Sucampo Pharmaceuticals' (SCMP) CEO Peter Greenleaf on Q1 2014 Results - Earnings Call Transcript

Sucampo Pharmaceuticals, Inc. (NASDAQ:SCMP)

Q1 2014 Earnings Conference Call

May 7, 2014, 05:00 PM ET


Silvia Taylor - Senior Vice President and Investor Relations Corporate Communications

Peter Greenleaf - Chief Executive Officer

Stan Miele - President of Sucampo Pharma Americas, LLC, and Senior Vice President of Sales and Marketing

Taryn Losch-Beridon - Vice President of Clinical Development

Cary Claiborne - Chief Financial Officer


Graig Suvannavejh - MLV & Company

Jason Kolbert - Maxim


Good afternoon and welcome to Sucampo's First Quarter 2014 Financial Results and Operating Highlights Conference Call. For opening remarks and introductions, I would like to turn the call over to Silvia Taylor, Sucampo's Senior Vice President and Investor Relations Corporate Communications. Please go ahead.

Silvia Taylor

Thank you, operator, and good afternoon, everyone. Thank you for joining us today. The earnings release and its attachments announcing Sucampo's first quarter 2014 financial and operational highlights was distributed this afternoon. For those of you who have not yet seen it, you will find it posted in the Investors section of our website at We also plan to file our 10-Q on or before May 12th and once filed a link to that document will also be posted on our website.

Joining me for the call today are Peter Greenleaf, Chief Executive Officer; Stan Miele, President of Sucampo Pharma Americas, LLC, and Senior Vice President of Sales and Marketing; Taryn Losch-Beridon, Vice President of Clinical Development; Cary Claiborne, Chief Financial Officer.

Before we begin, please note that various remarks management makes on this conference call and the information contained in today's earnings release are as of today, May 7, 2014. The company assumes no obligation to update forward-looking statements contained in this conference call, earnings release or the attachments as a result of new information or future events or developments.

This conference call, earning release and the attachments contain forward-looking information about the company's future operating and financial performance, business plans and prospects, in line products and product candidates, and share repurchase plans that involve substantial risks and uncertainties. Please refer to the forward-looking statements in the most recent form 10-K found on our website for additional risk factors affecting our forward-looking statements.

Now I'll turn the call over to Peter. Please go ahead.

Peter Greenleaf

Well, thank you, Silvia, and good evening, everyone. It's a pleasure to join you today for my first earnings call as Chief Executive Officer at Sucampo. I have to tell you how proud I am for the opportunity to lead this company and how excited I am by the opportunities that lie ahead of us. Today I thought I'd start the call by sharing with you all the reasons why I joined the company and why I'm still excited about our prospects.

I'll let you know the key areas where we're focusing our early work and finally I'll provide you with an update on progress to date, wrap with the quarterly performance. I will then turn it over to the team to discuss quarter one in detail.

So it's about 60 days since I joined Sucampo and progress we've been making as a company towards achieving our 2014 objectives and planning for continued evolution has been significant. This is a great time to join the company with the strong foundations set by my predecessor, Dr. Ryuji Ueno, and the real opportunity to advance Sucampo to the next stage of our growth.

From my experience of 20 years in the biopharmaceutical industry, it's taught me that great companies in our space share three important elements, great people, great science and strong fundamentals. Sucampo has a great foundation built in each one of these elements and I would like to shape my comments today around each one, since they represent areas where I have emphasized and worked with the team over the last 60 days.

So let's start with people, since people truly are Sucampo's number one asset. The people and culture at Sucampo are entrepreneurial, passionate and driven. We run a lean and nimble organization that is highly productive. During my first 60 days, I placed a heavy emphasis on understanding the people and the culture, visiting all of our global sites and conducting one-on-ones with the majority of our employees. I spent the time to validate and understand the culture and our values, assess our talent and set the tone to the organization. I can tell you that we have a committed and passionate workforce and one that we will continue to build upon. Increasing the medical and scientific leadership in the organization as well as business development expertise will be one of the key areas to maximize scientific potential and value in the future.

When discussing people, I'm also including our partners, since our business model has been and will continue to be very linked to their success and how we work together collaboratively. I personally believe that partnerships flourish when teams work together and are connected at all levels of leadership. I have met or plan to meet with all leadership with all of our major partners in the first 90 days on the job, including Takeda, Abbott Japan and R-Tech Ueno. My goal in all of these initial meetings is to communicate my commitment to our combined success to strengthen our collaborations and finally to potentially expand our work together.

Shifting gears to our engine, the science, I have to tell you that when I joined Sucampo, our scientific platform in prostones was a major element in attracting me to the organization. Prostones have proven to be effective, well tolerated and hold broad therapeutic potential. The early work in prostone technology has yielded marketed products that are generating revenue globally. These products are partnered with large pharmaceutical companies around the globe, which further validates our platform. Today, these partnerships generated stable and growing revenue base that fuels our business operations. Lastly, our technology platform provides a rich and diverse portfolio of compounds, which make up our pipeline today that together with new compounds will fuel the future engine.

Finally, let me close at the fundamentals. Financially, we're in a solid position with $90 million in annual revenues that have grown 13% on a three-year compound annual growth rate, minimal debt and a strong cash position. While we're in an enviable position amongst our peers of having commercially generated revenue, my observation here is that focus will be key for us. Over the last 60 days, we've made progress in simplifying our operation and building the team. As we move forward, it will be critical to focus our efforts only on areas where we get the best return on our efforts.

Our goal is to create sustainable long-term performance and value for our investors. With this in mind, we've undertaken a comprehensive view of our strategy in partnership with our Board of Directors. We are taking a full view of our operating structure, our prostone technology platform, our current pipeline, our partnerships and our capital structure. Our assessment is challenging everything we do, how we do it and where we make our investments. I'm looking forward to sharing this plan with you in the third quarter of this year.

With that as an introduction, let me move to a brief review of first quarter performance. I think you'll find very tight alignment with our quarterly performance and the principles I've outlined so far on the call. In Q1, we continued our strong financial performance, reporting today 31% year-over-year growth in revenues, principally driven by the solid performance of AMITIZA. This performance comes in the face of aggressive competition in the US. And we're happy today to report that we had a favorable ruling in our patent litigation on AMITIZA. The federal court agreed with our claim construction of a term of the patents in litigation. We continue to progress the lawsuit as we look forward to trial in December of this year.

During the quarter, we also saw important signs of success in our efforts to expand globally, led by significant growth in our Japan AMITIZA sales of 177% year-over-year. We also saw continued progress this quarter in Europe, which will be important to increasing access to AMITIZA globally.

Finally, our pipeline assets progressed, both in terms of lifecycle management of our products and clinical development of new compounds. We're excited by the depth of our pipeline and the opportunity to refine and expand it. You'll hear more from the team about our business and financial results for the quarter. And Cary Claiborne will provide specific net income and EPS guidance for 2014 at the end of the call.

In summary, hopefully it's obvious to you all that I'm excited to be here at Sucampo. I believe there is a great potential to drive increased value for patients, physicians and our shareholders. So I'll now turn the call over to Stan Miele to give an update on our commercial results for the quarter. Stan?

Stan Miele

Thank you, Peter. Good afternoon, everyone, and welcome to the call. The first quarter of 2014 was a strong quarter for AMITIZA in the US. US net sales of AMITIZA reported to us by our partner, Takeda, for royalty calculation purposes were $75 million, a growth of 16% for the quarter as compared to the first quarter of 2013. As Peter has stated, in the face of aggressive competition, we are pleased with the overall growth in AMITIZA prescriptions. Total prescriptions, as reported by IMS, for the first quarter of 2014 were approximately 316,000, an increase of 3% year-over-year. We are especially pleased to see consistent growth in total prescriptions from primary care and internal medicine physician specialties along with pain specialists.

We're also encouraged by the numbers of new patients coming into the branded prescription chronic constipation market. In the first quarter of 2014, the market grew 6%, which means more patients are entering the market for prescription therapies than ever. AMITIZA is continuing to benefit from consistent market growth as patients continue to switch from over-the-counter therapies to branded agent. We believe that there are four key areas that are important for AMITIZA's consistent brand growth even in the face of competition.

First, we have a strong safety message for 8 million prescriptions. We believe that the messages of AMITIZA strong heritage in this market resonates very well with physicians who are concerned about safety, especially primary care physicians. Secondly, we have the broadest label of products in the space with three indications, CIC, IBS-C and OIC. Third, we have the only ClC-2 chloride channel activator with a novel and unique mechanism of action. And finally, AMITIZA has a strong managed care position in both commercial and Part D covered lives. I want to go into this latter part in a bit more detail.

In commercial, we have a strong coverage with over 93% of the commercial lives covered with a majority of lives covered at Tier 2. Similarly, we have an advantage over the competition in Part D with 91% of the lives covered in preferred Tier 3 status. The formulary coverage is only step in the managed care process. Our partner Takeda is committed to actively promoting this enhanced managed care positioning and reminding health care practitioners that the AMITIZA brand still has the highest approval rate and lowest rejection rate of all branded products in the category.

We also believe that driving patient awareness is key to growing the category. And Takeda continues to move forward with a broader consumer awareness campaign focusing on numerous point of care programs, including direct to patient, pharmacy, exam room and e-prescribing programs. In the quarter, we also made progress on our global expansion efforts. Our revenue from sales of AMITIZA to Abbott in Japan grew 177% in the quarter to $6.1 million. We believe that there are two important factors contributing to the success of AMITIZA in Japan.

First, the two-week limitation in Japan that is generally applied to all newly approved prescription products for their first year on the market was removed in early December. Secondly, Abbott is placing a high degree of focus on the product. Across Japan, over 60% of Abbott's detailing efforts are for AMITIZA and they continue to educate physicians through symposia and other events that supplement in-office details.

The constipation market in Japan is large and AMITIZA is the first and only oral prescription product approved for chronic constipation. Our estimates are that the available market is over 21 million patients, which makes Japan a significant growing driver of our revenue going forward.

Moving on to Europe, where we continue to work with regulatory and reimbursement bodies. In Switzerland, we're anticipating Swissmedic's approval of the addition of the OIC to AMITIZA's label in the second half of the year and several reimbursement limitations were also revised during the quarter.

In the United Kingdom, today we're at our first NICE appraisal meeting for CIC and we anticipate a decision in the second half of the year. And as previously communicated, we are continuing to explore our options for our path forward for OIC after the MHRA did not approve the OIC indication.

In order to expand the approval for AMITIZA beyond the United Kingdom and Switzerland, in the second quarter, we are initiating the mutual recognition procedure for registration within the remaining markets in the EU, a process which we anticipate to conclude with approvals by the first quarter of 2015.

I'd now like to turn the call over to Taryn Losch-Beridon to discuss our clinical development and pipeline activities.

Taryn Losch-Beridon

Thank you, Stan, and good afternoon, everyone. I'd like to update you today on the progress we made this quarter in advancing our pipeline of prostone compounds and continuing product development. The slide in front of you shows an overview of those products and their stage of clinical development.

Starting with lubiprostone, the first chloride channel activator in the GI market, I'm pleased to announce that in April, the first patients were involved into a follow-on safety extension study of a global Phase III clinical trial of lubiprostone in patients six to 17 years of age. Sucampo was in Phase III clinical development for lubiprostone in pediatric functional constipation, which is amongst the most common gastrointestinal complaints in children and adolescence affecting anywhere from 4% to 37% of children worldwide. Our partner Takeda is funding 70% of the development cost for this program.

Next I'd like to provide an update on our development of a liquid formulation of lubiprostone for patients who will not swallow a capsule such as young children and some geriatric patients. Although we get expected to file a new drug application for this liquid formulation in the second half of this year, this will not happen. The FDA informed Sucampo in March that it would require additional data to characterize the pharmacokinetics of this formulation.

We also announced topline results for our PK and tolerability study for formulation of AMITIZA in adults with CIC. The study showed directional improvement in spontaneous bowel movement frequency in favor of this liquid formulation of AMITIZA compared to placebo, but it did not reach the statistical significance. Today, we would like to update you that Sucampo and Takeda will explore an alternative dosing formulation for which Takeda will pay 100% of the cost. And we hope to have progress to report within the second half of this year.

At that time, we should also have a clearer picture of when we will initiate the second pivotal trial in our Phase III pediatric functional constipation program in children aged six-ons to less than six years. And the alternate formulation will be required for this study. We look forward to updating you on our progress in the months to come.

We also completed a Phase Ib trial of cobiprostone this quarter. Cobiprostone is in development for the prevention and/or treatment of oral mucositis, which is estimated to be an up to $500 million market. Oral mucositis is the formation of ulcers that result from radiation therapy and chemotherapy in cancer patients, particularly those with head and neck cancer. It is estimated that the incidents of head and neck cancer in US is approximately 123,000 according to the CR database and approximately 80% to 90% of them will experience some grade of oral mucositis during their treatment.

Today, we're announcing the results of a Phase Ib trial which evaluated the safety and pharmacokinetics of cobiprostone and demonstrated that the compound was well tolerated overall and had low systemic exposure. We are excited about the potential for cobiprostone in oral mucositis and expect to begin a Phase IIa trial in the second half of this year. We are also evaluating the potential of cobiprostone in other disease states as well.

Finally, in the quarter, we initiated a Phase Ib trial evaluating the safety and pharmacokinetics of an orally-administered ion channel activator in development for lumbar spinal stenosis, a degenerative disease in the lumbar spine which causes numbness, muscle weakness and pain while walking. This trial is expected to conclude in the third quarter of 2014. In December, we also reported the results of a Phase IIa study for the IV ion channel activator for LSS and we plan to begin a new Phase IIIa trial in the second half of this year.

As part of our ongoing strategic review that Peter discussed at the beginning of the call, we're currently assessing all of our clinical programs and we will look forward to sharing the results of this assessment with you in the third quarter.

This concludes our update on clinical development and I look forward to taking your questions during Q&A. I'll now turn the call over to Cary Claiborne for a financial update.

Cary Claiborne

Thanks, Taryn, and good afternoon, everyone. I'd like to review the financial highlights of the quarter with you. As you've heard earlier on the call, we had strong financial performance in the first quarter of 2014. We achieved net income of $0.7 million or $0.02 per diluted share compared to a net loss last year $3.1 million or $0.08 per diluted share in the prior year.

Our two main drivers of growth this quarter were increased AMITIZA sales in both the US and Japan. US AMITIZA net sales, as reported by Takeda for royalty calculation purposes, increased 16% year-over-year to $75 million. The increase is driven by higher price and 3% TOX growth.

We completed the first quarter with a solid 31% increase in total revenues. Total revenues for the first quarter of 2014 were $22.2 million, including $13.5 million or product royalty revenue, an increase of 16% year-over-year. Product sales of AMITIZA in Japan nearly tripled from $2.2 million in last year's first quarter growing 177% to $6.1 million this year.

As a direct result of our contract sales force co-promoting AMITIZA for OIC in adults with chronic non-cancer pain to US physicians beginning in early January, our co-promotion revenue grew to $362,000 compared to $61,000 in the same period last year. This revenue line item represents the fees we received from Takeda that's paid to us on a per detail basis. This co-promotion revenue from Takeda covers a portion of the cost of our contract sales force.

R&D revenue decreased by $1 million to $1.8 million, reflecting lower cost associated with our liquid formulation trial, which completed in the first quarter of 2014, a pediatric trial and the reimbursement of the supplemental new drug application for OIC indication that was filed in 2013.

Total cost and expenses during the first quarter were essentially flat at $19.6 million compared to $19.5 million in the first quarter last year. These expenses include a $2.2 million increase in cost of goods sold to $3.5 million in the quarter, driven by greater volume of AMITIZA sales in Japan.

R&D expenses decreased $0.5 million to $5.1 million in the first quarter of 2014. The drivers of our reduced R&D expense include the conclusion of our clinical trial of the liquid formulation, lower cost of our lumbar spinal stenosis trials as well as the 2013 termination of our collaboration agreement with Numab AG. These reduced R&D expenses were partially offset by increased spending associated with the first patient enrollment for pediatric functional constipation, as Taryn just described.

While our total G&A expenses were essentially unchanged year-over-year, we did incur increased legal fees from prosecuting our patent infringement lawsuit. This increase was offset by an over 80% decline from 2013 in pharmacovigilance cost in Japan for AMITIZA due to the conclusion of the one-year post-launch enhanced vigilance required of newly launched products during the first year on the market.

Selling and marketing expenses decreased $1.7 million to $3.6 million in the first quarter, reflecting lower RESCULA cost as the prior-year quarter had one-time launch cost. This decrease was partially offset by increases from co-promotion activities of our newly deployed contract sales force for AMITIZA in the US as well as support for our European commercial activities.

Moving to our balance sheet, we had a strong cash position to support our objectives as our total cash, cash equivalents, restricted cash and investments as of March 31 were $106 million. Our cash balance includes $5.3 million of additional net proceeds from the issuance of common stock to our at-the-market facility. Our notes payable as of March 31 were $53.2 million compared to $52.7 million At December 31, 2013.

And finally, as Peter mentioned today, we are announcing specific 2014 earnings guidance for net income and earnings per share. For the full year 2014, our guidance is for GAAP net income to be in the range of $3 million to $5 million, our GAAP earnings per share of $0.06 to $0.11 per diluted share.

And now, I'll turn the call back over to Peter for concluding remarks before we move on to Q&A. Peter?

Peter Greenleaf

Thank you, Cary. So to wrap up the call and before we go to Q&A, I want to reiterate that we had a strong first quarter with solid financial results. I'm excited to be here at Sucampo and look forward to speaking with you all in the months to come, including updating you all on our strategic plan, which we plan to communicate in the third quarter.

And now we're ready to start the Q&A portion of the call. Operator, please open up the line for questions.

Question-and-Answer Session


(Operator Instructions) And your first question comes from the line of Graig Suvannavejh with MLV & Company.

Graig Suvannavejh - MLV & Company

My first question is actually for Cary. Cary, so the guidance that you gave is pretty granular. And so I'm trying to understand what gives you as a company and as a CFO the confidence to come out with a GAAP net income of $3 million to $5 million? And if you could provide for us what you think the potential source of upside or downside to that number could be as the year kind of evolves?

Cary Claiborne

Why we have confidence? We have pretty solid revenue sources. As Peter said, part of what attracted him to the company, US AMITIZA is a pretty solid revenue provider for us. Japan has been pretty solid. So we have a pretty good handle on those revenue drivers and we have some flexibility in our pipeline R&D spending, which can be a plus point for us. And I think where the upside can come in is how fast revenue grows from there.

Graig Suvannavejh - MLV & Company

My next question is broadly for the company, but I know the Markman decision is finally available and it looked like you guys, as we expected, came out winning that. And so my question, does this in anyway, unless we have the Markman decision in hand, impact the strategy around the litigation and how you're pursuing challenges or not and kind of expectations around the patent litigation on a go-forward basis?

Peter Greenleaf

Let me try to give you the somewhat oversimplified answer to that and second also look forward to meeting you live real soon. I think first and foremost, as we've stated in the past, we have a strategy that really takes us through the trial at the end of the year unless we're able to do anything prior to that, but that's just kind of the target point we're looking at. The Markman hearing and getting a favorable ruling there actually puts us in a really strong position. It did put us in a better position obviously than losing it. But it doesn't change our strategy in any way. As we mentioned, we're working with Paul Hastings on that and we're continuing to prepare for the trial towards the end of the year.

Graig Suvannavejh - MLV & Company

Just to confirm, it sounds like you guys are committed to going through with the patent litigation trial?

Peter Greenleaf

These things always have one of two conclusions. You either take them through the trial or you have some way of negotiating a settlement. And I think we want to do the most favorable thing to the company and it would be overshooting to try to predict what that outcome will be at this stage of the game. So our strategy right now is to prepare to go to trial, but of course we'll continue to sort of work that plan and we could see a different outcome than going to trial. But right now, that's what we're preparing for.

Graig Suvannavejh - MLV & Company

I know you've been on the job only for a relatively short time, but if you could provide for us an initial overall impression of Sucampo as a company in terms of the organization, the pipeline programs that you see, et cetera. And also, the follow-up to that, can you give us a sense of just given your own personal experience working at other companies and organizations of large and small where you think you can bring in either best practices, lessons learned, what have you, on to Sucampo?

Peter Greenleaf

I've been focusing a lot of my time and effort around people, the science and our basic fundamentals, the basic business performance of the company. And I can tell you those are all drivers to me being interested in the opportunity that exists here. We've got a technology platform that's got really good patent coverage, strong patent coverage, multiple different compounds, formulations and use patents. And we have an ability to invest in the pipeline that we have. I think we may have the ability to continue to invest in other areas there as well. And as I mentioned earlier in the call, we are currently reviewing the entire strategy moving forward for the company. So I think that will be a big component of it. The first stage is going to be a full internal assessment, which will include our patents and our portfolio that we have today and what more we can continue to invest in prostone-based technology.

So my 60 days in tells me that the compounds work obviously. We've got solid partnerships that are generating revenue. And the current programs that we have look to have some really good market potential. I think we need to build upon that. Our people, our operations as an organization, I can tell you we've got passionate people, very strong leaders. We are lean and we need to invest more in some key areas in the company, specifically the medical and science areas. We're in the science business. We create drugs and solutions for patients. We need to have deep expertise in the areas of science and innovation. And I think we need to continue to invest there. And that process of recruiting top-level talent is already in motion.

Business development has always been a key component to building companies, and I think we need to invest there as well. So outside of some general opportunities around focus, some internal structuring and simplifying of our operations, which have already begun to move in motion, I can tell you that I'm impressed with the way the company has run in a very efficient and effective manner.

The last part of your question, you asked me what I've seen, may or may not have been deployed here that could be an opportunity for the future. I think the most obvious one and I'll jump out on a limb a little bit here is that we are a public company that has not raised capital to invest at a faster rate that our revenue would provide us. And I think that's amiable. I think an organization that's producing almost $100 million in profit and is profitable at this stage of the game. What I've challenged the team with is should that be what we're targeting and should we potentially look to raise capital and be more active either in investing in prostones and other areas. We haven't concluded on that, but it will be a key part of how we look to grow the organization in the future. And it will be a key component of our strategy when we present that to you all and to our Board moving forward.

So deal making, ability to take on more risk, I think those are components that I think the organization could actively go after and probably has not in the future, diversification and tapping the market to do so.


And we have a follow-up from Mr. Graig Suvannavejh - MLV & Company.

Graig Suvannavejh - MLV & Company

I was hoping to get company's overall version of DDW this year and what's you take was on the presence you and your partner had there and were you able to achieve some of the goals you had before the conference started once it actually transpired and ended. So I guess the big picture question is how the DDW turned you guys this year?

Peter Greenleaf

Since I was not there, I'm actually to going to Stan who spent a good couple of days on the ground. Our thought leaders were actively working with our people and Takeda and has a really strong ground-level view of not only our performance, Takeda's, but also I think the overall constipation space. So, Stan?

Stan Miele

So a couple of things. I think in general when I take a look at the Takeda presence relative to Forest, Ironwood, I think there was very strong presence on the part of Takeda. A lot of activity in fact if you went by the competitors' booths, certainly not nearly as active as the Takeda and in particular the AMITIZA portion of the booth. It was a combined booth with Takeda. I think more importantly, though, is as you take a look at many of the scientific session, even the CME-sponsored programs, one thing that is resonating loud and clear certainly in the IBS arena is that whole micro bio piece that's in test on permeability and how that relates to IBSD. We feel that from a mechanistic standpoint, we're very well positioned to be able to address that as an unmet need per se.

A lot of sessions with respect to functional constipation and how IBSC and CC or CIC are very much overlapping, and I think that's sort of the framework moving forward as opposed to so much of a pure differential diagnosis that how are the gastroenterologists and the primary care physicians going to be able to discern what product at what time with respect to disease, the actual indication itself.

So I will just close by saying there was strong presence by the Takeda. I think all three indications were highly discussed, not just CIC and IBSC, but also OIC and we had many strong one-on-one meetings with all of the thought leaders and it was, from my perspective, a very successful meeting.

Peter Greenleaf

On the Takeda front, I have made it part of my sort of first two-week mission to get very connected with the organization. And I met with Yasu Hasegawa in Tokyo in the first three weeks in the job as outgoing CEO, current, but outgoing. I met with the North America leadership and with their global business development folks. So I want everyone on the call to be very clear that I see the Takeda relationship and overall partners as a critical success factor for the organization and my attempt would be to strengthen them and to hopefully expand upon them in the future.

Graig Suvannavejh - MLV & Company

I know that you guys were excited about launching your own efforts around OIC. How would you gauge the initial effort by the Sucampo sales force on OIC? And just generally speaking, how you guys feel about one year into the OIC launch, how that's feeling?

Stan Miele

Well, we're certainly encouraged by the fact that there is significant growth amongst pain specialists, includes rheumatologists, anesthesiologists with a sub specialty in pain and to the tune of roughly 46% growth year-over-year. So we're seeing nice growth, but I want to also say that we need to temper that with it's a relatively small an when you look at the number of overall physicians. The Sucampo sales team is active and it's still a bit early in the process. But I think if we look at pain specialists as sort of the leading indicator, we're seeing some good signs. There is a lot more work to be done in terms of translating this into the primary care space, which is really where we need to see our greatest growth. We were winning the hearts and minds of the pain specialists, but now that needs to be further translated to the primary care level.

Graig Suvannavejh - MLV & Company

And how long do you expect that might take?

Peter Greenleaf

Well, I think again, we're still a bit early in the process. We're seeing low single-digit growth with respect to new and total prescriptions. I don't think we project anything dramatically different when we look at the overall brand as it relates to this consistent growth. The one thing to keep in mind, though, is that still many of even the primary care physicians, this is going to take some time in order to convert these patients who were still primarily taking over-the-counter products for OIC. And although we're in there seeing these doctors, it still has to be a constant reminder. But Takeda is committed and they're seeing over 65,000 physicians along with the number of physicians we're seeing. So it's a battle, but we're committed.


Jason Kolbert - Maxim

This is Jason Kolbert at Maxim. Just a couple of questions. I just saw the second press release. So I have a chance to better understand the numbers. Thank you. What I want to understand a little bit more and a little bit more granularity are really two things. One, the guidance, so we're looking for a sequential growth and the guidance seems to reflect lower single-digit growth. I'm trying to understand is that a conservative guidance if I were to annualize the current quarter? Can you easily get to that number? And you know that what I'm always looking for is to see you kind of winning market share. What are the factors that are driving you towards a more conservative outlook?

Cary Claiborne

If you go back to 2013 and normalize it, excluding special items but also we had a $10 million milestone that we got from Takeda for the OIC approval, so if you normalize 2013, our net income was $3 million. So our guidance for 2014 on the same basis is $3 million to $5 million. So you can call it conservative. There is some growth in there. But we are investing in our R&D pipeline, our self-funded R&D in 2014. Some of the projects you heard on the call that we are funding, that Takeda isn't funding. So that is driving some of the increase in R&D expenses year-over-year that you may or may not have in your model. We've scaled back significantly in terms of what we're doing with Hasegawa.

Jason Kolbert - Maxim

But I also want to understand how I should be looking at Japan. Given the increase in growth sequentially, Japan looks like it still has a lot more growth left. What does peak penetration look like in the Japanese market for AMITIZA?

Peter Greenleaf

I guess I can try and start here, but caveat of it's 60 days and I haven't had a deep guide into the Japanese constipation market. The growth there has been really robust. But if you look at it in the total view, it's still relatively small. So if you put it in the context to the year, the one I'm watching for in terms of really achieving our guidance that you're seeing here, the majority of that's been driven by the US business. And right now, we are seeing on TRx, NRx and on market growth single-digit growth, a little higher on market growth, sort of the high single-digit and low to Midland on NRx and TRx. If that keeps up, we feel these guidance rates are right in line.

Japan performing exceptionally well, better than what we've sort of forecasted, could present some upside, but I would say it's limited primarily just because of the size of the overall revenue stream there is relatively small.

Cary, would you add anything to that?

Cary Claiborne

Japan should grow, because our major changes, the two-week limitation going away after the first year, which we mentioned, we would expect it to grow. But it's growing off of a smaller base. But year-over-year, we would expect to see it grow. We said it tripled. Wouldn't expect it to triple, but we would expect to see some growth definitely significant growth from 2013 levels.

Jason Kolbert - Maxim

And help me understand your comments on capital structure, because you seem to have been saying that there are some strategic investment that you've been a little bit constrained in the past to do. You have a strong balance sheet. You have some founders that and you've also been using the aftermarket credit facility. So I'm trying to understand what the strategic capital focus is versus raising capital with strategic investors and making an acquisition or building up a war chest in the balance sheet. It's just hard for me to understand why you're using the ATM facility, given where the capital structure of the company is today and what you want to see happen in terms of the capital structure going forward.

Peter Greenleaf

I think we have to look at this relative to the overall strategy of the company. It is a component. Organizational structure and capital structure become ways to operationalized whatever our strategy is in the near term. So just back step to the context of the question I was answering prior, it was more centered around what have I seen done in other companies I'd been with that has been successful that potentially has not been done here at Sucampo. I don't think you need to look too far as to see that we've built the company based on the revenues we've been able to produce. They have fueled where we are today. We've not raised capital, I believe, since the original IPO, significant capital in the markets. We have limited capital market distribution. We still have a huge within our ownership structure percentage of this that's owned by our original founders. And I think all of these are factors that we need to look at in the context of our strategy moving forward.

Our goal is to increase shareholder value, which includes growing the share price obviously. There are ways that we will do that around execution of the business. But there are ways that may have been or may be restricting our ability to do it by lack of getting broader distribution of the stock in the marketplace, getting different institutional shareholders to participate, et cetera. I know this will all be areas that we will explore as part of this strategy. I don't have any conclusions for you today. I'm not coming to you today to say we are definitively raising capital. When and if ever do that, it will be with a very strong pitch around what the use of those proceeds would be. So I would keep an ear towards 3Q and I would also look to see some of the things that we're doing between now and then that will sort of lean into how we want to structure the organization moving forward and what type of organization we see for the next 10 years, not just what the sort of heritage has been for the first 10 years.

Let me have Cary address specifically the ATM vehicle.

Cary Claiborne

You're familiar with the ATM, at the market offering. It's really just a tool in our tool chest to opportunistically take advantage of moves in our stock. For instance, what you saw in the first quarter literally was a couple of days in the market in early January raised $5.3 million at just under $10 a share. And that gave us just a little cushion there. As I said, we have some self-funded R&D we're doing this year that provides an opportunity to take advantage of opportunities like that to raise some limited capital in a very cost efficient manner and achieve some of the goals that Peter is talking about in terms of over time getting more public shares out in the market at an attractive valuation relative to if you think about we bought stock back in prior years at under $4 a share. So it's never going to be a major way to fund the business, but it is a quick and efficient way to raise limited amounts of capital.

Jason Kolbert - Maxim

Cary, are you trying to say that buying stock $4 and selling it at $10 is a good thing?

Cary Claiborne

I think it's much better than the other way.


Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.

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