Jennifer Good - President and CEO
Frank Muscolo - Corporate Controller and CAO
Gregg Gilbert - Bank of America/Merrill Lynch
Penwest Pharmaceuticals Co. (PPCO) Q2 2010 Earnings Call August 4, 2010 11:00 AM ET
The matters discussed herein contain forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties which may cause the actual results in future periods to be materially different from any other future performance suggested herein.
For this purpose, any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. Without limiting to the foregoing, the words believes, anticipates, plans, expects, intends, potential, appears, estimates, projects, targets, may, could and similar expressions are intended to identify forward-looking statements.
Important factors that could cause results to differ materially include the following: the timing of clinical trials such as the Phase IIa clinical trials referenced above and risks related to patient enrollment, risks relating to the commercial success of Opana ER, including our reliance on Endo Pharmaceuticals Incorporated for the commercial success of Opana ER, risks of generic competition, and risks at Opana ER will not generate the revenues anticipated, the need for capital, regulatory risks relating to drugs in development, including the timing and outcome of regulatory submissions and regulatory actions with respect to A0001, whether the results of clinical trials will be indicative of the results of future clinical trials and will warrant further clinical trials, warrant submission of an application for regulatory approval of or warrant of the regulatory approval of the product that is subject to the trial, whether the patents and patent applications owned by us will protect the company's products and technology, actual and potential competitions, and other risks as set forth under the caption Risk Factors in Penwest's quarterly report Form 10-Q filed with the Securities and Exchange Commission on May 10, 2010, which risk factors are incorporated herein by reference.
The forward-looking statements contained in this press release speak only as of the date of the statements made. Penwest disclaims any intention or obligation to update any forward-looking statements. And these statements should not be relied upon as representing the company's estimates or views as of any dates subsequent to the date of this release. TIMERx is a registered trademark of Penwest. All other trademarks referenced herein are the property of their respective owners.
I will now turn the call over to Jennifer Good, President and CEO of Penwest.
Good morning. Welcome to our review and discussion of Penwest's results for the three and six months ended June 30, 2010. Joining me on the call today is Frank Muscolo, our Corporate Controller and Chief Accounting Officer.
I will review our second quarter performance, provide a business update and review our corporate priorities. Frank will then review the financial results for the quarter and first half of 2010. And we will then open up the call to your questions.
For the second quarter of 2010, we reported record revenue and earnings for Penwest. Our revenues increased 159% year-over-year, and we reported net income of $0.26 per share. The strong quarterly earnings performance was driven by $13.6 million of revenue as well as a 28% reduction in our total operating expenses, as we continued to tightly manage our costs.
Our strong earnings this quarter were coupled with the three settlements of our outstanding Opana patent litigation. During the quarter, Penwest and Endo entered into agreements with Barr, Impax and Sandoz to settle this litigation.
Under our settlement agreement with Impax who has first-to-file status on the majority of the strengths of the product, Impax can begin marketing a generic version of Opana ER beginning on January 1, 2013. As a result of Impax's first-to-file status on these strengths, all other generic challengers cannot launch these strengths until 180 days after Impax launches.
Also, as a reminder, Actavis was first to file on the 7.5 milligram and 15 milligram strengths, and we had previously settled our litigation with them, allowing for a launch of these strengths in July 2011.
We believe these settlements remove a key uncertainty in our business and maximize the value of Opana ER for our shareholders.
I would now like to discuss the progress we've made in the business during the quarter. As many of you know, we had a new Board elected in June at our Annual Meeting. And we have detailed the corporate priorities adopted by the Board in our earnings release issued this morning. As I review the components of our business, I will discuss how each of the priorities impact the current business.
Let me begin with Opana ER, which is marketed in the U.S. by our partner, Endo. Opana ER continued to perform well in the market during the quarter. For the second quarter of 2010, we recorded royalty revenue from this product of $12.3 million. Net sales of Opana ER for the second quarter of 2010 were $56.6 million compared with $40.2 million in the second quarter of 2009, representing an increase of 41% in net sales.
Underlying demand for the product has remained strong, with IMS reporting TRx growth of 28% over the second quarter of last year. Endo continued to increase the share of Opana ER in the marketplace, and the overall pain market itself has experienced nice growth in the first half of this year.
The increase in net sales was also driven by a price increase that Endo took earlier this year. So demand and pricing for the product are both up.
Next, I want to discuss our internal development program, A0001, a compound we are developing for Friedreich's Ataxia and MELAS syndrome. These studies are underway, enrolling patients, and both studies have active patients in the trial as well as several patients who have completed each trial.
The timing for data has slipped one quarter as we worked through operational issues for both trials during the second quarter. These issues have been resolved and there is a backlog of patients waiting to be screened. We now expect to complete these studies during the fourth quarter and report top-line data by yearend.
One of our corporate priorities for A0001 is to find a partner to advance the further development of the compound and ultimately commercialize the drug. So while the studies are underway, we are seeking potential partners for this compound.
The third key element of our business is leveraging our drug delivery technologies and formulation expertise through collaborations. We had a strong revenue quarter in this business with a significant amount of work completed for our partner, Otsuka Pharmaceutical, and with the addition of a new deal in April with Alvogen Inc.
Our collaboration with Alvogen is a multi-drug, multi-year deal that contemplates the development of up to five drugs over the next two years. We have already commenced development work on the first candidate. We are responsible for the formulation of the compound, and Alvogen is responsible for manufacturing, conducting the trials, regulatory and legal and ultimately commercialization of the product if it's successful.
We are excited about our new collaboration and are enjoying working with our new partners at Alvogen.
Our corporate priorities include leveraging our drug delivery technologies and drug formulation expertise by focusing on establishing collaborations with significant revenue potential, while at the same time managing this portion of our business to ensure that at a minimum it's cash flow-neutral on an annual basis. Our performance in this business in the first half of the year clearly supports our priorities.
Finally, a quick comment about the continued financial discipline with which we are managing the company. We've been actively reducing the overhead of the company from the past two-and-a-half years to reflect the research needs of our business plan and priorities. As a result, this is the ninth straight quarter in which we've demonstrated a meaningful reduction in our operating costs compared with the year-earlier quarter.
In the second quarter, overall operating expenses decreased 28% compared to the second quarter a year ago. We will continue the review of the company's expenses as we go forward, as our Board is committed to further reducing our expenses to ensure that the vast majority of the Opana ER royalty stream is retained in the operating income of the company.
And finally, as announced in the first quarter, the Board remains committed to returning capital to our shareholders in the most tax-efficient manner available through a contemplated dividend in the fourth quarter of this year.
With that update, I'll now turn it over to Frank to discuss in more detail our results for the period.
Thank you, Jennifer, and good morning, everyone. I will spend a few minutes reviewing our financial results for the second quarter and six months ended June 30, 2010.
For the second quarter of 2010, we earned a net profit of $8.4 million or $0.26 per share compared to a net loss of $2.1 million or $0.07 loss per share for the second quarter of 2009. This was our fourth consecutive quarter of profitability.
This improvement in operating results reflect the increased revenue from Opana ER as well as a reduction in our total operating expenses of approximately $2 million compared with the second quarter of 2009. I'll now review each of these components in more detail.
Total revenues for the second quarter of 2010 were $13.6 million compared with $5.3 million for the second quarter of 2009. This increase in revenues was primarily due to $12.3 million of royalties recognized from Endo on its net sales of Opana ER, an increase of $7.9 million compared with our royalties from Opana ER in the second quarter of 2009.
This increase in royalties from Opana ER was due to increase in net sales of Opana ER as well as the fact that we received our full royalty rate on Opana ER as compared to the second quarter of 2009 when the royalties due to us was subject to a reduction as Endo had not yet recouped the remainder of $28 million in development costs that they had funded on our behalf.
These development costs were fully recouped by Endo in the first quarter of 2010, which resulted in our earning a full royalty rate in our second quarter.
Our increased revenues were also attributable to increased collaborative licensing and development revenue of $582,000 primarily as a result of the milestone received under one of our development collaborations with Otsuka and increased development activity under our collaborations with Otsuka and our new collaboration with Alvogen.
I now want to briefly summarize the key components of an amendment we and Endo signed during the second quarter of 2010 in conjunction with our settlement agreement with Impax.
We have agreed to a cap of 22% on royalty payments beginning with the second quarter 2010 through the fourth quarter of 2012, at which time an adjustment will be made to reduce our overall royalties by $7.3 million as compared to the royalties we would have received under our existing royalty schedule over this time period.
In addition, we agreed to a cap of 20% on royalty payments beginning in the first quarter of 2013 through the fourth quarter of 2013, at which time an adjustment will be made to reduce our overall royalties by $700,000 as compared to the royalties we would have received under our existing royalty schedule over this time period.
Our operating expenses in the second quarter 2010 included a charge of $467,000 relating to the accelerated vesting of certain outstanding stock options and restricted stock. Following the proxy contest in which we were involved related to the 2010 Annual Meeting of Shareholders, the election of three new class I directors resulted in the change of control of our Board of Directors under the terms of certain outstanding stock option and restricted stock awards granted to employees and directors.
As a result, on June 30, 2010, the date the election results at the Annual Meeting was certified, unvested stock option to purchase approximately 538,000 shares of our common stock and 25,000 shares of unvested restricted stock were automatically accelerated and vested in full.
These accelerations resulted in a charge of $467,000 in the second quarter of 2010, of which $226,000 was recorded to selling, general and administrative expense and $241,000 was recorded to research and product development expense.
SG&A expenses for the second quarter of 2010 were $2.5 million compared with $3.3 million for the second quarter of 2009. The decrease of $830,000 was primarily due to lower professional fees, including fees in connection with our 2010 proxy contest as compared to such costs relating to our 2009 proxy cost and related litigation, and lower compensation expenses as a result of staff reductions implemented in the fourth quarter of 2009.
The costs we incurred in the second quarter related to our 2010 proxy contest totaled $821,000 as compared to $1.1 million in the costs we incurred in the second quarter of 2009 related to last year's proxy contest.
Partially offsetting these lower costs in this quarter was the addition of share-based compensation expense of $226,000 related to the accelerated vesting of stock options and restricted stock, as discussed above.
Research and product development expenses for the second quarter of 2010 were $1.9 million compared with $3.4 million for the second quarter of 2009. This decrease of $1.5 million was primarily due to lower spending on the development of A0001. The decrease is also attributable to increased allocations of internal R&D costs relating to our drug delivery technology collaborations to cost of revenues and lower compensation costs as a result of staff reductions implemented in the fourth quarter of 2009.
Partially offsetting these lower costs were the additional share-based compensation expense of $241,000 related to the second quarter 2010 accelerated vesting of stock options due to the change in control discussed above.
For the six months ended June 30, 2010, we earned a net profit of $12.2 million or $0.38 per share compared with a net loss of $3.1 million or $0.10 loss per share for the six months ended June 30, 2009. This improvement in operating results again reflects the increased revenue from Opana ER and the reduction in our total operating expenses of approximately $3.2 million compared with the six months ended June 30, 2009.
Total revenues for the six months ended June 30, 2010, were $22.4 million compared with $10.5 million for the six months ended June 30, 2009. This increase in revenue was primarily due to $19.5 million of royalties recognized from Endo on its net sales of Opana ER for the first six months of 2010 compared with $8.8 million in royalties from Opana ER for the first six months of 2009.
Our increased revenues were also attributable to increased collaborative licensing and development revenue of $1.1 million primarily as a result of increased development activity under our collaborations with Otsuka and Alvogen that I mentioned earlier, which resulted in increased revenues recognized from reimbursements of our development costs as well as the milestone payment we recognized.
Our SG&A expenses for the six months ended June 30, 2010, were $4.1 million compared with $5.6 million for the six months ended June 30, 2009. The decrease of $1.5 million was primarily due to lower compensation expenses as a result of staff reductions implemented in the first and fourth quarters of 2009, and lower professional fees, including fees in connection with the our 2010 proxy contest as compared to such costs related our 2009 proxy contests and related litigation.
The cost we incurred in the first half of this year related to our 2010 proxy contest totaled $846,000 as compared to $1.3 million in cost we incurred in the first half of last year related to our 2009 proxy contest.
These decreases were partially offset by higher share-based compensation expense in the 2010 six-month period, largely reflecting a non-cash credit recorded in the first quarter 2009, which resulted from the forfeiture of stock options held by former employees in connection with our January 2009 staff reductions, and the addition of share-based compensation expense related to the second quarter 2010 accelerated vesting of stock options and restricted stock resulting from the change of control in our Board of Directors, as described above.
Research and product development expenses for the six months ended June 30, 2010, were $4.1 million compared with $6.4 million for the six months ended June 30, 2009. This decrease of $2.3 million was primarily due to lower spending on the development of A0001. The decrease was also attributable to lower compensation costs as a result of staff reductions implemented in the first and fourth quarters of 2009 and increased allocations of internal R&D costs relating to our drug delivery technology collaborations to the cost of revenues.
Partially offsetting these lower costs was additional share-based compensation expense related to the second quarter 2010 accelerated vesting of stock options discussed above.
I'll now take a moment to discuss our cash position as of June 30, 2010, and highlights of the cash flows for our first six months of 2010. At quarter-ended June 30, 2010, we had cash in investments of $14.4 million, an increase of $2.9 million from our cash level at December 31, 2009.
For the first six months of 2010, our operating activities provided net cash of $5.5 million compared with $1.5 million of net cash used in operating activities for the first six months of 2009. Cash used in financing activities in each of the first six months of 2010 and 2009 included $2.7 million in principal payments on our term non-payable. At June 30, 2010, we had $1.4 million of principal remaining on this term loan, which is expected to be fully paid off by September.
As an update to the financial guidance we provided at the beginning of the year, for the full year 2010, we are increasing our revenue guidance and currently expect revenue to be in the range of $46 million to $48 million as compared to our previous revenue guidance of $43 million to $45 million. This has been driven by higher-than-forecasted net sales of Opana ER as well as increased revenues from our drug delivery technology collaborations.
As a result of an ongoing review of our overall expenses by the Board of Directors, we are suspending our expense guidance provided at the beginning of the year and will provide new expense guidance at a later date.
Now, let me turn the call back to Jennifer for some closing remarks.
Actually no closing remarks. Frank, that was very thorough. Frank and I will now be happy to open up the call to any questions that you may have.
(Operator Instructions) Your first question comes from the line of Arthur Friedman of (Friedman Asset Management).
I have several questions here I wanted to ask just to get clarification. I've not quite understood the strategy about capping the royalty stream. Why did you agree to that, and what were the trade-offs? Can you just give us a little more color on that?
Yes, sure. This was done in conjunction with our patent settlements with Impax Laboratories with Endo. Our patents on Opana ER expire in September 2013. When we were discussing on January 2013 date, we wanted to make sure that Endo was incented with what we thought our shareholders in our interest were to go ahead and settle this litigation.
If they're in Endo's shoes, they were actually giving up potentially nine months of the brand here, because we actually felt quite comfortable on our legal case. But we felt for Penwest, the overhang and sort of the financial surety we could get, we needed to incent Endo to sort of come along.
So Endo also has done some other deals in conjunction with this with Impax. So there was some money that traded hands between them. So this was really our way to come to the table and make sure that we were aligned with Endo to get this done around January 2013 and make the economics work for them.
That actually makes a lot of sense. I just wanted to understand, because on the surface, it didn't make sense. It makes sense now. Second of all, and this is more a question for Frank. In terms of the recording of the stock options, I was a little unclear in terms of GAAP. The $241,000 recorded in R&D for the stock options? Can you do that? That doesn't make sense to me. I didn't understand it.
The fact that has been charged to R&D really is the fact that those individuals work in the R&D group. It's part of their compensation.
I've another question. In terms of further cuts, if you're going to seek further collaborations with the TIMERx, then exactly who is less to cut in terms of further staff reductions? You wouldn't want to cut the salesmen. So would you be cutting scientists?
Really my job as I manage the organization is to make sure we've got an organization that maps its business priorities. So for this round, when we reviewed at the Board, their commitment you can see in our priorities is to license 0001. So we don't anticipate we'll be doing further development work on that, although that's obviously always a decision we can wither based on the data.
So these cuts are mostly scientists that related to the A0001 program. We do have in place a fully functioning capable organization to support these drug delivery collaborations. That unit, as sort of I described for a while, is breakeven on a cash flow basis. So that group involved about 12 folks. It's really 11 scientists and one business development guy who is the co-inventor of the technology and still leading that effort for several years. So I'm comfortable we can execute on our drug delivery deliverables with this organization.
The strategy of being cash flow neutral as opposed to cash flow positive, I just find it a little puzzling. Can you talk about that?
It's a good question. It's probably a wording thing. We look at it in a short term in making sure we break even from a cash perspective, because in the restructure of most of these deal, we try maintain the real financial leverage or upside of the deal and the royalty streams, because you can do these two ways.
You can take more money upfront and really get not a lot when it goes to market. Or you can try and operate your business so you're covering your cost, but then you get a lot more significant royalty stream on the back-end, which as you can see with Endo was our strategy if you're around way long ago. On Mylan, we had above market rates. And so we're trying to break even for now, but maintain much more of the upside as these drugs go to the market. We think that's probably better for our shareholders in the long run.
(Operator Instructions) Your next comes from Gregg Gilbert of Bank of America/Merrill Lynch.
Gregg Gilbert - Bank of America/Merrill Lynch
A couple on Opana. First, is your higher guidance due to the better-than-expected Opana performance for the second half of the year?
It's two things. Endo had a very strong second quarter with Opana ER that exceeded the plan. It's also our drug delivery businesses running at a much higher level than we forecasted as well. We actually haven't raised the forecast for the second half of the year for Opana, but that's just being conservative. I think if you look at the second quarter, that's definitely upside here to the numbers.
Gregg Gilbert - Bank of America/Merrill Lynch
Are there any new strengths or forms of Opana ER that can be launched before January of 2013 that could help Penwest?
I'm going to defer to Endo to answer those. This is an important product for Endo. And I think it's become even more important as it's sort of been short up through 2013. So being our marketing arm, I think we can be assured they are sort of thinking about how to maximize the franchise.
Gregg Gilbert - Bank of America/Merrill Lynch
Lastly, can you give us any more history and details around the generic drug deal with Alvogen? That'd be interesting.
Alvogen is kind of an interesting group. Actually a lot of them came out at the whole activist crowd, a lot of the management team in (inaudible). So we've known them obviously over the years. They've sort of bounded together, and they've founded this private company, that's on a very aggressive growth trajectory, much like they took after (Mylan).
They had come to us, because they had known our TIMERx technology actually from the folks that had been inside Mylan. And they view it really as one of the only competitors to the Alza, Aureus Systems. And there's not been a lot of other technologies that can actually compete with the Alza system. So they had come in and wanted to so some of these difficult-to-do generics.
And so that's what we're going to target with them. I think they are an interesting partner to do that. They're aggressive. They've got a proven track record as a management team, and really our goal is to find five compounds over the next two years and move quickly on them and get them filed.
Gregg Gilbert - Bank of America/Merrill Lynch
So are any of those candidates far enough long to talk about? For example, is Concerta a possibility?
Gregg, I can't comment on what we're working on, just like any generics company wouldn't. We are working on one compound already and moving aggressively. But probably you shouldn't expect that I'll really talk about any of those compounds until they're filed and announced.
And there are no further questions at this time. So I'll turn the call back over to the presenters.
We greatly appreciate your support and your time today. I will be speaking at the BMO Conference in New York City tomorrow. I'm speaking at Gregg's conference, the Bank of America Conference, in Southampton next week. I hope to have the opportunity to see some of you there. Thank you.
This concludes today's conference call. You may now disconnect.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!