DepoMed's (DEPO) CEO James Schoeneck on Q1 2014 Results - Earnings Call Transcript

May. 8.14 | About: Depomed Inc. (DEPO)

DepoMed (NASDAQ:DEPO)

Q1 2014 Earnings Call

May 08, 2014 5:00 pm ET

Executives

August J. Moretti - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

James A. Schoeneck - Chief Executive Officer, President and Director

Matthew M. Gosling - Senior Vice President and General Counsel

Jack Anders -

Analysts

Scott R. Henry - Roth Capital Partners, LLC, Research Division

Jason N. Butler - JMP Securities LLC, Research Division

Joy Mishaw

Operator

Good afternoon, everyone, and welcome to the Depomed First Quarter Fiscal Year 2014 Financial Results Conference Call. [Operator Instructions] Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Mr. August Moretti, Chief Financial Officer. Sir, please go ahead.

August J. Moretti

Thank you, operator. Good afternoon, and welcome to our First Quarter 2014 Financial Results and Business Update Conference Call. With me today are Jim Schoeneck, President and Chief Executive Officer of Depomed; Matt Gosling, Senior Vice President and General Counsel; and Jack Anders, Vice President, Finance.

Before we get started, I'd like to remind you that the matters discussed on this call contain forward-looking statements that involve risks and uncertainties, including those relating to the commercialization of Gralise, CAMBIA, Zipsor and Lazanda, achievement of our financial guidance for 2014 and intellectual property matters. Actual results may differ materially from the results predicted and recorded results should not be considered an indication of future performance. These and other risk factors are more fully discussed in the Risk Factors section and other sections of our annual report on Form 10-K for the year ended December 31, 2013, and of our quarterly report on Form 10-Q that we expect to file with the SEC by the end of this week.

Depomed disclaims any obligation to update or revise any forward-looking statement made on this call as a result of new information or future developments. Depomed's policy is to only provide financial guidance and guidance on corporate goals for the current fiscal year and to provide, update or reconfirm its guidance only by issuing a press release or filing updated guidance with the SEC in a publicly accessible document. References to current cash, cash equivalents and investments are based upon balances as of March 31, 2014. All guidance, including that relating to the company's expected product revenues, total revenues, EPS and adjusted non-GAAP EPS and cash usage is as of today, May 8, 2014.

I'll now turn the call over to Jim Schoeneck.

James A. Schoeneck

Thanks, Augie, and thank you all for joining us on the call today. We appreciate your continued support and interest in Depomed. I'd like to summarize the operational and financial accomplishments in the first 4 months of 2014, then I'll turn the call back to Augie to discuss our finances, after which we'll open the call for questions.

Starting 2014, we are in a very strong position with 4 commercial products in pain and neurology that we believe are primed for growth, plus we have a significant cash position to support future acquisitions to expand our product portfolio. In the first quarter of 2014, we laid the groundwork for the year ahead. We relaunched CAMBIA in February, and we began to gain traction on Lazanda during the quarter. We also continued to focus our commercial efforts on Gralise and Zipsor.

Top line. We generated first quarter 2014 product revenues of $21.5 million, an increase of 136% compared to the $9.1 million for the same period last year. We accomplished these results despite factors that we believe negatively impacted demand for our products in Q1. Severe winter weather, particularly across the Sun Belt, which is a stronghold for our products, as well as the first year of insurance -- first-of-the-year insurance coverage related to the reset of high-deductible plans in the ACA, slowed our prescription demand early in the quarter. Second, during the first quarter of this year, key wholesalers reduced their inventories of our products from December 31 levels. This is the second year in a row that we've experienced a reduction of wholesaler inventories in the first quarter. We believe that the prescription uptick we've seen in March is a good sign, as is the recovery of wholesaler purchases that we have seen in April.

Let's take a look at net sales by product, beginning with Gralise. Gralise prescriptions were approximately 65,000 in Q1 2014, an increase of approximately 30% over total prescriptions in the first quarter of 2013. Gralise net sales for the quarter were $10.9 million, an increase of 79% over first quarter of 2013 net sales and down slightly from the $11.7 million we reported in 4Q 2013. Importantly, we improved our position for Gralise exclusivity.

In January, we received a favorable Markman claim construction ruling for Gralise in our ANDA lawsuit. Then in April, we settled with 2 of the 3 defendants. These defendants can begin selling generic versions of Gralise on January 1, 2024 or earlier under certain circumstances. The patent litigation continues against the sole remaining defendant, Actavis, the first filer and the ANDA trial is scheduled to begin next Monday, May 12. The case is streamlined and Actavis is not disputing infringement of some of the claims in our 2 October 2022 patents. Actavis is challenging infringement only on one element of the claims of the other patents. Then earlier today, the judge in the case ruled that Actavis cannot introduce evidence related to its only invalidity challenge to our October 2016 patent. Obviously, outcomes in litigation matters are inherently uncertain. We continue to believe that we have a strong case and remain confident that we'll achieve a favorable resolution ensuring a lengthy period of commercial exclusivity for Gralise.

Next, let's turn to CAMBIA. CAMBIA's the only single agent in its class approved for the treatment of acute migraine. We acquired CAMBIA in late 2013 and we relaunched the drug in approximately 6 weeks with our full sales force starting to sell CAMBIA in February. Net sales in Q1 were $4.6 million. We are pleased with the sales performance considering the February start. The highly successful representatives that we brought over from the prior owner of CAMBIA began selling the drug for us in mid-February. CAMBIA is now fully integrated into our commercial organization, and we anticipate prescription growth in future periods.

First quarter Zipsor sales were $5.3 million compared to $3 million in the first quarter of 2013, an increase of 77%. Zipsor prescriptions were down for the first 2 months of the year, reflecting reimbursement resets and the launch of a new competitor. Zipsor total prescriptions have increased for each of the last 3 reporting weeks, so we are hopeful that we have resumed prescription growth for the brand along with net sales growth.

Finally, Lazanda net sales in the quarter were just under $700,000. Our efforts to improve patient access with our signature support program are bearing fruit, and we anticipate that sales will accelerate during 2014. In fact, over the last 4 weeks, the FHA audit reported revenue for Lazanda, which approximates gross revenue, for the first time is annualized over $10 million. We believe that we're starting to see the breakout of Lazanda sales.

As we've discussed on prior calls, revenues from partnering and licensing continue to be an important part of our business. The partnerships we have in place and seek to continue create value for us, and the most significant contribution this last quarter came from our agreement with Mallinckrodt. In the first quarter, we recognized a $10 million milestone payment for the FDA's approval of Mallinckrodt's XARTEMIS XR, an extended release formulation of oxycodone and acetaminophen utilizing our Acuform technology. We began receiving high-single-digit royalties on the net sales of XARTEMIS in the first quarter and anticipate receiving royalties through 2032 based on recently issued Mallinckrodt patents.

In addition, Mallinckrodt has developed a second product, MNK-155, an extended-release version of hydrocodone and acetaminophen that uses our Acuform technology. MNK-155 will provide milestone payments and the same high-single-digit royalties on net sales if approved by the FDA. Mallinckrodt has stated that it intends to file the NDA for MNK-155 before September 30, 2014, and we are entitled to a $5 million milestone upon acceptance of the NDA, followed by a $10 million milestone if approved.

In addition, Ironwood continues to advance IW-3718 for the treatment of refractory GERD, which also uses our Acuform technology. Ironwood initiated Phase II testing of the compound in March, resulting in a milestone payment of $1 million to us. We may benefit from additional milestones and royalties if the drug continues in clinical development and ultimately gains FDA approval. Ironwood has stated that data from the Phase II trial is expected in the first half of 2015.

Depomed continues to be in a very strong financial position. In 1Q 2014, we paid taxes resulting from our PDL transaction and ended the first quarter with $213 million in cash. Our strong balance sheet enables us to support the growth of our existing product portfolio and to aggressively seek additional product marketing opportunities through acquisition. Our focus remains on pain, neurology and adjacencies, and while we can't predict the timing of any future acquisitions, our BD team remains active in pursuing late-stage and marketed growth opportunities.

To sum up, we're excited about the prospects for our business in 2014 and look forward to updating you on our progress throughout the year. Depomed today is a product-focused, growth-oriented specialty pharmaceutical company with a growing franchise of treatments for pain and neurology. With revenues from 4 marketed products and a strong balance sheet, we believe that 2014 has the potential to be another significant year of growth for the company.

I'll now turn the call back over to Augie to discuss our financial performance and then we'll be happy to take questions after we conclude our discussion.

August J. Moretti

Thank you, Jim. Before I summarize our financial results for the quarter, I want to remind everyone about the impact of the accounting for the PDL BioPharma transaction. In October 2013, we sold interests in future royalty and milestone payments in the type 2 diabetes therapeutic area to PDL for $240.5 million, which we received at the closing of the transaction in October. Depomed is accounting for the transaction under the debt accounting method. The debt accounting method requires us to recognize as revenue the underlying royalties and milestones that we sold to PDL, to record the proceeds of $240.5 million as a liability and to impute an ongoing interest charge against the amount of the liability that is deemed to be unpaid.

As we discussed in our earnings call in March, in addition to GAAP presentations, we have presented non-GAAP financials in today's earnings release, along with an appropriate reconciliation to give our investors and other readers of our financials a view of our operations that, among other things, eliminates the PDL noncash royalty income and the noncash interest charge.

In the first quarter of 2014, we recognized $42.8 million of PDL noncash royalty revenue and $5.4 million of PDL noncash interest expense. We also recognized $11.8 million in noncash tax expense related to this arrangement.

I'd now like to summarize the financial information for the quarter ended March 31, 2014. Total product revenue for the quarter was $21.5 million compared to $9.1 million for the quarter ended March 31, 2013. The increase in revenue in 2014 was principally the result of higher Gralise revenue, higher Zipsor revenue and the addition of CAMBIA and Lazanda revenue. Gralise product sales were $10.9 million for the first quarter of 2014 as compared to $6.1 million in the first quarter of 2013. Zipsor sales in the first quarter of 2014 were $5.3 million as compared to $3 million in the first quarter of 2013. CAMBIA, which we acquired in December 2013, had net sales in the first quarter of 2014 of $4.6 million, and Lazanda, which we acquired in late July 2013, had net sales in the first quarter of 2014 of $680,000.

Selling, general and administrative expenses were $32.5 million for the first quarter of 2014 as compared to $26 million for the first quarter of 2013. The increase in SG&A expense in Q1 2014 was primarily due to increased sales and marketing expenses related to Lazanda, which we acquired in July 2013, and CAMBIA, which we acquired in December 2013, and the increased legal expense related to ongoing patent infringement litigation.

Research and development expense was $2 million for the first quarter of 2014 as compared to $3.3 million for the first quarter of 2013. The decrease in R&D expenses for Q1 2014 primarily related to the absence of all SEFELSA expenditures in 2014.

GAAP net income for the first quarter of 2014 was $17.9 million or $0.30 per share compared to a net loss of $5.5 million or $0.10 per share for the first quarter of 2013. The 2014 GAAP results were largely impacted by our recognition as revenue of $42.8 million of noncash PDL royalty revenue, which largely consists of Glumetza royalties from Salix that we, in turn, pay to PDL. During Q1 2014, this amount was unusually large due, from what we understand, to be increased wholesaler stocking of Glumetza during the quarter and may not reflect future trends as we have not observed an increase in prescription demand for Glumetza.

Non-GAAP adjusted loss for the first quarter of 2014 was $785,000 or $0.01 per share, which excludes PDL accounting, amortization related to product acquisitions and stock-based compensation. Cash, cash equivalents and marketable securities were $213 million as of March 31, 2014. As Jim mentioned, we paid our federal and state taxes on the PDL transaction in the first quarter of 2014, and if we disregard the tax payment, cash consumption for the quarter was approximately $5 million. Keep in mind that we accrued the $10 million Mallinckrodt XARTEMIS approval milestone and the $1 million Ironwood milestone as revenue in Q1, but we did not receive the cash payments until Q2. So the March 31 cash does not include these milestone payments of $11 million.

Before addressing our guidance for the remainder of the year, I'd like to remind you that the guidance is based on our current budget. As you can well understand, the budget is based on a large number of assumptions, given the complexity and scale of our business and the uncertainties in estimating future product revenues. These assumptions may change substantially as the year progresses for any one of a number of reasons, some of which are in our control and some of which are not. Specifically, this guidance may change if we acquire or in-license any additional products. I would direct you to the Risk Factors section of our annual report on Form 10-K and our upcoming 10-Q filing for a more complete discussion of the relevant risks relating to our guidance.

With that said, we reiterate our guidance provided in our March earnings call: product sales of between $115 million and $125 million; total revenues of $200 million to $225 million, which includes noncash revenues related to the PDL transaction and $10 million of Mallinckrodt milestone that we earned in Q1 and then an additional $5 million of potential milestones from Mallinckrodt this year; GAAP EPS of approximately $0.21 to $0.36; non-GAAP adjusted EPS of breakeven to $0.16; cash flow of at least breakeven.

Depomed is using for its 2014 guidance and for the presentation of its financial results in 2014 non-GAAP adjusted earnings and non-GAAP adjusted earnings per share. These operating metrics are non-GAAP financial measures that we believe provide supplementary information to investors. The company uses these non-GAAP measures in connection with its own planning and forecasting purposes and for measuring the company's performance. These non-GAAP financial measures should be considered in addition to and not a substitute for or superior to financial measures calculated in accordance with GAAP. Non-GAAP adjusted earnings and our non-GAAP adjusted earnings per share guidance for the year ending December 31, 2014, are not based on any standardized methodology prescribed by GAAP and represent GAAP net income and GAAP earnings per share adjusted to exclude 4 items: noncash PDL royalty revenue, net of related costs; noncash interest expense on the liability related to the sale of future royalties and milestones to PDL; amortization related to product acquisitions and stock-based compensation expense; and also to adjust the income tax provision to reflect the estimated amounts payable in cash. Non-GAAP financial measures used by the company may be calculated differently from, and therefore, may not be comparable to, non-GAAP measures used by other companies.

I will now turn the call to Jim Schoeneck for concluding remarks.

James A. Schoeneck

Thanks, Augie. For 2014, we continue to believe we were building an attractive core product business and we anticipate strong growth in revenues during the remainder of 2014. Our partners, like Mallinckrodt and Ironwood, are progressing drugs that bring milestones and royalties to Depomed, and we continue to aggressively defend our IP on several fronts, believing this will bring additional value to Depomed shareholders. Our 2014 strategy and corporate goals have 2 significant components: first, we will focus on our top line growth for our branded marketed products, Gralise, CAMBIA, Zipsor and Lazanda; and second, we will seek to acquire or in-license late-stage differentiated assets that will help us meet our short- and longer-term financial goals.

We look forward to updating you on our progress throughout the year, and we want to thank you for your continued support. Operator, we'd now like to open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Scott Henry from Roth Capital.

Scott R. Henry - Roth Capital Partners, LLC, Research Division

It sounds like you're getting some encouraging signs on Lazanda. And I guess, in general, when we look at prescription trends and when we saw everything kind of flatten out in Q1, most notably, I think Gralise, but it is your inclination then that we should start to see growth again? And I guess, the other thing I would mention, do you think it's all weather-related to cause this dip? Just any color there would be great.

James A. Schoeneck

Yes, Scott, I think what we saw was we saw the dip really happen from December to January and while we saw a bit of a dip last year, it was more pronounced this year. We dropped on a weekly basis an average of about 110 scrips a week over the 4-week period for the first 4 complete weeks of January compared to where we were in December and that we've seen it come back up in February, March and with the data into April. But I think we've seen that start to recover, I'm talking about Gralise specifically on that. I think the weather really did affect us and we're very strong with Zipsor and Gralise, in particular, through the Sun Belt, CAMBIA to a bit of a lesser concentration, but particularly on Gralise and Zipsor. So I think that's -- I also think that this year, more than most years, we've seen these -- the resets on the higher deductible plans come into play where we've seen some prescriptions not getting filled at the pharmacy level as much as perhaps in past years. Some of that, I think, was confusion around the ACA, and I even heard some anecdotal things where surgeons' offices actually had substantial openings during the first part of the year as people were trying to figure out coverage. So I think some of that's played in as well as some of the weather-related piece. And as I mentioned, I think the wholesaler is dropping inventory for the second consecutive year. I know we've seen that in other people's reports as well. I think it's one that we may just -- they're managing their business that way and we may just need to be all looking at that a bit more closely in terms of the inventory expectations from end of the year to the end of first quarter.

Scott R. Henry - Roth Capital Partners, LLC, Research Division

Okay, that's helpful. I mean, the main takeaway for me is that you do still think it's a growth product. And with the -- did you comment on when we may hear a decision on the orphan drug issue?

James A. Schoeneck

Matt's here and I'll turn it over to Matt, Scott.

Matthew M. Gosling

Yes, Scott, it's really hard to predict at this point. We don't know what is the source of the delay there. At this point, it's just hard to predict when we'll see something from the court on that one.

Scott R. Henry - Roth Capital Partners, LLC, Research Division

Okay, fair enough. And Jim, did you mention how much inventory you thought was destocked in Q1 with regards to Gralise?

James A. Schoeneck

Yes, Jack Anders is here. He's probably close to those numbers. I'll turn that one over to Jack.

Jack Anders

Scott, I think what we saw was probably about a week -- sorry, half a week to a week drop at the end of March compared to the end of December.

Scott R. Henry - Roth Capital Partners, LLC, Research Division

Okay. Final question for Augie...

James A. Schoeneck

Scott, with that we've definitely seen a recovery in April as well.

Scott R. Henry - Roth Capital Partners, LLC, Research Division

Okay, great. The final question just, so that $32.5 million SG&A number in the quarter, I know there were reasons it was up, but should we expect it to continue at that level going forward? Or was that kind of a high point?

August J. Moretti

Scott, I'm reluctant to give quarterly guidance on the expense levels. But I will say that traditionally for us, a number of our sales and marketing initiatives have had a bit of a front-end tilt to them and also we are, as Matt mentioned earlier, we've been ramping for the trial, which starts on Monday and so there are significant legal expenses in that first quarter. Obviously, the trial is scheduled for the second quarter, so there'll be significant legal expenses in this quarter as well.

Operator

[Operator Instructions] And our next question comes from Jason Butler from JMP Securities.

Jason N. Butler - JMP Securities LLC, Research Division

First one, on CAMBIA, can you just give us a bit more color about what you've heard back from the field and the initial launch period that gives you confidence that you've already achieved the plateau on the downside and that you're going to see a return to growth? What -- and just broadly, what are physicians saying about the product?

James A. Schoeneck

Well, I can say the physicians, they continue to be very excited about the product, if they've used it before. The fact that there isn't anything else available for these migraineurs for acute treatment other than triptans, and frankly, they just don't want to overuse triptans. So some physicians will alternate between it, some physicians will actually use the 2 drugs together. So we've seen excitement from the physician side. I think the other thing that we see is that sometimes at the pharmacy side, we're not getting as many of the scrips filled as we would like to see and we're addressing that programmatically over the next few months here that I think may get us some more conversion of the scrips that show up at the pharmacy actually getting filled. But there's a lot of excitement around it. And with the field force expansion selling the drug that we have, we've gone from 35 people that were selling it to now having 165 selling it, but we're also introducing it to new customers. There's a lot of doctors that had not had a CAMBIA rep before that now have one. And so those offices were really more in a launch mode, but yet we're able to leverage the key opinion leaders that have already used the drug, and that's indeed what we're doing. So that's, Jason, why we think we've got -- we're in a good spot now and that we can be in an even better one.

Jason N. Butler - JMP Securities LLC, Research Division

Great, that's helpful. Then just on Gralise and the ANDA litigation, you made a comment about Actavis not challenging some of the non-infringement issue on the '22 claims, some of the '22 claims. Can you just give us a little bit more color about that and what that actually means to the overall challenge for those specific patents?

Matthew M. Gosling

Yes, Jason, it's Matt. So the point there is just, if they're not challenging infringement, then it boils down to a validity fight on some of those October '22 patents. So again, we think we've got -- we've been working on these patents for years. We think we've got a strong case here, and we feel confident we'll get a favorable resolution. But the point is it boils down to validity, so it's a kind of one-pronged attack on those couple of patents.

Jason N. Butler - JMP Securities LLC, Research Division

Okay, that's helpful. And then just last question, Jim, broadly on BD. I know you can't really give us any specific color here, but can you just maybe generally talk about what you're seeing out there? Are you finding assets that you're interested in and just valuations aren't there? Or are you being outbid? Or are you -- or is it a lack of assets that you're really being attracted to that's the big challenge right now?

James A. Schoeneck

I don't know if I would say that it's either of those in terms of the challenge. I think that we've got 2 that we've completed in the last 9 months or so. And if I could continue to do 2 every 9 months, I'd be a very happy camper. I think with that, we are continuing to look for transactions like we've done and larger transactions, and so we've got plenty of deal flow. I mean, I really am -- it truly is one where that group is just -- is staying very busy. I think we're also disciplined around it. I mean, we're not going to go off with a number that we think is crazy and would jeopardize the overall company going forward. So I think it's really around the discipline. But it's not as much about purely getting outbid or that I think asset prices are just way out of line right now. I think it's one where it's finding the right thing, it's finding the right thing that fits with our mix and that we believe that we've got something we can do to it to continue to grow it.

Operator

[Operator Instructions] Our next question comes from Joy Mishaw from Cenvest.

Joy Mishaw

I just wanted to follow up on the previous question regarding the ANDA litigation. Can you also just expand or explain what the relevances of the -- of Actavis not being able to introduce any more evidence, I think it was against the 2016 patent. Can you just expand on that a little?

Matthew M. Gosling

Yes, Joy, the point there is just that Actavis was asserting invalidity, I think, due to indefiniteness. And the judge just said, "Well, you know, it's too late, too late to introduce that evidence so you can't." And that's the only basis on which they've claimed invalidity of that patent, which means they're not -- so there, it boils down to an infringement fight rather than a validity fight. So -- and they're going to have to demonstrate non-infringement of that -- against that patent there.

Joy Mishaw

Okay. So non-infringement against the 2016 patent and then validity of the '22?

Matthew M. Gosling

That's correct.

Operator

And ladies and gentlemen, at this time, I'm showing no additional questions. I'd like to turn the conference call back over to management for any closing remarks.

James A. Schoeneck

So thank you all for joining us on the call today. As I stated earlier, we appreciate both your interest and support of the company, and we look forward to continuing to grow the products through the rest of this year and to continue to seek aggressively to bring additional products in. We thank you for your support, and we look forward to updating you in the future.

Operator

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your telephone lines.

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