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KYTHERA Biopharmaceuticals, Inc. (NASDAQ:KYTH)

Q1 2014 Earnings Conference Call

May 8, 2014 4:30 p.m. ET

Executives

Heather Rowe - Associate Director, Investor Relations

Keith Leonard Jr. - President and CEO

John Smither - CFO

Analysts

Chris Schott - JPMorgan

Tyler Van Buren - Cowen

Seamus Fernandez - Leerink

Operator

Good day, ladies and gentlemen, and welcome to the KYTHERA Biopharmaceuticals First Quarter 2014 Operating Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, today's conference call is being recorded.

I would now like to turn the conference call over to our host, Ms. Heather Rowe, Associate Director, Investor Relations. Please go ahead.

Heather Rowe

Good afternoon, and thank you for joining us. For our prepared remarks and Q&A, I'm joined here today by Keith Leonard, President and CEO, and John Smither, CFO.

Before we begin with our formal remarks, we want to remind you that we will be making forward-looking statements, including financial projections as well as plans and expectations as detailed in our operating results release issued earlier today. These forward-looking statements contain certain assumptions, risks and uncertainties that are beyond our control and could cause our actual results to differ materially from these statements.

A description of these risks can be found in our latest periodic report filed with the SEC and in recent press releases. In addition, KYTHERA does not undertake any obligation to update any forward-looking statements made during this call.

I will now turn the call over to Keith Leonard, President and CEO. Keith?

Keith Leonard Jr.

Thank you, Heather, and thank you for joining us this afternoon. Our call today is broken into four sections. First, I will provide a brief update. Then I will turn it over to John to review our financial results. Next, I will touch on the expected timing of our planned regulatory submissions before opening up the call for Q&A.

We had a productive quarter in advancing ATX-101, a potential first-in-class facial injectable drug for the reduction of submental fat which commonly presents as a double chin.

Not surprisingly our main focus for the quarter has been the preparation of a new drug application or NDA for submission to the FDA. Recall, we held our pre-NDA meeting with FDA last fall, and as a result we believe we understand their expectations with regard to content, form and the basis for analysis and have been preparing our filing accordingly. While this clarity gives us comfort as we move through the process and seek approval, it doesn't of course mean we take anything for granted.

We have an outstanding team, who are diligently working on each requirement for the NDA. We are focused on making a high quality submission, and while it is a substantial undertaking, we're on track to file in the second quarter. While our primary focus has been this preparation of the NDA, in parallel we are also increasing our activities to ensure commercial readiness and to plan and prepare for a successful launch. I'll discuss some specific examples a little later.

We're excited there is a position in societies and key stimulators continue to express their enthusiasm of the potential for ATX-101 to be the next big innovation in the aesthetic medicine. In April, ATX-101 was featured in a key scientific session at the annual meeting of the American Society for Aesthetic Plastic Surgeons or ASAPS. This presentation was also highlighted in an ASAPS meeting press release.

The already robust aesthetic medicine market continues to grow, specifically the long-term trend towards non-surgical procedures within aesthetics continues. According to the recently released ASAPS annual survey, non-surgical procedures increased by 31.1% in 2013 with an estimated $2.7 billion being spend on injectables and another 1.9 billion spend on skin rejuvenation.

Since ASAPS tracking began in 1997, non-surgical procedures have grown at an astounding 520%, while traditional surgical interventions have grown at healthy 89%. You may remember a study released last year by the American Society for Dermatologic Surgeons or ASDS indicated that 60% of the more than 6300 consumers surveyed were bothered by the excess fat under their chin. Notably this was the same percentage of those who reported being bothered by lines in the mid face, where fillers are typically used, and was higher than the 50% who indicated that they were bothered by lines between the eyebrows where toxins are typically used.

These data help confirm our view that the area under the chin has high aesthetic value and has an important place in this large and growing market. If approved, we believe ATX-101 will be an attractive solution for the reduction of submental fat, representing a new category within facial aesthetics. Based on clinical trials conducted to-date, ATX-101 has exhibited significant meaningful and long-lasting results in the reduction of submental fat.

Recent analyses further confirm prior data demonstrating long-lasting results. Based on a recent update generated for NDA filing, results from our long-term non-treatment observational study shows that 87% of patients who achieved at least a one grade response on their clinician reported scale in their predecessor trial maintained at least a one graded response after four years.

Recall that ATX-101 causes focal adipocytolysis or put simply it destroys fat cells rather than just shrinking them. It's like the difference between popping a balloon or simply deflating it. These long lasting results also fit nicely with stated consumer preference as shown in the 2012 ASAPS survey, where 92% of consumers indicated when selecting treatment they prioritize gradual long-lasting results over cost and immediate results.

Earlier I mentioned we're wrapping up our readiness efforts. This is particularly true in medical affairs. Our medical affairs program is centered on physician and patient success. Simply, we want to provide physicians with the highest level of scientific and medical information to give them the best possible tools to enable patient success, meaning patients who are satisfied with both the aesthetic outcome and the experience.

Physician training including educating physicians on the science and the product will be a critical component of our launch plans. We're planning for a state-of-the-art educational program for proper patient selection, injection training and managing both patient and physician expectations. We're making important progress in building out our medical affairs team, including the recent hiring of a director to build and lead the Medical Science Liaison or MSL field team. We'll add additional medical affairs personnel and we plan to have the MSL field staff in place by Q4 2014.

Moving on to commercial, we started building the commercial infrastructure so that we'll be prepared for a successful commercial launch upon approval. Specifically in 2014 this will include strategic communications, professional relations, sales operations, public relations and HCP education and training. According to market research, there are approximately 10,000 aesthetically-oriented dermatologists and plastic surgeons in the U.S.

Our market modeling suggests that within that group, approximately 30% of physicians account for around 80% of that business. We'll target these high value, high volume injectors. In addition, we're conducting quantitative physician and consumer segmentation studies. And we will use this date to further refine our position targeting and our consumer marketing activities.

We've also communicated that we can efficiently reach the target physicians through an initial specialty sales force of around 60 to 80 reps, which over time and as we gain momentum we expect could grow to 100 plus to help us meet our expanded targets.

We're in the process of modeling our understanding of ATX-101 from the clinical trial setting to what we believe will be of commercial use. For example, while the clinical trials allowed for up to six visits for patients to achieve a composite two grade change in clinician and patient rating skills to meet clinical trial endpoints, results show that almost 90% of patients were satisfied with a one grade change in the clinician rating component of the composite.

When looking at the clinical trial data we see that most patients achieve a one grade change in the clinician scale in two to four visits. Insights like these will continue to be important as we model what might be expected physician practice outside of the clinical trial setting.

So far I focused my comments on the U.S., now a word about our strategy for ATX-101 outside of the U.S. Recall that in March we announced our acquisition of rights outside of the U.S. and Canada from our former partner Bayer Consumer Care. As we said at that time we're undertaking a territory by territory analysis to determine where, when and how, to best commercialize ATX-101.

In our analysis we're evaluating factors including facial injectable pricing, the size of the aesthetic market within that territory, the regulatory environment, our intellectual property protection among other things.

We'll focus our efforts on the most attractive markets knowing that the path and timelines of those markets varies, which will create a natural stagger in filings and approval outside the United States.

By way of background it's helpful to remember that some countries such as Japan and China require local clinical trials. In addition, many countries require approval in another country first; it's so-called CPP or Certificate of Pharmaceutical Product issued by a leading global regulatory body such as the FDA or EMA.

We'll be pragmatic and we'll pursue a multilayered regulatory strategy that leverages our U.S. dossier to the extent possible. But we'll also not ignore attractive markets that require additional data rather it may simply take us longer to get there. So we'll seek to launch ATX-101 in key markets as quickly as possible. And in parallel we'll continue to prosecute the more challenging key markets.

Again, we'll provide more details on our ex-U.S. submissions over time, but for now it's most important to understand that we're making good progress on this strategy, we continue to expect to make multiple ex-U.S. filings by the second quarter of 2015.

As we decide on how to commercialize ATX-101 in key markets we'll evaluate whether it makes the most sense to do it ourselves, to have a partner, or to work through a distributor. We've assembled an executive team with solid relevance international experience, and I have confidence in their collective expertise to determine how to best maximize the long-term global value of ATX-101. Again, we'll use a data-driven strategy, quality and efficiency, and these will drive our decisions.

In summary we're on track to achieve key milestones. And with that, I'll turn it over to John.

John Smither

Thanks, Keith. As of March 31, 2014, cash and cash equivalents and marketable securities were 152.6 million of which 1.2 million was restricted. This compares to 87.6 million of which 13.8 million was restricted at March 31, 2013.

Our press release and our discussion so far have been expressed in financial terms as reported under U.S. generally accepted accounting principles or GAAP. As a reminder, in our last call I mentioned there will be several items in 2014 that under GAAP will be reflected in the statement of operations as an expense but don't necessarily require the use of cash.

The most significant of these to date is the non-cash for in-process research and development charge were IPR&D resulting from the acquisition of the rights to ATX-101 outside of the United States and Canada from Bayer, which we announced on March 10th.

If you recall, Bayer received $33 million in KYTHERA common stock plus a $51 million note bearing interest at 5% per annum payable no later than 2024, and is eligible to receive certain long-term sales milestone payments by an annual sales outside of the U.S. and Canada. The transaction was accounted for as in asset purchase and expensed as in-process research and development at its fair market value of 52.8 million of non-cash charge. The 31.2 million difference between the gross amount of the consideration to Bayer of 84 million and the amount expensed this in-process research and development is primarily attributable to the discount on the note payable to Bayer to adjust it's face value to fair market value as required by GAAP.

The 31.2 million difference will be amortized over future periods as additional non-cash interest expense based on an effective interest rate of 15%. In addition, the shares outstanding increased during the first quarter, which again was primarily the result of approximately 698,000 shares issued to Bayer as part of the total consideration.

Our net loss was 69.4 million for the first quarter of 2014 compared to 14.1 million for the first quarter of 2013. This reflects the non-cash IPR&D charge of 52.8 million I just mentioned. With the one-time IPR&D charge our net loss -– excuse me, without the one-time IPR&D charge our net loss would have been approximately 16.7 million and for a complete reconciliation please see our press release.

I won't review this quarter's R&D and G&A expense today on the call since they're detailed in the press release we issued this afternoon, but I'm happy to answer any questions that may arise during the Q&A session of our call.

In our press release, we reiterated our guidance that we expected in 2014 with the year end cash balance of between $90 million and $100 million. Given what we know today, and assuming a first-pass FDA approval and PDUFA V Standard review timelines, we expect our existing cash, cash equivalents and marketable securities will allow us to fund our operating plans through at least the next 12 months, and more specifically will get us through the FDA's decision for approval.

With that, I'll turn the call back to Keith.

Keith Leonard Jr.

Thanks, John. Now let's look ahead at the coming quarters. Our key priorities are as follows; first, our number one focus is on a high quality NDA filing for ATX-101. As I said earlier, we remain solidly on track to file the U.S. NDA this quarter. Our goal is to achieve a first cycle approval, and we're planning for a standard 12-month review as outlined by PDUFA V. This means we wouldn't expect approval before the second quarter of 2015.

Second, we will prepare for a possible panel meeting and pre-approval inspections both here and in our contract manufacturers. Third, we will continue to make progress on commercial readiness. And lastly, as we finalized our ex-U.S. regulatory strategy, we still plan to make multiple ex-U.S. submissions for ATX-101 by the second quarter of 2015.

In summary, I'm proud of the progress we are making, and I look forward to updating you on our future achievements as we execute against our corporate priorities. Although while focusing on high value, quality, good investment and resourcefulness. We believe that all of the principles position us to achieve long-term success and to deliver shareholder value. I also want to take a moment to thank our employees, the workload around here continues to be very demanding and we continue to perform well. I'm proud of all of our accomplishments as we not only execute to-date, but also envision tomorrow. All of our planning prep and hiring require foresight to see what needs to be done now to enable that future success.

With that, thanks to all of you for joining us today. We will now turn the call back over to the operator to open it up for questions.

Question-and-Answer Session

Operator

Ladies and gentlemen, thank you for your participation in today's conference. (Operator Instructions) And our first question comes from Chris Schott with JPMorgan. Your line is open.

Chris Schott – JPMorgan

Great. Thanks very much, just had a couple here. First one was; it seems like Allergan is having a very successful rollout of VOLUMA. Can you just talk about any read-across for KYTHERA in terms of the market's ability to support kind of a premium priced more durable therapy and how that's -- how you think about that as you think about pricing ATX-101?

The second one was just, can you elaborate a little bit more, you talked about patients needing two to four treatments in more of a real world setting. Do you want to elaborate a little bit more about how you're thinking about kind of optimizing price versus volume in the market here? I guess, how you think about balancing kind of maximizing revenue per patients for those who need fewer cycles versus not making the therapy too expensive for patients in the other end of the spectrum, just a little bit more color on that would be appreciated.

And then a final quick one if you have any thoughts, just any industry implications or implications for KYTHERA as we think about this Valeant hospital bid for Allergan, if that combination moves forward, just any thoughts on what that means for the industry and for you guys? Thanks very much.

Keith Leonard Jr.

Okay. You gave me a lot to work on there. First of all I just want to make sure -- do you say the read-across from VOLUMA to ATX-101?

Chris Schott – JPMorgan

The read-across, yeah, just more as a proxy as we kind of seen a more, maybe a little bit more premium priced aesthetic products kind of rolled out and having a very successful roll out. How you think about that as you are thinking about price for your therapy?

Keith Leonard Jr.

It's price, but there is a couple of things. So, VOLUMA is longer acting products, and I think that the higher price that they put on that above JUVEDERM reflects what we believe is that patient preference for longer acting. So we think with our four-year data that we just walked you through leaves in a very good position to make sure that the product is highly valued by patients. I think the VOLUMA experience supports that observation.

The second observation I would make is that VOLUMA has been kind of a training led launch. So we look at the training that Allergan has done. They have done a great job at rolling out physician training. As I mentioned before in the call, we think training physicians on how to use the product and patient and physician expectation is going to be really important. So that's I think a second read-across.

Third, I think it highlights that we have been asked before is there exhaustion within the patient pool, is there a limit on how much patients will spend. And I think it supports an idea that innovative products that are really differentiated can do very well. And this is in a relatively short time period from Allergan, so I can't say that we would match their trajectory. I would aspire to something like that. They are obviously a very well executing company. And we would like to be like them in that respect, but I think those are the reads-across to the VOLUMA.

The other last small thing is it will be interesting to see what the actual dosage in practice looks like compared to that that was used in the clinical trials. And the reason I say that it clearly bears on actual price to the consumer when you take the unit price, and you look at the number of units consumed. And that's something that as I mentioned earlier in the call, we've been spending some time modeling, not only dose per patient, but to go to the second part of your question, how many treatments would it actually take.

I completely understand your question about essentially elasticity of pricing and how do you get patients to value the products enough to pay a lot without excluding a lot of customers. I can restate your question and I know exactly how we should ask our questions. I can give you an answer on that. There is still a lot of pricing research to do. I mentioned that we are doing both physician and patient segmentation studies and of course in that respect the patient segmentation is pretty important to understand how price sensitive these customers might be that are currently in the spectrum and those who might be added on.

Chris Schott – JPMorgan

A follow-up on that though, are you expecting the patients skew more towards the two treatments or towards the four or more like just based on what you are seeing today?

Keith Leonard Jr.

No, I think we are going to have a spectrum of patients that this is the difficult part. So we are using scales and solid data. And we have a lot of patients. But I think the way we are going to end up thinking about this is there will be a spectrum of patients, some will be two, some will be three, some will be four, some will be five, some will be six, and you are going to end up with a mean that will end up talking about after a week in measure and real practice. But may not be very many patients to actually get that mean. So it's not that I think it's leaning towards the two to four. We just look at the product's performance. And we use that important one great change as kind of a proxy for what we think drives satisfaction. I think the data would support the two to four range with 50% being at -- little over 50% being at two, receding after two treatments, and a little over 71% achieving an after four treatment. That is in our total population of moderate to severe, right? So I think it's a good proxy, and we will still see a spectrum of patients.

But when we got into our final pricing and value calculation, that's something we are going to have to take into account. As far as implications on the Valeant Allergan hospital bid, we are watching with interest. We will see what happens. I think it makes obvious the value of well performing; highly differentiated products in the ones that I am thinking about are the JUVEDERM platform and BOTOX with anesthetics. Allergan has other products as well that are very, very nice, but I think it reinforces the attractiveness of aesthetics not only as a really rapidly growing area, but also one that's somewhat immunized from reimbursements and the pressure there with the cash pay model. So, it will be interesting to see how it all works out.

Chris Schott – JPMorgan

Thank you very much.

Operator

And our next question comes from Tyler Van Buren of Cowen & Company. Your line is open.

Tyler Van Buren - Cowen

Hi there, good afternoon. I was hoping that we could get maybe a little more clarity on the multiple ex-U.S. submissions which we now know will count in the second quarter of next year, and the long-term global strategy. Specifically I would assume that EU filing would occur in the second quarter, and now that you have got the rise back from Bayer. I was kind of wondering what level of work they have done, and over the course of the next year what additional work will be required for that filing and potential timelines and disclosures we might see, as well as what additional territories you all are finding interesting?

And secondly, may be some additional information on the non-clinical registration trials going on, more specifically the two that are not required by the FDA and kind of when we might hear about some of the additional learnings that could help your commercial launch preparations?

Keith Leonard Jr.

Okay. Tyler, thanks. First I want to start with a clarification because I made a -- might not have made myself clear. I mean, it's not that we expect those multiple submissions to happen in the second quarter of next year. We expect them to make multiple submissions by the second quarter of next year, meaning, you should expect a series of announcements from us over the next 12 months one by one as we focus progressively on each submission. So we didn't think about it as -- we are going to have a kind of second waiver filings. It's my expectations that we will have filings that are getting staggered out over time. And that's driven in part by strategy, in part by localizing the file that we have to -- this module one has to be pretty much changed and localized to the country you are applying to. Module two, which is a clinical section has to get somewhat tweaked. In some cases we are going to seek scientific advice meetings that hadn't occurred with Bayer and in some cases we may file directly. So that's the reason for this stagger.

I think we mentioned on one of the last calls, and I don't -- I can mention it as something we are working on, but I can't mention it as something resolved, but it's an implication of taking over the file. There is a change in the drug products manufacturer. As you remember by the previous license, Bayer was responsible and had been doing their own drug product manufacturing. So when we take over the regulatory submissions etcetera, one of the things that we have to do is switch the drug product manufacturer. We don't think that's an issue in the sense that we have a very good drug product manufacturer on board, Hospira and they are quite capable. It's a matter of timing.

On the second topic you asked about the other, the non-registrational files, I'll just click through those quickly. One of those was a long-term follow up study coming out of Phase 3 of approximately 200 subjects and that study is fully enrolled. It's a follow up non-treatment study. We had mentioned a great one and four or a new grade study, it's a safety study only that's approximately 90 subjects, and that is enrolling. So we are making progress there. We talk about a patient management study to systematically investigate several paradigms to further understanding and optimize patient management comfort. It's about 80 subjects that is fully enrolled. And then lastly we talked about a study documenting safety in patients 65 to 75 years old that is enrolling. So two are fully enrolled and two are still enrolling, and that's at least for me pretty much as expected. The great four category which is the extreme submental fat and patients over 65 are not quite as prevalent as those in our target population, those are kind of adjacent population. And so it does not surprise me in fact it's kind of within our planning that those would still be enrolling. So we are making good progress on those.

As far as outputs, don't know the timing of outputs, but we will keep you posted on that. And of course we will be submitting whatever safety data is derived out of these studies into our 120-day safety update.

Tyler Van Buren - Cowen

Okay, thanks so much.

Operator

(Operator Instructions) Our next question comes from Seamus Fernandez of Leerink. Your line is open.

Seamus Fernandez - Leerink

Yeah, thanks, and thanks for all the detail around, finally, timeline, Keith. Can you guys really give us a little bit of a walkthrough of the sort of the steps that you need to complete to get to the filing? And again what are your plans in terms of the kind of communication that you will make to the street around the filing, would you anticipate communicating the filing itself or only communicating the filing upon acceptance? Thanks.

Keith Leonard Jr.

You are talking about the U.S. filing, correct, Seamus?

Seamus Fernandez - Leerink

Yes, that's correct.

Keith Leonard Jr.

Okay. So it's our way -- we think the fact that we did the file complete is a relatively material event for a company like us. So our plan would be to communicate when we file. And we have also acknowledged that for a company of our status. Acceptance of the filing is also important. We are playing for a high quality submission with almost virtual lock on acceptance. But you can't take that for granted either. So when we will have acceptance we would also communicate at that time.

Seamus Fernandez - Leerink

Okay.

Operator

(Operator Instructions) I'm showing no further questions. Ladies and gentlemen, thank you for your participation in today's conference starting at 4:30 Pacific Time today. A replay of the call will be available. The replay will also be available at KYTHERA'S corporate website at kytherabiopharma.com. This concludes the presentation. You may now disconnect and have a great day.

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