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Inspire Pharmaceuticals, Inc. (NASDAQ:ISPH)

Q2 2010 Earnings Call Transcript

August 5, 2010 8:00 am ET

Executives

Adrian Adams – President and CEO

Jenny Kobin – VP, IR and Corporate Relations

Tom Staab – EVP and CFO

Analysts

David Moskowitz – Madison Williams

David Amsellem – Piper Jaffray

Joseph Schwartz – Leerink Swann

Jon Stephenson – Summer Street Research

Operator

Good morning. My name is Jennifer, and I will be your conference operator today. At this time, I would like to welcome everyone to the Inspire Pharmaceuticals second quarter 2010 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (Operator Instructions) As a reminder, ladies and gentlemen, this call is being recorded today, Thursday, August 5th, 2010. Thank you. I will now turn the conference over to Mr. Adrian Adams, president and chief executive officer. Please go ahead, sir.

Adrian Adams

Thank you, operator, and good morning, everyone. And thank you for joining us for Inspire's second quarter 2010 financial results webcast. With me this morning are Executive Vice President, Chief Financial Officer, and Treasurer Tom Staab; and, Vice President of Investor Relations and Corporate Communications Jenny Kobin. Before I proceed, I would like to ask Jenny to read our forward-looking statement. Jenny?

Jenny Kobin

Thank you, Adrian. Before we get started, I would like to remind everyone that we have a slide presentation to accompany our conference call this morning, which can be viewed at our Web site at inspirepharm.com. If you are listening to this call on your telephone, you may access a synchronized slide deck on our Web site by choosing the link on our webcast page that says Click Here to listen via phone.

This conference call and presentation contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995, which convey management's expectations, beliefs, plans, and objectives regarding future performance. These forward-looking statements are subject to a wide range of risks and uncertainties that could cause results to differ in material respects, including those relating to product commercialization, product development, revenue, expense, earnings and cash utilization expectations, intellectual property rights, adverse litigation developments, competitive products, results and timing of clinical trials, success of marketing efforts, the need for additional research and testing, delays in manufacturing, funding, and the timing and content of decisions made by regulatory authorities including the US Food and Drug Administration.

Actual results could differ materially from those described in this conference call and presentation. Information on various factors that could affect Inspire's results is detailed in the reports we filed with the Securities and Exchange Commission. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements.

Now, I'll turn the call back over to Adrian to review today's agenda provided on slide three.

Adrian Adams

Thank you, Jenny. I'm pleased to provide an update this morning to our shareholders and analysts on the company's second quarter financial results, including our commercial accomplishments; progress in our research and development programs; and, corporate initiatives to structure, shape, and resource the organization to success. During the second quarter and first half of the year, the organization has remained tightly focused on executing against our key corporate strategic objectives that we believe will help build shareholder value over time. We are looking forward to providing you with our key accomplishments and updates throughout this webcast.

As always, I will begin by providing you with an overview of the main areas that we will cover during today's webcast. First, I will review a snapshot of our accomplishments to-date related to the corporate objectives we outlined at the beginning of this year. Second, I will review the continued commercial success of Inspire's sales force during the second quarter and first half of the year. Third, I will review the key updates in our late-stage research and development programs, including the AzaSite for blepharitis and denufosol for cystic fibrosis programs. Then I will turn the call over to Tom to review the financial results for the second quarter and review our revised 2010 financial guidance. I will then conclude the call with a review of our upcoming milestones for the second half of the year as they relate to our corporate objectives. And then, open the call up for your valued questions.

Please now refer to slide number four. This slide provides a representation of Inspire's core capabilities and our plans to build shareholder value over the course of time through focused execution against our strategic imperatives. Inspire's mission is to build and commercialize a sustainable plant line of innovative new products based on our technical, scientific, and commercial expertise. As many of you know, our focus of Inspire is in the two specialty pharmaceutical markets of ophthalmology, anchored by AzaSite and supported by a portfolio of revenue-generating products; and, pulmonology, anchored by denufosol, our potential breakthrough product for cystic fibrosis. Our five key strategic imperatives are aligned towards creating value for shareholders by building on these foundations for success and growing the business within both the ophthalmology and pulmonology areas.

Please now refer to slide number five, where I will discuss these five key strategic imperatives with a view towards providing you with a summary of Inspire's continued execution and accomplishments in each of these areas during the second quarter and first half of 2010.

First, I am pleased to report that in terms of Inspires commercial performance, our specialty ophthalmology sales force continues to drive increased revenue and prescription growth quarter-over-quarter for our anchor product AzaSite, a product indicated for bacterial conjunctivitis. We are delighted to report that AzaSite experienced sustained revenue growth of 27% and solid prescription growth of 32% over the second quarter of 2009 – and revenue growth of 33%, and prescription growth of 36% over the first half of 2009. Our sales force also continued generating the revenue stream we enjoyed from core promotion of ELESTAT. And we'll continue to promote this product until a generic version is launched. As we have previously disclosed, we still expect a generic epinastine product to be launched sometime before the end of this year.

Second, we continue to deliver solid financial results, which Tom will review in more granular detail later on in the webcast. I would like to highlight a few of the key accomplishments in this area. Our overall second quarter revenue grew nicely by 18% over the second quarter of 2009. And our six-month revenue grew 32% over the first half of 2009. We have also reduced net loss by 7% for the quarter and 18% for the first half of the year, compared to the same periods in 2009.

Another key component to strengthening our financial position is reducing our current debt balance, which we continue to pay down each quarter. And as previously reported, we expect to have minimal amount of this debt on the balance sheet at the end of this year.

Third, we believe we are making good progress with respect to execution against all key research and development milestones with our late-stage programs with denufosol for cystic fibrosis and AzaSite for a potential new indication for blepharitis. In the denufosol program, we remain focused on completing and announcing results from our second Phase 3 pivotal trial with denufosol, TIGER-2, in the first quarter of 2011. If we receive positive results from this trial, we will target a potential NDA submission with the FDA for the second half of 2011. And with six months prior to review, we hope to be in a position to commercially launch denufosol sometime in 2012. As we prepare for these important clinical and regulatory milestones, we continue to build awareness and understanding of the data from our first Phase 3 clinical trial with denufosol, TIGER-1, through presentations at multiple scientific conferences.

I'm also pleased to provide an update related to one of our ongoing franchise development activities for AzaSite. Our team has been working to design, produce, and obtain regulatory approval of a new, improved bottle for the product as part of our long term growth strategy for the brand. As you may know, AzaSite is a viscous drop, which allows the product to maintain contact with the ocular surface, an important differentiating factor for the product. The new improved bottle is being designed to seek an optimized shape to specifically account for the product's unique attributes with the goal being a superior patient experience.

In our development program with AzaSite for blepharitis, our team has been working to refine clinical trial design for additional Phase 2 work. This work is expected to begin in late 2010.

Fourth, in terms of corporate development and licensing, our Asian partner, Santen Pharmaceutical, a premier ophthalmic company with 80% market share in dry eye in Japan, received Japanese regulatory approval for their diquafosol dry eye product called Diquas. We originally entered into a development, license, and supply agreement with Santen for diquafosol in 1998. And we recently amended that agreement to be released with our API supply obligation in order to optimize operational efficiencies. As has been previously communicated, Inspire will be entitled to receive a tiered royalty rate on net sales of Diquas in Japan with a minimum high single-digit rate and a maximum low double-digit rate. According to Santen's recent quarterly announcement, Diquas is in preparation for commercial launch. We look forward to keeping you updated on any announcements Santen makes related to their launch process.

In terms of our other dry eye partnership, we are currently engaged in discussions with Allergan with respect to several points of debate regarding rights and obligations under our licensing agreement, including the direction of the PROLACRIA development program on our rights to Restasis royalties, including core promotion rights.

In the broader aspects of corporate development in licensing, our strategy remains focused on assessing opportunities in the ophthalmology space, including assets that may provide near and mid-term value of revenue, and leverage our commercial infrastructure as well as looking at small M&A opportunities. On the pulmonology side, we are assessing opportunities to leverage Inspire's assets outside of North America, and exploring assets that will broaden the specialty pulmonary therapeutic area, which would likely occur after receiving the TIGER-2 for our results.

Finally, we have made a series of management changes designed to structure, shape, and resource the organization for long term success. During my first six months with the company, I've interacted with numerous internal and external stakeholders, and evaluated the management structure needed to build on our foundations for success. The changes we made, including expanding the Inspire leadership team and revising job responsibilities and reporting structures provide focus of both the ophthalmic business, in an effort to drive sales, and on the denufosol program, in an effort to ensure seamless regulatory and commercial preparation.

Please now refer to slide six. I'd like to move on to a more detailed review of the commercial sales force's success in continuing to grow the AzaSite brand. Quarterly revenue for the product grew from $7.6 million in the second quarter of 2009 to $9.6 million in the second quarter of 2010, reflecting a 27% increase in revenue. Our sales force also made good progress in increasing prescriptions from approximately 131,000 in the second quarter of 2009 to 173,000 in the second quarter of 2010, an increase of 32%.

As I have previously mentioned, our specialty ophthalmology sales force is very focused on targeting the eye care specialist market. And as you can see on the slide, they have made impressive progress in two key metrics. First, from an overall eye care specialist perspective, our sales force has increased AzaSite's market share from 8% in the second quarter of 2009 to 11% in the second quarter of 2010. Also importantly, they have made substantial progress in the eye care specialist target call audience, increasing the market share amongst the targeted call audience from 13% in the second quarter of 2009 to 19% in the second quarter of 2010.

Now, please refer to slide seven for a brief review of AzaSite growth on a year-to-date basis. AzaSite revenue and prescription growth over the first half of the year both increased by 33% and 36%, respectively, compared to the same period in 2009. Revenue grew from $13.8 million in the first half of 2009 to $18.3 million in the first half of 2010. Similarly, total prescriptions grew from approximately 248,000 prescriptions in the first half of 2009 to 337,000 prescriptions in the first half of 2010. We will continue to track this information and share it with you over the course of the year.

I'd now like you to refer to slide eight to review some other key metrics regarding the sales force's enhanced productivity. Since launch, the commercial organization has been directed to focus on growing the depth of prescribers by increasing the number of prescriptions written and increasing in the breadth of our call audience with our increasing prescriber base since launch. We remain very pleased with this upward trend and the sales force's continued efficiency and productivity.

These targeted efforts have resulted in an impressive 32% increase in the total number of total prescriptions per month for each sales representative in addition to increase in the total monthly prescriptions written per target by 26% to 4.2 per target doctor. These are impressive increases in what remains a challenging environment for sales professionals. And we will continue to evaluate ways to increase the sales force's productivity to enhance growth in the future.

I would like now to move on to research and development updates over the past quarter beginning on slide nine, with a brief discussion of our AzaSite for blepharitis product. To begin with the discussion of the disease, blepharitis is characterized by inflammation of the lid margin, which has a multi-factorial etiology. The disease can subdivided into two categories that can overlap, anterior blepharitis, which is an acute disease associated primarily with the presence of bacteria; and posterior blepharitis, which is a chronic disease primarily associated with meibomian dysfunction. There is no product currently approved in the treatment of blepharitis. According to an Inspire-funded survey review of blepharitis, greater than or equal to 34 million adults may suffer from some form of blepharitis over a 12-month period in the United States.

We are developing AzaSite as a potential treatment for this disease. We've previously announced results from initial Phase 2 trials in patients with anterior blepharitis, and have later led to a critical plan for moving forward to pursue a potential indication for the treatments of this disease. Our primary focus until the end of the year is to refine future clinical trial design, including work to further define patient populations; improving the methods for quantifying signs and symptoms, including utilizing a photographic central reading center; and, accounting for the (inaudible) in the control group. We remain on target to begin additional Phase 2 work in late 2010 to inform a potential Phase 3 program initiation in 2011.

Now, I would like to review updates in the denufosol for cystic fibrosis program. So please refer to slide number 10. The cystic fibrosis market continues to be under-served, with only three approved CF lung disease prescription products available for patients, two inhaled antibiotics and an inhaled mucolyptic, all of which treatment downstream effects of CF lung disease progression, but do not target the underlying cause of the disease.

We are developing denufosol, a first-in-class ion channel regulator targeted on early disease state intervention that potentially corrects the ion transport defect in patients independent of CFT or genotype. Denufosol is designed to enhance airway hydration, and mucociliary clearance by, firstly, increasing chloride secretion; secondly, inhibiting sodium absorption; and, thirdly, increasing ciliary beat frequency. These integrated pharmacological actions and denufosol's potential to reach the small airways are key to maintaining lung function and potentially delaying the progression of this dreadful disease.

Please now refer to slide 11. Before reviewing the time lines and scientific awareness of franchise development plans for denufosol, I would like to highlight that denufosol dates are recently presented at the European Cystic Fibrosis Society meeting by Dr. Richard Moss of Stanford University that focused on a pre-specified analysis at the adolescent subgroup patients in our first positive Phase 3 clinical trial with denufosol, TIGER-1.

To appreciate the relevance of this data, it helps to understand the overall impact of the disease on lung function. If you look at the graph on the left side of the slide, you will see the medium percent predicted FEV1 plotted by age for CF patients in 1990 and 2008 as reported from the CF Foundation's patient registry. The shaded area represent the years of adolescence. There are two important aspects to highlight in this graph.

First, the improvement in lung function from 1990 to 2008 is primarily attributed to improvement in pediatric care. The percent predicted FEV1 from age 6 to 12 observed in the chart has improved substantially over the 18-year period.

Second, when you inspect the part of the graph shaded in blue, representing CF patients during adolescence, you'd notice two important things. First, during adolescence, CF patients are especially vulnerable to an accelerated rate of decline in lung function; and, secondly, the cross sectional rate of decline in medium percent-predicted lung function for adolescent patients have not improved from 1990 to 2008 despite the introduction of multiple treatments for cystic fibrosis.

With this in mind, I'll now present the result from the adolescent subgroup of patients from TIGER-1. One hundred and twenty-three of the 352 patients in TIGER-1 were adolescents. First, I will show you the main change from baseline FEV1; followed by analysis of and of results expressed as the percent predicted FEV1, which accounts in the patient's changes in age and height during the trial.

Please refer to slide number 12. The data on this slide is from a pre-specified analysis studying the effects of denufosol in adolescent patients in the TIGER-1 trial. The graph shows the adjusted mean change from baseline of the week 24 endpoint for the Intent-to-Treat or ITT population in the adolescent subgroup. You can see that the treatment, in fact, in adolescents was 122 milliliters, which is nearly three-fold of the 45-milliliter treatment effect observed in the ITT population.

Now moving on to slide 13, the data is presented as percent predicted FEV1, which accounts for patients changes in age and height during the trial. As you can see by looking at the blue line, the adolescent patients on denufosol essentially maintained their lung function over the 24-week and 48-week periods. In contrast, the adolescent patients on placebo, represented by the gray line, experienced a statistically significant decline in lung function over the first 24 weeks, which then appear to stabilize when the patients were switched from placebo to denufosol. This trial was similar in the broader ITT population.

As highlighted previously, adolescence is a particularly volatile time for CF patients in terms of the rate of loss of lung function. The data seen in TIGER-1 in this patient population underscores the potential of denufosol to be an early disease state intervention therapy that may potentially delay the progression of this disease. I would also like to remind you that the audio reply of Dr. Moss' presentation on this data is currently available on our Web site.

Let me refer to slide 14 for a high-level review of the denufosol opportunity and our plans to leverage the product. Our team is diligently preparing for top line data release from our second pivotal Phase 3 clinical trial of Tiger -2 in the first quarter of 2011. If these results are positive, our plan is to file an NDA submission with the US FDA in second half of 2011. Our team has already begun preparing for an FDA Advisory Committee meeting first and a submission, which is expected for all new chemical entities like the denufosol.

We have begun significant activities to prepare the scientific community. Our team is working with key opinion leaders in the CF area, both within North America and also in Europe to present unpublished clinical data at medical conferences. Denufosol data will be presented in all presentations of the European Respiratory Society meetings in Barcelona in September and at the North American CF Conference in Baltimore in October. To increase awareness of denufosol clinical trial results and scientific data, we'll also be involved in regional advisory board meetings with key opinion leaders.

We're also working on a series of franchise development activities. I'm pleased to announce that we have initiated the first clinical trial in studying expanded patient populations with denufosol. This small trial will evaluate the safety and tolerability of denufosol in 2-year old to 4-year old patients since our TIGER-1 and TIGER-2 results studied patients down to the age of five. We're also planning to initiate a trial studying patients with more impaired lung function and are continuing to enroll TIGER-2 patients into the labeled three-year denufosol trial to evaluate the potential disease modifying effects of denufosol over a four-year period, including the time in TIGER-2.

That concludes the corporate highlights for the quarter. And with that, I would like to turn over the call to Tom for the financial review. Tom?

Tom Staab

Thank you, Adrian, and good morning, everyone. I am pleased to provide you with an overview of our second quarter 2010 financial results as Adrian has mentioned. There are three key things on which I'd like to focus my comments for the quarter, hose are, one, solid and continued revenue growth; two, decreased cash burn from prior quarters; and, three, revised guidance for 2010, specifically relating to a reduction in operating expenses and cash utilization from previous expectations.

On slide 15, you'll notice that in the second quarter of 2010, we were able to successfully reduce our net loss by 7% to $8.8 million as compared to the second quarter of 2009. We successfully achieved this reduction through a combination of revenue growth, judicious expense management, and decreased interest expenses through the repayment of our debt. Our net loss per share in the second quarter of 2010 improved by 35%, with an improvement of $0.06 per share based on a $663,000 decrease in the absolute dollar loss and from an increase share count following an equity financing completed late August to arrive at a net loss of $0.11 per share.

Moving on to slide 16, we continued our historical trend of double-digit revenue growth in the second quarter of 2010 as compared to 2009. Total revenue for the second quarter of 2010 was $27.3 million, an 18% increase from 2009. When breaking down the revenue into its individual components, AzaSite revenue increased 27% to $9.6 million in the second quarter of 2010, compared to $7.6 million in 2009. We believe our commercial organization continues to increase awareness and use the beta site in the marketplace, resulting in strong prescription growth of 32% and increased market share in our target call audience, which is approaching 20%.

The difference between revenue and script growth rates was primarily the result of a reduction in inventory levels as wholesalers have tightened inventory quantities to approximately one-and-one-half weeks of demand, reflecting a significant decrease from previous levels held over the last two years, which generally range from two to three weeks on hand. In addition, we have seen recent growth in several large Medicare part D plans, which carry a higher rebate percentage.

As you compare to the first quarter of this year, we have been able to grow AzaSite revenues 11% despite the loss of approximately $1 million of hospital usage associated with an erythromycin supply shortage that was resolved earlier this year. Excluding this $1 million benefit, AzaSite enjoyed approximately 25% of organic growth from the first quarter.

Continuing on, aggregate co-promotion and royalty revenue was $17.7 million in the second quarter of 2010. Breaking that down into its individual components, we recorded $11.2 million in royalty revenue from Restasis in the second quarter of 2010 as compared to $8.9 million in 2009. We recorded $6.5 million from co-promotion from revenue from ELESTAT in the second quarter of 2010 as compared to $6.6 million recognized in 2009.

It is important to note that our 2009 activity included the deferral of ELESTAT revenue due to annual contractual minimums applicable at this time. As of January 1st, 2010, all co-promotion revenue on ELESTAT is recorded that the product as sold as we no longer are under contractual minimums that require revenue deferral. On an apples-to-apples comparison, by excluding the deferred revenue impact in the second quarter of 2009, ELESTAT revenue increased approximately 3%.

Now, let's move on to slide number 17 for a discussion of our operating expenses. In the second quarter of 2010, operating expenses increased by approximately $4 million to $35.9 million. This increase was largely due to increased administrative expenses for executive management changes and the related compensation and other expenses for those changes, resulting in approximately $3 million of additional expense in the second quarter of 2010 as well as an increase of cost of sales associated with the increased AzaSite sales volume. These increases were partially offset by a decrease in research and development expenses. It is important to note, approximately 85% of our second quarter research and development work was focused on denufosol as we look forward to TIGER-2 results.

Now, I'd like to direct your attention to the bottom row of the slide showing our cash utilization. As mentioned earlier, an 18% growth of aggregate revenue, tight control over operating expenses, and the continued repayment of debt yielding lower interest payments have enabled us to reduce our cash utilization by 29% when compared to the second quarter of 2009. Accordingly, we have utilized $9 million in the second quarter of 2010 and $23 million of cash in the first half of the year.

That brings us to our balance sheet summary on slide 18. We ended the second quarter with $106 million in cash and investments and working capital of $83 million, representing an excellent financial foundation to leverage our commercial organization and prepare for a US denufosol launch in 2012. Our working capital position has decreased a modest $2 million or very slightly from the end of last year.

Lastly, I'd like to highlight the continued decrease of our debt balance. We have decreased our current debt balance $10 million from 2009 to a June 30 balance of $15 million with the expectation that we will have approximately $5 million at the end of 2010 and we'll have our current debt entirely paid off by the first quarter of 2011. Furthermore, principal repayment on our outstanding debt represents approximately 45% of our cash burn for the first half of the year.

Please now refer to slide 19, which contains our revised 2010 financial guidance and as outlined in our press release issued earlier this morning. If you are following the slide deck accompanying the call, you will note that we have highlighted in blue those guidance items, which have changed from previous expectations for ease of identification.

Going through the detail of our guidance, we continue to expect 2010 aggregate revenue in the range of $100 million to $111 million, which is unchanged from previous expectations. We have, however, revised guidance on 2010 aggregate operating expenses, which we now expect to be in the range of $145 million to $159 million, reflecting a narrowing of the range from previous guidance.

Specific operating expense category guidance is as follows, cost of sales $13 million to $18 million, research and development expenses $48 million to $60 million, selling and marketing expenses $48 million to $53 million, and general and administrative expenses $27 million to $32 million. Included within this operating expense guidance are project stock-based compensation costs at approximately $8 million to $12 million.

Furthermore, expected cash utilization in 2010 has been revised. And cash burn is now expected to be in the range of $53 million to $65 million, reflecting a reduction from previous guidance. This amount continues to include $20 million of principal debt repayment and allowed us to achieve our objective of being debt free by the end of the first quarter of next year.

In summary, we are pleased to be executing efficiently and effectively on our planned financial and operating objectives for the year. We are well-positioned to achieve success, and continue to look forward to a strong close of 2010 and eventful 2011.

Now, I'd like to turn the call back over to Adrian for some closing remarks.

Adrian Adams

Thank you, Tom. I'd like to conclude this morning's call on slide 20 for the look ahead to what you can expect over the next six months as we remain focused on executing with excellence against our core 2010 corporate objectives.

First, we will continue to leverage our commercial infrastructure in an effort to enhance sales force productivity to drive AzaSite prescription and revenue growth.

Second, we will continue to work towards delivering strong financial results through tightly managing our expenses, whilst making measured investments and opportunities targeted towards building shareholder value for the time and meeting our financial guidance for the year.

Third, we will pursue excellence in our research and development programs, including the TIGER-2 trial with top line data release in quarter first of 2011; enrolling patients in the three-year open-level trial; conducting franchise development activities, including the trial studying CF patients; and, initiating additional Phase 2 work with AzaSite for blepharitis.

Fourth, we will continue to assess opportunities for a strategically aligned corporate development and licensing activities.

And fifth, we will structure the organization for success through the recruiting and anticipated hiring of two key leadership roles in the areas of research and development and (inaudible) operations and completing a fully integrated pre-launch our launch plan for denufosol to ensure appropriate resources and expertise are in place in advance of potential commercial launch in 2012.

With that, I would now like to open the call for your questions about the quarter. Operator, can you please give the instructions?

Question-and-Answer Session

Operator

(Operator Instructions) Please hold while we compile the Q&A roster. Your first question is from David Moskowitz with Madison Williams.

David Moskowitz – Madison Williams

Hi. Thanks for taking my questions. Just a couple here, on ELESTAT, you expect that to essentially go away to generic competition before the year ends. That leaves you with basically only one product that you're promoting with roughly 100 sales people. Can you talk about the strategic initiatives behind what you plan to do with that sales force in the ophthalmology business? And then I guess second question would be, can you give us a little color on your decision to part ways with the scientific officer at (inaudible)? Thanks.

Adrian Adams

On the first one with ELESTAT, you're correct. We have given guidance. And this has been known for some time that we expect a generic of ELESTAT in the second half of this year. And clearly, in the event that the product rolls away from a generic point of view, then that will give us an opportunity to – on two fronts. Firstly, it will give us some increased time to focus on AzaSite. So we are very, very pleased with the way that product is going from a prescription and revenue basis. And secondly, as we've highlighted on a number of occasions, we are actively pursuing a lot of different types of corporate development and licensing activities that, if successful, may bring in a product.

At this point in time, as I've mentioned, to incorporate the license – a lot of activities that you tend to be involved in don't reach fruition. But it is a strategic goal to look for opportunities that could potentially bring a product into the portfolio. That said, right now, we are very focused; and as we move into next year, very focused on driving enhanced sales force productivity and continuing momentum that we've seen with AzaSite.

With regards your second question, we were obviously disappointed at Ben's decision to leave the organization to look for other opportunities. From our perspective, I think we are very focused on recruiting and hiring a key professional in that area. And we're confident we've been able to achieve that, and with the right levels of expertise to drive and achieve the goals that we have in place not just in ophthalmology, but also in pulmonology.

Meanwhile, I think with the way that we have structured the organization, I think all the programs are progressing well. Everyone in the organization is very focused on the goals that we need to achieve. And I do not anticipate any reduction in efficiencies, effectiveness, professionalism, and standards in the research and development area as we complete the recruitments and hiring of the new research and development head.

Operator

The next question is from David Amsellem with Piper Jaffray.

David Amsellem – Piper Jaffray

Thanks. Just a couple, can you shed any light on your discussions of Allergan, about the Restasis royalty? And what would happen to the Restasis royalty or what could happen if further development of PROLACRIA were to be discontinued?

Adrian Adams

Obviously, as we've mentioned in the call, we're currently engaged in discussions with Allergan. So I think it would be inappropriate for us to comment in any aspects of those discussions. One of the key points in those discussions relates to future developments of PROLACRIA, and whether or not there is a way for that particular asset.

As we've communicated on a number of occasions, in the event there is a process in place that looks at onward developments of PROLACRIA, in the event that the joint development committee decides to terminate the development for PROLACRIA, then we have a situation where if we do not, within six months, (inaudible) of any development program, in the event that that happens for further obligations, from the core promotion provisions for Restasis, then we would potentially a reduction in overall royalties around about 30%. That said, I think – I don't want to comment on the discussions that we're having with Allergan because they're ongoing at this particular point in time.

David Amsellem – Piper Jaffray

Okay. And then one additional question on – insight on blepharitis, can you provide some specifics on how the next study will be different from the prior Phase 2 in terms of the main clinical endpoints and duration of treatment?

Adrian Adams

No. Not at this point in time. As we've mentioned, I think from the Phase 2 results that we announced in the early part of this year, we obviously wanted to focus on the signs and symptoms and getting greater clarity in relation to measurement devices that would allow us to look for any potential informing decisions in relation to Phase 3 initiation. So that work is continuing. We are anticipating beginning that additional Phase 2 work during the latter part of this year. And those types of activities, which include, for example, looking at photographic eye measurements to allow us to get more precision in relation to what is happening in the eye, all of those particular activities we hope will better inform us on a potential Phase 3 initiation during the course of 2011.

David Amsellem – Piper Jaffray

Yes, that's helpful. Thanks.

Adrian Adams

Thank you, David.

Operator

Your next question is from Joseph Schwartz with Leerink Swann.

Joseph Schwartz – Leerink Swann

Hi. Thanks for taking the question, and congratulations on your progress. I was wondering if you could talk about denufosol manufacturing and what capacity constraints there are assuming that this is successful and the first disease modifying drug for CF. Thanks.

Tom Staab

Sure, Joe. It's Tom, and good morning. Thank you for the question. As we've previously announced in some of our publications, whether our 34-S [ph] filings, is that we have been using a Japanese supplier for our clinical trial materials. And they have been a good provider for us for these clinical trials. And we're also engaged in getting a secondary denufosol supplier. And that is well in progress. And we've disclosed in 8-Ks the dollars associated with that European supplier. So things are going to plan along those lines. And we will continue to pursue that. And we'll give updates as those updates are appropriate.

Joseph Schwartz – Leerink Swann

Okay. And can you tell us when the last time the Japanese supplier was inspected. It seems like when new products come through existing plans, the FDA often uses that as an opportunity to shore up their performance. And they often find things, which may have been latent. But if often doesn't help the new product trying to reproduce that. Are there–?

Tom Staab

Sure, Joe. I don't know that I can give you the exact timeframe that they were inspected. I do know that they have been inspected before because obviously, the Japanese provider produces diquafosol as well as denufosol. And so, I know they have been inspected before. I do not think that's been in the last couple of years, but they have been inspected.

Joseph Schwartz – Leerink Swann

Okay. Great. And then, just on AzaSite, it seems like the gross to net maybe widening with more rebate activity driven by Medicaid programs, if I'm not mistaken. Is that expected to continue just because of the sales didn't keep pace with the prescriptions, which were quite strong?

Tom Staab

Yes, good question again. I think there're two answers there. One is, as you focus on the difference between scripts and revenue, the primary reason for that is a de-stocking at the wholesaler level. And if you had used our estimate of the wholesaler's inventory at Q1 and extrapolate that out for Q2 that would account for the 5% difference between prescriptions and revenue.

But with that said, we also have been very successful in getting on some very large plans of late, particularly with Medicare. And those plans generally require a little higher rebate as you look at the general mix. I can't really speculate as to how much of that's going to change in the future because we've been working on this for a number of years. And we've been very, very successful on getting on the appropriate formularies and maximizing the dollars per script. So I think that we're very comfortable with where we're at.

Joseph Schwartz – Leerink Swann

Okay. That's extremely helpful. Thank you.

Operator

(Operator Instructions) Your next question is form Jon Stephenson with Summer Street Research.

Jon Stephenson – Summer Street Research

Just to follow-up on the AzaSite side, could you remind us when those formulary wins started taking effect and when they started slowing through in terms of volume?

Tom Staab

Sure, Jon. I mean, as you're probably well aware, over the sixth – I'd say six to last nine months, we've had a couple of very nice formulary wins. It generally takes a couple of months for those really – for those formulary wins to kick into gear. And I can tell you one very large plan in particular we were successful in executing that plan last year. It took effect in Q1, but it was later in Q1 that you actually started to see that pretty significant ramp, and you really saw a significant ramp associated with that in Q2. So the broad-based answer to your question is we've had success over the last six to nine months. And you really see that really kick into gear in the second quarter.

Jon Stephenson – Summer Street Research

And is that the primary reason why the scripts have gone from maybe 20% to 25% year-over-year growth to more like 45% less in the last month or so or is that what's going on?

Tom Staab

I think there's a combination of reasons. One is formulary success. But it's also, as Adrian mentioned, yes to the overall efficiency and effectiveness of our commercial organization and a very intense focus on that. So I think it's a combination of those two aspects.

Adrian Adams

You are correct that we have been very, very pleased with the recent trends from a prescription productivity point of view from the sales force for the AzaSite. We're very pleased with that.

Jon Stephenson – Summer Street Research

Okay. And then, on the sales force, I mean how many products do you think you can optimally promote in that organization? Obviously, one of the prior callers asked about what you're going to do post-ELESTAT generics. What's the optimal number of products in the bag?

Adrian Adams

Well, it's a good question. And I think – I'm not sure as to go into the theory of product detail in most conventional sales forces. You have a situation where you have one key primary lead product, which in our case is AzaSite; secondary product, which is ELESTAT; and then, a potential for short detail for a third product. So from our point of view given our very precise focus on the target, and I think we most certainly have the capacity for two products, for which we can get some enhanced productivity.

But right now, I think we're focused on – ELESTAT continues to do well. And we've not seen a generic yet, although we expect one before the end of the year. We feel there's good growth potential left in AzaSite. And we continue to look for a potential opportunity to bring a further product into the portfolio to replace ELESTAT if and when that goes generic.

Jon Stephenson – Summer Street Research

And lastly, what impact does the timing of ELESTAT generics have on the decision in terms of how to proceed the PROLACRIA decision and the related impact on Restasis royalties?

Adrian Adams

I don't think it's predominantly focused on that at all. I think in the end, there are separate considerations on decisions in relation to whether or not we in-license an offset to replace ELESTAT. It's such a product that becomes available. I think we look at things from an opportunistic point of view and how we can add to ongoing momentum within the business. So those are separate considerations.

Jon Stephenson – Summer Street Research

Okay. Great. Thanks.

Operator

You do have a follow-up question from Joseph Schwartz with Leerink Swann.

Joseph Schwartz – Leerink Swann

Hi. Thanks for taking the follow-up. I was intrigued by some of the discussion around the better performance for denufosol in adolescence. And I was wondering, can you see, based on baseline criteria, whether their makeup in the second Phase 3 TIGER-2 is any larger than the first? I don't think you were aiming to enrich the enrolment in that way. But could that be a factor which could influence the results in the second trial.

Adrian Adams

Well clearly, I think with the TIGER-2 results, there are a number of differences between TIGER-2 protocol and TIGER-1. The most notable of which, obviously, was the extension from 24 to 48 weeks, looking at a three-year open-level extension study as well. But all other aspects of the protocol remain predominantly the same. Obviously, the TIGER-2 trial is fully enrolled. And I don't want to speculate at all as to the makeup of that trial or the overall patient population. And we look forward to the end of the results in the first quarter of next year.

That said, with the similarities in relation to the protocol of TIGER-2 and TIGER-1, one of the reasons why we've highlighted this particular data is that with a mortality that's still – mortality rate that's still – has a life expectancy in the CF right about 37 years. In the event that you could impact the lung function decline in the adolescent population and in the event of the data supports that clearly, that gets the very essence of what we're trying to do with denufosol, and that is make available an eye product that could potentially impact the progression of the disease and potentially has a possibility of extending life, which is in the end is what it's all about in cystic fibrosis patients.

Joseph Schwartz – Leerink Swann

Great. And in TIGER-1, were adolescents generally associated with a higher percent predicted FEV1 at baseline since I think you're going slightly in that direction – more in that direction than TIGER-2? Do you think in reaching for that, that criteria could select for more adolescents?

Jenny Kobin

Yes, this is Jenny. I think that as reminder, in TIGER-1, what we saw was an average of 14 and an average baseline FEV1 for between 92% and 93%. I think your point is in TIGER-2, if we have captured the top end of the entry criteria to be in between 75% and 110% predicted, could that lead to coming even more into that adolescent patient population? I think that that's certainly something that remains to be seen. But you would imagine that that would go in that direction.

Joseph Schwartz – Leerink Swann

Okay. Thanks for the help.

Operator

At this time, there are no further questions. I will turn the call back over to Mr. Adams for any closing remarks.

Adrian Adams

Thank you, operator. And thank you to each and every one of you for attending this call this morning. And obviously, on an ongoing basis, we are – we will continue to look forward to update you on our progress against our five key strategic imperatives. So with that, please have a good rest of the day. And we look forward to interacting and sharing information with you on our next call. Thank you very much.

Operator

Thank you, ladies and gentlemen. That does conclude today's conference call. You may now disconnect.

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Source: Inspire Pharmaceuticals, Inc. Q2 2010 Earnings Call Transcript
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