 launch. As a result, we regard 2011 sales as the earliest possible indicator of VIMOVO performance and not the 2010 results. So, I look forward to updating you on VIMOVO’s progress in due course.
Turning to Treximet, we are pleased to report there has been further incremental progress with royalty income increasing by 9% sequentially to $4.1 million quarter-quarter. However, despite some ambitious plans by GSK, we have yet to see things change much in total or new Treximet prescription.
So, we are providing guidance for the entire year based on the first-half number. Bill will have more to say about that. The good news for POZEN is that the revenues from both Treximet and VIMOVO have no offsetting expenses other than legal cost for the paragraph IV patent litigation and we expect that the bulk of this cash income will provide substantial funds to develop and commercialize our pipelines of what believe are highly promising drug assets.
Now because of the solid foundation provided by these two approved products and our current business model, we have what few small pharma grow companies have and that’s tens of millions of dollars of anticipated cash flow from approved product.
On that note, I’ll turn to our PA portfolio of products which as you know is the first step in the next phase of our corporate strategy, namely retaining control of both the development and the commercialization of our pipeline candidates.
We see our PA portfolio as enabling the full power of Aspirin, or as Bayer, its inventor has called it the wonder drug. 50 million Americans use Aspirin regularly for cardiovascular disease prevention, but despite this 20% of people on the low-dose Aspirin are at risk for serious GI complication, 25% discontinue or reduce their use of Aspirin due to GI side effects and low-dose Aspirin discontinuation leads to three times increased risk of potentially failed cardiovascular events.
So, to address the needs of millions of people in the U.S. and potentially the needs of more than 100 million globally who could benefit from Aspirin therapy, POZEN has defined a proven signs of integrated therapies to develop a familiar of products that is designed to reduce the GI toxicity associated with Aspirin therapy. We are using POZEN’s patented technology, it’s already approved, already proven in VIMOVO to coordinate the release of immediate-release omeprazole, a PPI, and pH-sensitive Aspirin.
Our first product in the PA portfolio candidate is PA32540, so 325 milligrams of enteric-coated Aspirin and 40 milligrams of the immediate-release omeprazole. This product has the potential to expand the use of Aspirin for secondary prevention of cardiovascular disease in patients at risk for Aspirin-induced ulcer. The concept for PA32540 is simple; provide a product that has the potential to offer possible protection against the second heart attack or stroke without the increase in gastrointestinal toxicity.
In today’s world, lower doses of Aspirin are often prescribed instead of 325 milligrams in some cases to lower the risk of GI toxicity, but some doctors think that the 325 milligram dose works better for the primary goal of preventing heart attacks and strokes. We do not want doctors who wish to prescribe 325 milligrams of Aspirin to their patients fail to prescribe it for fear of GI toxicity.
We’ve already conducted pre-extensive qualitative market research with physicians, payers and patients and are thrilled frankly with the receptivity for this product concept. While the quantitative work still needs to be done, we learned quite a few things that I think bodes well for this product’s acceptance. Physicians say that they will prescribe this for about 40% of their secondary prevention patients taking Aspirin. They see this as a very desirable solution for the patients at risk for GI ulcers and bleed.
Interestingly, heart attack patients tell us that 60% of them are already taking a gastroprotective agent with even a higher percentage reported on stroke patients. There’s no question that both physicians and patients see GI toxicity with daily Aspirin as an issue, 75% of all patients taking daily Aspirin with or without a gastroprotective agent said they would take action including talking to their doctor if this product were available.
In my years of experiences, this is considered high receptivity to a product concept, but all that interest won’t matter if the payers won’t cover it. From our payer work, we know that cost is always a factor, but without affordable pricing philosophy we believe we can achieve Tier 2 and Tier 3 open access. Appraising at work close to generic components we believe we can achieve payer coverage, market place acceptance and profitability. We continue to progress the market research and other pre-marketing planning, so there will be more to report on future calls and in future presentations.
Thank you. And I’d like to turn it back over to Dr. Plachetka.
Thanks, Liz. I mentioned in the recent calls that our clinical development program for 32540 is underway. We began enrolling patients in two pivotal Phase III studies involving over 100 clinical trial sites and one long-term safety study in the fourth quarter of 2009. Based on current enrollment rates in the two pivotal trials, we expect to submit an NDA some time in 2012.
Moving on to the PA asset which represents a change from how we operated in years past allows us to keep full ownership and full control of the development and commercialization of these product candidates, and although this may appear to cost more in the short run, POZEN will have the ability to better control its own destiny, which ultimately will mean evolving towards more predictable and profitable financial model delivering sustainable growth.
We intend to do this by continuing to efficiently develop new products by creating a lean, efficient commercial organization. We will be expanding our successful in-source business model into our commercial arm of the business utilizing leading edge sales and marketing technology and delivering innovative, but affordable products for patients.
Liz is in the final stages of developing the company’s strategic roadmap for pre-commercialization and commercialization activity and she will availing that later this year, so stay tuned.
Now, I will return the call over to Bill Hodges who will talk about the numbers.
Thank you, John. Financially our 2010 second quarter was a great quarter; actually it’s our most profitable quarter since we have been in business. We have reported revenue of $28.2 million compared to $4.9 million in the second quarter of 2009 and a net profit of $16.2 million or $0.53 per share on a diluted basis, compared to a net loss of $4.3 million or $0.14 per share loss on a diluted basis for the second quarter of 2009.
This year’s quarter two revenue breakdown is as follows: $20 million milestone payment from AstraZeneca; $4.1 million of Treximet royalty reflecting the 18% royalty rate and Treximet sales of $22.7 million. The amortization of upfront payments received pursuant to the collaboration agreement with AstraZeneca of $4.1 million, and please note that this completes the amortization of the upfront payments as we have completed our obligations under the AstraZeneca agreement.
Our operating expenses for the 2010 second quarter totaled $12.1 million compared to $9.3 million for comparable period in 2009. Our operating expenses in this year’s second quarter were higher as anticipated, primarily due to cost associated with our PA32540 Phase III studies and ongoing Treximet patent litigation expenses.
Regarding the latter point, the patent infringement trial is schedule to take place in October this year and we are looking forward to getting this matter resolved. Looking at the six-month results, we are profitable through the first six months 2010 with $13.2 million of net income or $0.44 per share on a diluted basis versus a net loss of $7.7 million or $0.26 loss per share in the first half of 2009.
Revenue in the first six months of 2010 totaled $35.2 million versus $13.7 million in 2009, but the main difference being the $20 million VIMOVO approval milestone and the operating expenses were essentially the same at $22 million in 2010 and $21.8 million in 2009. As a result of the $20 million milestone payment, our balance sheet strengthened and we ended the quarter with $50.4 million in cash in short term investments and $4.2 million in accounts receivable.
We expect that our cash balance at December 31, 2010 will be in the range of $35 million to $37 million. We believe our current cash balances, our royalty streams and anticipated milestones are sufficient to meet our operating plans for the foreseeable future including our strategy to retain control of development and commercialization of product candidates.
We continue to carefully manage our expenses and operate with a discipline that we practice today and has allowed us to be successful in reaching this point. Now turning to our outlook, we anticipate a net loss in the range of $3 million to $5 million for the full year, our yearend cash and net loss outlook assuming that we will initiate to PA65020 Phase III studies in the fourth quarter that our IP or patent litigation cost will be approximately $7 million this year and that Treximet sales will be in the range of $85 million to $90 million, which basically assumes a repeat of the first half performance.
Our yearend cash and net loss outlook conservatively assumed that we will not receive the $25 million milestone from AstraZeneca this year relating to ex-U.S. VIMOVO approval. However, we are forecasting to receive this milestone in 2011. So this concludes our financial results for the second quarter of 2010, so now let me turn the call back over to Dr. Plachetka.
Thank you Bill. Operator, we can open up the line for questions now.
Thank you. (Operational Instructions) Our first question is coming from the line of Jonathan Aschoff with Brean Murray Carret. Please state your question.
Jonathan Aschoff – Brean Murray Carret
I was wondering, has AstraZeneca given you guys, at least given you guys an accurate sense of their launch timing?
It’s pretty much what they did public around which is really around the fourth quarter. As I mentioned, they are getting their payers lined up and I think the timing is really all going to depend on when they reach the goal set their planning to, but it’s going to be in the fourth quarter.
Jonathan Aschoff – Brean Murray Carret
Okay and Bill how much of $7 million in legal have you spent already in the first half?
I think it’s like $4.8 Jonathan.
Jonathan Aschoff – Brean Murray Carret
Okay that’s simple, thanks. Do we still expect R&D to up-tick uptickper quarter the way it just did or kind of flatten out a lot compared to the 1Q to 2Q sequence?
We expect it to go up a little bit in the third quarter and more dramatically in the fourth quarter as we start the Phase III studies for 65020.
Jonathan Aschoff – Brean Murray Carret
Okay and so simply the Treximet Treximet guided from the first half performance. Is that something you still think is conservative or do you think it might take the sales force a bit to start to behave in line with their new incentive that came their way in January for selling Treximet. Treximet?
Well, I think it’s no secret that Glaxo has gone through an overall corporate reorganization and clearly part of that affected the selling team for Treximet Treximet. So, I think it’s probably reasonable to assume that normally there is some sales force disruption as part of it, so we think our call for the second half being the same as the first half is probably pretty reasonable.
Jonathan Aschoff - Brean Murray Carret
Okay, thanks a lot guys.
Our next question is coming from the line of Michael Tong with Wells Fargo.
Michael Tong - Wells Fargo
Hi, good morning. Just a follow-up on Treximet Treximet question. Liz, you talked about not seeing a sharp ramp. Is it more sales force disruption as you just said or is it more payer resistance, just looking at where Treximet Treximet is going?
I think it’s an unfair combination of things. The sales force disruption is really more in the back half of the year, but as you probably notice with all products there is challenges at the payer and so they are having their share like everybody else. It’s just a wonderful challenging environment.
Michael Tong - Wells Fargo
Maybe a question for John. What’s the latest thinking in terms of the trial design for 650?
We have two areas of focus on there Michael. One is the reduction of ulcer, that’s actually very straightforward, because that mirrors the VIMOVO program. Our market research is interesting in that even though Aspirin is well known for its analgesic properties, a lot of doctors were training in the era NSAIDs and they don’t really appreciate the value of Aspirin.
So we are probably going to start with some studies demonstrating just how good Aspirin is in osteoarthritis patients and I think that will be a critical component of what we do and also moving the patient acceptance and the physician acceptance of the PA products as pain relievers.
But the overwhelming value of the product is that it offers excellent pain relief, anti-inflammatory activity and cardio protection in a single dosage form unlike the NSAID which as you all know have the potential for raising the risk of bad cardiovascular outcome.
Michael Tong - Wells Fargo
Okay and then lastly on VIMOVO. Bill, you guided to, not a significant royalty from VIMOVO in 2010. Is it something that AZ basically talked to you about because it seems to me if they are launching in the fourth quarter, there is going to be a pipeline field, so how are you going to recognize that royalty?
We did pay 10% on that sales, so the pipeline field, we would get 10% of that. So, we are just, I think guiding that we anticipate some promotional things to try to get patients on, and we are not sure exactly what the number is going to be, but certainly we will get royalties on the pipeline field, so you could anticipate that.
Michael Tong - Wells Fargo
Okay, great. Thank you.
(Operational Instructions) Our next question is coming from the line of Kimberly Smith with Jefferies & Company.
Kimberly Smith – Jefferies & Company
Hi. Based on the published claim construction for Treximet, how do you feel about the upcoming litigation?
We feel good about the upcoming litigation. We have been through the Markman Hearing and we are very satisfied with the outcome of that. We are doing our prep work. We know that the other side has offered up some arguments and I remind everybody that in the European prosecution of the same types of patent, we were faced with challenges from Almirall and Merck and defeated those challenges in the European patent court and the claims issued.
So, we are confident of what we are doing, we are not overconfident. We understand that there is a lot of a tension out there relative to this, but we believe that we were the first to come up with this particular concept of putting these two things together and affecting such a dramatic and synergistic benefit for patients and we believe that an issued patent is in fact a strong endorsement of that concept for us.
Kimberly Smith – Jefferies & Company
Dr. Plachetka, there are no further questions at this time. I will now turn the call back over to you for any closing comments.
Well, I appreciate that very much. As I said earlier, we are very pleased with the second quarter results and with the path that we are on to develop our PA franchise. We are going to be at the Bank of Montreal conference, August 5, and that’s at the Sheraton New York Hotel and Towers and then in September the 20 and through the 22, we will be at the UBS conference which as usual is held at the Grand Hyatt in New York, and we hopefully will see some of you there. So, signing off. And thank you operator for helping us today.
Thank you. Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time and we thank you for your participation.
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