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Inspire Pharmaceuticals (NASDAQ:ISPH)

Q3 2010 Earnings Call

November 4, 2010 8:00 a.m. ET

Executives

Adrian Adams – President and CEO

Jenny Kobin – VP, IR and Corporate Relations

Tom Staab – EVP and CFO

Analysts

David Moskowitz – Madison Williams

Jon Stephenson – Summer Street Research

Michael Schmidt – Leerink Swan

Ian Sanderson – Cowen & Company

Biren Amin – WJB Capital

Liana Moussatos – Wedbush Securities

Misha Intwala – Piper Jaffray

Good morning. At this time, I would like to welcome everyone to the Inspire Pharmaceuticals third quarter 2010 financial results conference call. [Operator Instructions.] As a reminder, ladies and gentlemen, this call is being recorded today, Thursday, November 4, 2010. Thank you. I would now like to introduce Mr. Adrian Adams, president and chief executive officer. Mr. Adams, you may begin your conference.

Adrian Adams

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

Jenny Kobin

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

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

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

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

Adrian Adams

Thank you, Jenny. I'm pleased to provide an update on our third quarter financial results this morning to our shareholders and analysts. As you may have seen from our press release this morning, we delivered another strong quarter, driven by excellent commercial performance and quality financial management.

Our research and development programs are progressing as planned, and we have undertaken initiatives to resource the organization in a measured way in light of the potential milestones for Inspire in the coming year. We have a solid foundation in place and are poised for what could be a potentially transformational and exciting year in 2011.

As usual, first I will begin today's webcast with a review of the quarter and our year-to-date accomplishments against the key strategic imperatives we established at the beginning of 2010. Second, I will discuss the accomplishments of our commercial team in detail. Third, I will provide updates on all late-stage research and development programs in cystic fibrosis and blepharitis before turning the call over to Tom for a review of our financial performance and 2010 financial guidance.

I will then conclude the call with a summary of our near-term objectives before opening the call up for your valued questions. Please now refer to slide number 4.

This schematic provides a broad overview of Inspire's vision. That is, to build and commercialize a sustainable portfolio of innovative new products based on our technical, scientific [inaudible] and to accomplish this, through a continued focus on the specialty therapeutic areas of ophthalmology and pulmonology, which are both cost-efficient therapeutic areas in which to operate.

The ophthalmology side of our business is anchored by our flagship product AZASITE for bacterial conjunctivitis, and also includes co-promotion revenue from ELESTAT and a royalty stream from Restasis. The pulmonology business is anchored by Denufosol tetrasodium, our potential breakthrough product for cystic fibrosis, which is currently in late-stage phase 3 clinical testing.

We continue to execute against our five key strategic imperatives with the goal of creating sustainable shareholder value. With that in mind, please refer to slide number five to review our accomplishments to date in these areas.

First, I am pleased to report that our specialty ophthalmology sales force continues to deliver increased AZASITE revenues and prescriptions through their targeted efforts calling on ophthalmologists and optometrists.

We have also been very pleased to continue generating revenues related to ELESTAT. We do not know when the FDA will complete its review of the [inaudible] relating to a generic version of ELESTAT. However, we believe, as mentioned in prior calls, that it is likely that a generic form of epinastine could be approved and launched at any time.

Second, as it relates to delivering strong financial performance, the organization has performed well within the third quarter and year-to-date by increasing our [inaudible] management has also continued decreases in net loss. Also, we have been continually paying down our debt, such that we will end this year with minimal debt on the balance sheet.

We are very pleased with all key aspects of our financial performance, which Tom will describe in further detail later in this call, and we believe the company is well-positioned for 2011 from a financial perspective.

Third, in terms of driving excellence in research and development execution, we have made good progress with our clinical programs, including Denufosol for cystic fibrosis and plans for additional AZASITE work in the area of blepharitis. We continue to anticipate results in the first quarter of 2011 from TIGER-2, our second pivotal phase 3 trial with Denufosol.

In support of our franchise development activities for Denufosol, we have completed enrollment in a small safety and tolerability trial called REACH in two- to four-year old cystic fibrosis patients. You will recall that our phase 3 registration trials are studying Denufosol in patients down to the age of five. We expect to have the results from REACH in the first quarter of 2011.

Today we also reiterated our plan to initiate an additional phase 2 trial with AZASITE for blepharitis by the end of the year, which I will describe in a little more detail shortly.

Fourth, moving on to our corporate development and license initiatives, as we previously announced in August, we amended our dry eye agreement with Allergan. The amended agreement provided important clarity on the long-term revenue stream and responsibilities related to both Restasis and PROLACRIA. Inspire's right to the royalty revenue associated with Restasis and any follow on ophthalmic cyclosporine product has now been solidified through 2020 at a reduced, tiered global rate. As a reminder, there is no change in the Restasis royalty rate in 2010.

In addition, we also gained sole control over any future PROLACRIA development and commercialization. However, given that we are focusing resources on AZASITE and Denufosol, we are not at this time planning to proceed with clinical development of PROLACRIA.

Fifth, we have undertaken measured efforts to structure and resource the organization for success. In particular, I am very pleased with two key hires that took place during the third quarter. Firstly, Dr. Charles Johnson had joined Inspire as executive vice president of research and development and chief medical officer.

Charlie has over 30 years of experience in clinical practice as a pulmonologist and in the pharmaceutical industry. He brings significant medical, regulatory, and drug development expertise in both of our therapeutic areas of pulmonology and ophthalmology. Charlie's industry experience includes work on the development and launch of Lucentis and Pulmozyme, and he has led successful advisory committee presentations at the FDA.

The second key hire is Bob Savel, who has joined our organization has senior vice president and chief technical officer. We recognize the importance of this key role in our organization as we prepare for the potential commercial launch of Denufosol in 2012. Bob has more than 20 years of experience in multiple facets of manufacturing and operations including managing clinical and commercial-scale pharmaceutical manufacturing at Johnson & Johnson.

Now please refer to slide 6 for a more in-depth review of our sales force's accomplishments in growing the AZASITE brand. Quarterly prescriptions for AZASITE grew 45% to approximately 182 million prescriptions in the third quarter of 2010. This strong prescription growth drove attractive revenue growth of 23% quarter-over-quarter to $11.1 million in the third quarter of 2010.

This performance is also further illustrated in slide 7. This slide shows our AZASITE revenue and prescriptions have also seen a steady increase in the first nine months of 2010 compared to the same period in 2009. Prescriptions have increased by an impressive 39%, driving revenue growth of 29% for the first nine months of 2009.

Please now refer to slide 8, where I would like to review some key metrics related to our sales force's focus on enhanced productivity. Our strategy for building the AZASITE brand is to continually add to the breadth and depth of prescribers, which is illustrated in this graph. Since launching the product in August of 2007, our specialty sales force has continued to grow the total number of prescribers of the product as well as the total number of prescriptions per prescriber.

This point is further illustrated by two key measurements included on this slide. When comparing the productivity of the sales force quarter-over-quarter, you can see that the average monthly total prescriptions per sales representative have increased by 17% to 658 prescriptions. Also, the average monthly total prescriptions per target have increased by 10% quarter-over-quarter to 4.4 prescriptions. We are very pleased with the enhanced productivity being delivered by our quality sales force as we continue to execute a precision-oriented, targeted approach to increasing market share.

With this in mind, please now refer to slide 9, which expands on this point. The graph depicts monthly market share in Inspire's target call audience. There has been an upward, steady growth in market share over the past year.

In Inspire's key target call audience, our market share has grown from approximately 13% in the third quarter of 2009, to an average of 21% in the third quarter of 2010 with a recent uptick in AZASITE momentum to greater than 22% market share. AZASITE's market share continues to grow among the broader eye care specialist market, which includes optometrists and ophthalmologists, from approximately 8% in the third quarter of 2009 to 11% in the third quarter of 2010.

I'd now like to review the research and development program updates for the third quarter, beginning on slide 10 with a brief overview of our plans for an additional phase 2 trial with AZASITE for blepharitis. Blepharitis is a disease that is characterized by inflammation of the lid margin, which is complex and has a multi-factorial etiology. Acute blepharitis is usually associated with the presence of bacteria, lid debris, and sebaceous gland activity, whereas chronic blepharitis is generally associated with dysfunctional meibomian glands.

According to an Inspire-funded survey, greater than or equal to 34 million adults in the United States may have suffered from some form of blepharitis in a 12-month period. Despite this large number, blepharitis is often underdiagnosed or misdiagnosed in clinical practice.

We are studying AZASITE as a potential treatment for this disease. Today we announced our plan to initiate an exploratory phase 2 trial with AZASITE for blepharitis by the end of this year. This trial plans to enroll up to 300 blepharitis patients with various levels of severity of clinically relevant eyelid margin erythema, or redness, and lid debris.

This multi-center trial will be set up to evaluate AZASITE compared to vehicle over four weeks of treatment with an eight-week followup period with the goal of informing future trial design. We will be assessing the patient population, length of dosing, and measurements of multiple signs and symptoms of blepharitis, including utilizing photographic methods and a centralized reading center. Information from this trial is expected in the second half of 2011, which we hope will better inform a potential phase 3 program.

Please now refer to slide 11, as we move on to a discussion of Denufosol for cystic fibrosis. As you well know, cystic fibrosis is an orphan disease with approximately 33,000 to 34,000 in the United States and Canada. Approximately 54%, or 20,000, patients are under 18 years of age. However, despite improved pediatric care, and better nutrition, the average life expectancy for a cystic fibrosis patient born today in the United States is still only 37 years.

The currently available therapies for cystic fibrosis mainly treat the downstream complications of the disease, including thickened mucus and infections, but do not treat the underlying cause of the disease. Denufosol is a novel ion channel regulator currently in late-stage phase 3 clinical testing. Denufosol is targeted as an early disease state intervention that potentially corrects ion transport in patients independent of the class of CFTR defect.

Denufosol has a novel mechanism of action that enhances airway hydration and mucociliary clearance in the lungs by increasing chloride secretion through an alternative chloride channel, inhibiting sodium absorption, and by increasing ciliary beat frequency.

We believe that these integrated pharmacological actions and the potential to reach the small airways are key to maintaining lung function and potentially delaying the progression of lung disease in cystic fibrosis patients.

Turning now to slide 12. This slide provides a snapshot of the Denufosol opportunity. In June of 2008 we reported positive results from our first phase 3 clinical trial with Denufosol called TIGER-1. We continue to expect the top line results from our second phase 3 clinical trial, TIGER-2, in the first quarter of 2011.

If these results are positive, we expect to file the NDA submission in the second half of 2011. We have begun preparing for an FDA advisory committee meeting, which is standard for all new chemical entities such as Denufosol. If approved on the timeline anticipated, we expect to commercialize Denufosol in 2012.

We have been interacting with the scientific community at various meetings with continued dissemination of the results from the TIGER-1 pivotal trial. Most recently, we presented data at the European Respiratory Society and North American Cystic Fibrosis conference meetings that included data related to the novel mechanism of action of Denufosol, data that highlighted Denufosol's potential to treat patients on minimal pharmacotherapy and non-clinical safety data. We have also been conducting market research studies in advance of commercialization to gain physician feedback on Denufosol.

In addition, we are conducting other clinical trials with Denufosol beginning with a three-year open-label trial called DEFY, which stands for Denufosol Efficacy over Four Years. This trial is available to qualifying patients that complete TIGER-2. The DEFY trial will give us long-term outcome data on the continuous use of Denufosol and the ability to evaluate its potential disease modifying impact.

While this trial is not expected to be required for the NDA, we plan to include the available preliminary data from this trial in the submission. We expect to have data from patients who will have been Denufosol for two to two-and-a-half years at the time of submission.

Also, as we announced this morning, we have completed enrollment in an additional clinical trial called REACH, which is a small safety and tolerability trial of Denufosol in two- to four-year-old patients. We expect results from this trial in the first quarter of 2011, and plan to include this data in the NDA submission package as well.

So in summary, a great deal of activity with Denufosol as we move towards an eventful 2011. Now, I would like to turn the call over to Tom to review the financial aspects of the quarter, beginning on slide 13. Tom?

Tom Staab

Thank you Adrian and good morning everyone. I am pleased to provide you with an overview of our third quarter 2010 financial results.

The third quarter represented a strong quarter for us as Adrian has mentioned. In particular, I'd like to highlight two specific trends on which to focus your attention. These trends are one, strong AZASITE prescription growth, driving increased revenue, and two, tight control of our spending, which has resulted in an improved net loss and reduced cash utilization.

On slide 13, you'll notice in the third quarter of 2010 we reduced our net loss by 11%, to $7.6 million as compared to the third quarter of 2009. We successfully achieved this reduction through a combination of revenue growth, judicious expense management, and decreased interest expense through the continued repayment of our debt.

Our net loss per share in the third quarter of 2010 improved by 25%, for an improvement of $0.03 per share, based on a $935,000 decrease in absolute dollars and an increased share count.

Moving on to slide 14, total revenue for the third quarter of 2010 was $26.7 million, a 6% increase from 2009, reflecting attractive growth in AZASITE and Restasis revenues. It is important to note that our growth in aggregate revenue was diminished due to the recognition of deferred ELESTAT revenues associated with the accounting treatment for annual contractual minimums applicable at the time, which elevated the third quarter of 2009's ELESTAT revenue by approximately $2.1 million.

When breaking down third quarter revenue into its individual components, AZASITE revenue increased 23% to $11.1 million in the third quarter of 2010, compared to $9 million in 2009. Our commercial organization remains focused on increasing awareness of usage of AZASITE in the marketplace, resulting in strong prescription growth of 45% and increased market share in our target call audience, which now exceeds 22%.

The difference between revenue and prescription growth rates is largely associated with the one-time benefit beginning in the third quarter of 2009 associated with an erythromycin shortage. As we reported last year, our third quarter 2009 AZASITE revenue reflected a $1 million to $1.5 million benefit from an erythromycin shortage.

When you exclude this benefit from the third quarter of 2009, the comparable revenue growth rate between the quarters is in the range of 38% to 48% and is more in line with overall prescription growth of 45% between the two quarters.

In addition, as we noted in the second quarter of 2010, we have seen a continued but lesser impact of two other things. That of one, lower wholesaler inventory levels, and two, growth in our Medicate Part D business, which generally carries a higher rebate.

As you evaluate these items in the third quarter of 2010, there was a slight increase in wholesaler inventory levels as compared to the second quarter of 2010, but to the lower end of the historically expected two to three weeks of inventory on hand. Additionally, we have experienced continued prescription growth in Part D plans, but at a lower growth rate than noted in the second quarter of this year.

Continuing on, aggregate co-promotion and royalty revenue was $15.6 million in the third quarter of 2010. Breaking this down into its individual components, we recorded $11.7 million in royalty revenue from Restasis in the third quarter 2010 as compared to $9.4 million in 2009. We recorded $3.9 million from co-promotion revenue from ELESTAT in the third quarter of 2010, as compared to $6.7 million recognized in 2009.

As I have referred to previously, all 2010 ELESTAT revenue is recorded as the product is sold, as we no longer are under contractual minimums that require revenue deferral in 2009, thus explaining the primary difference in revenue between the quarters.

Furthermore, as we have mentioned in previous calls, we continue to expect a generic epinastine to enter the market in 2010. However, a launch has not occurred to date, and we will continue to enjoy a nice revenue stream from ELESTAT until the generic launches.

In summary, on an apples-to-apples comparison of our recurring revenue, thus excluding the $2.1 million deferred ELESTAT revenue impact and a $1.5 million erythromycin shortage benefit, our third quarter aggregate growth rate was approximately 24%. This rate approximates the year-to-date aggregate revenue growth rate of 22%, which we believe is a better representation of the underlying aggregate revenue trends in 2010, especially with the continued contribution of ELESTAT.

Now let's move on to slide 15 for a discussion of our operating expenses. In the third quarter of 2010, operating expenses increased by approximately $1 million to $34.2 million as compared to the third quarter of 2009. The small increase in total operating expenses was largely due to a $2.8 million of increased administrative expenses resulting from changes in executive management, increased consulting and legal expenses associated with [inaudible] activities including the amendment of our Allergan agreement as well as an increase in cost of sales associated with increased AZASITE sales volume. These increases were partially offset by a decrease in R&D expenses. Importantly, 80% of our R&D activity is focused on TIGER-2 and the Denufosol program.

Now I'd like to direct your attention to the bottom row of this slide showing our cash utilization and to provide some information on the second of my two focal points regarding tight control of expenses and the related benefit in our cash utilization figures. As mentioned, revenues growth, and in particular AZASITE sales growth, tight control over operating expenses, and the continued repayment of debt, yielding lower interest payments, has enabled us to reduce our cash utilization in the third quarter of 2010 by 41% when compared to the third quarter of 2009.

As such, we utilized $6.7 million in the third quarter of 2010, and $30 million of cash in the first nine months of the year. When you compare the nine-months ending September 2010 to the same period in 2009, our cash utilization decreased $12 million from $42 million to $30 million, or 29%.

In addition, I am pleased to report that we have been awarded four grants totaling approximately $1 million under the U.S. government's Qualifying Therapeutic Discoveries project, which awards grants for R&D projects that show significant potential to produce new and cost-saving therapies, support jobs, and increase U.S. competitiveness. We expect to receive this money before the end of the year.

Given all of these factors, in particular our tight control of expenses, AZASITE and Restasis revenue growth, and the continued benefit of ELASTAT revenue, we are changing our cash utilization guidance to a range of $43 million to $53 million, down from our previous guidance of $53 million to $65 million.

That brings us to our balance sheet summary on slide 16. We ended the third quarter with approximately $100 million in cash and investments and working capital is $79 million, representing an excellent financial foundation to leverage our commercial organization and to prepare for a potential U.S. Denufosol launch in 2012.

Finally, I'd like to highlight the continued reduction of our debt balance. We have decreased our debt balance by $15 million from the end of 2009 to our September 30, 2010 balance of $10 million. And we expect to pay off our current debt facility in the next six months. Furthermore, I think it is important to note that half of our cash burn for the first nine months of this year represented principal repayment on our outstanding debt.

Please now refer to slide 17, which contains our 2010 financial guidance as outlined in our press release issued earlier this morning. In summary, all revenue and expense guidance remains the same as the ranges we provided in August during our second quarter report. However, as mentioned earlier, we have decreased our cash utilization expectations based on the positive trends in the first nine months of the year. Accordingly, cash utilization in 2010 is now expected to be in the range of $43 million to $53 million.

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

Now I would like to turn the call back over to Adrian for some closing remarks.

Adrian Adams

Thank you Tom, and please now refer to slide 18. As mentioned during this call, we continue to execute with excellence against our key strategic imperatives in 2010. We remain focused on our vision to build and commercialize a sustainable portfolio of innovative new products based on our technical, scientific, and commercial expertise, with the ultimate goal of building sustainable shareholder value over time.

We are poised for a potentially transformational year in 2011, based on the foundations for success we continue to build in 2010, which I will briefly review.

First, we continue to leverage the commercial infrastructure and enhanced sales force productivity through targeted marketing efforts, resulting in increased EZASITE revenue and impressive prescription growth.

Second, we continue to deliver tight expense control while making measured investments for success in the organization. Importantly, we're on track to meet our financial guidance for the year.

Third, we continue to execute against our key research and development projects. The TIGER-2 and REACH trials are fully enrolled with the results from both trials expected in the first quarter of 2011 and our plan to initiate an additional phase 2 trial with AZASITE for blepharitis is on track for the end of the year.

Fourth, in terms of our corporate development and licensing strategy, we have amended and restated agreement with Allergan to provide clarity and certainty on the long-term revenue stream we will receive on Restasis.

And fifth, we continue to structure and resource the organization for success with a strategically aligned and experienced leadership team including the two key hires of Dr. Charles Johnson and Bob Savel.

Based on these fundamental foundations for success, we believe that we are positioned well for a potentially transformational year in 2011, which I would like to briefly outline on our final slide, number 19.

As we transition to our future in 2011 and beyond, we are keenly focused on our mission and vision and will focus our efforts on striving to achieve the events in the following areas: continuing to grow the AZASITE brand, reporting the top line results from our phase 3 pivotal TIGER-2 trial in the first quarter of 2011, reporting the results from the REACH safety and tolerability Denufosol trial in patients two to four years old, potentially submitting an NDA for Denufosol to the FDA in the second half of 2011, and reporting information from the additional AZASITE phase 2 blepharitis trial in the second half of 2011.

We hope that 2011 is going to be a truly exciting year for Inspire and our planning for success. We look forward to sharing our progress with you on an ongoing basis as we remain focused on building shareholder value.

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

Question-and-Answer Session

Operator

[Operator Instructions.] Your first question comes from the line of David Moskowitz with Madison Williams.

David Moskowitz – Madison Williams

I have a question on AZASITE. Can you talk about any price increases that you guys have taken thus far in 2010?

Tom Staab

We have taken a 9% price increase on AZASITE just recently in the month of October, and so the WAC price of that product is now around $78.

David Moskowitz

And so that kind of leads to my next question. You talked about the AZASITE benefit that you got last year in the third quarter - $1 million to $1.5 million. So first of all, just isolating that phenomenon, should we expect that that anniversaries last quarter and that this quarter we could start seeing the product track vis-à-vis demand? And then now with the recent price increase can you characterize any inventory swings that we might expect that are going to influence that pattern as well?

Tom Staab

I think it's important to mention that at least with the erythromycin shortage that we saw a continued benefit in 2009, and actually a more significant benefit in the fourth quarter of 2009 because if you remember, and I know you weren't following the company at that time, but that actually started in September, so you only had a one-month benefit in 2009 in the third quarter but you had the full three-quarter benefit in the fourth quarter. So when we expect our fourth quarter results for 2010 you're going to have to take into account that increment in comparing revenue from the fourth quarter of '09 to the fourth quarter of '10.

In regard to your second question on inventory, obviously the price increase should benefit in a higher margin on our AZASITE scripts in the fourth quarter. We took that price increase in the middle of October. However, we don't envision a change in inventory levels in the fourth quarter at the end of the year. However, as we've noted in previous calls, the major wholesalers have actually reduced inventory levels from 2009, probably due to macroeconomic events.

David Moskowitz

So just to review, no real inventory swings from the price increase, and I guess with the $1 million to $1.5 million effect that you had at the third quarter 2009 we should expect maybe a $3 million to $5 million effect that we're going to annualize on in the fourth quarter?

Tom Staab

No, actually the impact that we reported in the fourth quarter of 2009 was about $2 million to $2.5 million, so Q4 of 2009 is inflated somewhere between $2 million to $2.5 million from our normal general IMS script runs.

David Moskowitz

And with regard to the Denufosol, you mentioned that you're going to have patients on therapy by the time the NDA potentially gets filed, with experience of 2 to 2.5 years. Do you think that's enough data to show that this product has a disease-modifying effect? Do you think you could include that in the label based on those data, or certainly would you be able to make any claims referencing those long-term patients?

Adrian Adams

As we've discussed in the past, I think we're very pleased that we're going to have a significant number of patients who have been on the therapy for 2 to 2.5 years by the time of submission, and clearly all data will be reviewed. But we do not anticipate that that data will lead to any specific claim. Having said that, clearly when one looks at the positioning of Denufosol within the spectrum of cystic fibrosis treatment, the hope is that by getting this product used as an early disease prevention product, that it has the potential to impact overall disease progression.

So on an ongoing basis, from the DEFY trial, as we obviously look to that data it will give very important information that a lot of opinion leaders and caregivers and definitely patients will be interested in in relation to what impact it's making on an ongoing basis. And clearly with some of the results we saw from TIGER-1, obviously if [inaudible] are replicated in TIGER-2, which as you know is a longer timeframe of the study, etc., that shows promise and potential for the future. Clearly, any data that we have will be a review issue with the FDA.

David Moskowitz

Just one last follow up on that. Do you happen to know what the proportion of patients will be that will have experience with Denufosol for two years or more?

Adrian Adams

Not at this stage, no.

Operator

Your next question comes from the line of Jon Stephenson with Summer Street Research.

Jon Stephenson – Summer Street Research

Just in terms of the op ex guidance, obviously you're three quarters of the way through the year. Pretty wide range, and I was wondering if you might be able to comment on what are the key variables in terms of narrowing down that range?

Tom Staab

Generally we issue guidance in February of the year and we issue guidance for the entire year. And as you're well aware, there are a lot of variables that come into that. Generally we like to stick with that annual guidance because there's a lot of time and forethought put into that, as well as the potential variables that go throughout the year. So unless there's a reason to change the guidance, we generally don't. As you look at op ex for the year and for the quarter, we intend to start the blepharitis study as Adrian had mentioned, and we'll have the continued expenses associated with Denufasol, including some franchise development activities that we've laid out with the REACH study. But we reaffirmed all of our revenue and expense guidance and there really isn't any atypical variables that I would point out.

Jon Stephenson

And then in terms of the REACH study, could you talk about how long patients will be followed up? Is this just a one-arm study, or is this a two-arm study? What efficacy endpoints will be measured, etc.?

Jenny Kobin

I can go over that. Again, as a reminder, the REACH study is in two- to four-year-olds. It was a small study, so enrolling approximately 25 patients, and we're just really looking at safety and tolerability, not efficacy. It involves seven days of dosing at the standard 60 mg dose, and then we were collecting data on various kinds of end points, including oxygen levels and some other aspects, just to be monitoring the safety. But that's information that we'll be able to have in Q1.

Adrian Adams

We're very pleased about the data that will be available in the first quarter, and obviously there will be data that we will include within the submission at the time of NDA submission.

Jon Stephenson

The last question on the AZASITE blepharitis study, I was wondering why just a two-arm study versus the [inaudible] because if I recall correctly from prior conversations there was some belief that the vehicle might be associated with some aspect of the efficacy?

Adrian Adams

As we've commented in the past, with the phase 2 trial information that we've had to date, these are challenging areas in which to do trials, and based on the information we've got we fine-tuned the aspects that have been built into the protocol for this study. Within that, also we've been looking at the potential impact within the past studies with lid wipes, and a lot of those particular learnings have been built into this new protocol, and we hope to get some further information from this trial as we get the results in the second half of next year and look forward to that better informing us on a going forward basis. So it's based on learnings from past phase 2 trials, in areas where we're trying to get a little bit more specific and more granularity in relation to what is actually happening within the eye during these treatment periods.

Jon Stephenson

Okay, but should we assume that you've concluded that there isn't any specific efficacy just associated with the vehicle?

Jenny Kobin

Again, I think we feel like from a regulatory perspective we need to compare to vehicle and we are incorporating a number of ways to try to tweak the study and the design such that hopefully we can capture that impact.

Adrian Adams

That's why we're particularly interested in utilization of the photographic methods, centralized reading centers. We do believe that that's going to have a lot of value in relation to better informing us moving forward.

Operator

Your next question comes from the line of Michael Schmidt with Leerink Swan

Michael Schmidt – Leerink Swan

Hello, it's Joe Schwartz and Michael Schmidt from Leerink. Thanks for taking the question. I was wondering if you could give us a sense of how much the phase 2 trial for AZASITE and blepharitis might cost?

Adrian Adams

It's difficult to be absolutely precise, but trials in this order usually cost in the range of $5 million to $10 million, so they're very much lower cost than you would typically see in a lot of chronic disease therapy trials.

Michael Schmidt

And how much of a variance is there in terms of the average monthly prescriptions per rep and per target figures that you gave? Are there ways that you can bring the bottom performers up toward what the best performers are doing in terms of best practices? How much more of a performance enhancement is there do you think in that business?

Adrian Adams

It's a very good question, that, and clearly it gets to the very essence of the way in which we manage and direct our 92-person sales force. The way in which Inspire grows share and competes within this market is we identify target groups of physicians with high prescription potential. We focus our efforts on those physicians, build prescription depth and then build further prescribers on top of that on an ongoing basis. So we sequentially grow our average number of prescribers whilst maintaining the heavy prescribers that we've built over the course of time. This strategy we believe, which we loosely refer to as "peeling layers of the onion back", is an aspect where we do believe that as we move into 2011 that there is further productivity, not just from existing prescribers and increasing that depth, but also an increase in the prescribing levels for physicians that we will add to our target group of physicians as we move into 2011. So we do anticipate potential enhanced productivity moving into next year.

Michael Schmidt

Turning from productivity to efficiency, you mentioned that pulmonology and ophthalmology are cost-efficient areas to operate. How satisfied are you with the profitability of the commercial organization now? You've made some improvements and I'm just wondering in terms of break-even for that organization or further profitability, how far are you from critical mass? Do you think you need new products or what is going to ultimately drive value there?

Adrian Adams

Very good question. I think as we've commented on a number of occasions, if one looks at the overall productivity aspects and revenue and prescription generation from the sales force and particularly in the ophthalmology area, we do believe that on a standalone basis if you look at the costs associated with the sales force and the returns on that that it is profitable in its own right. Obviously from an organization broader perspective, as we transition through next year, that anchor of AZASITE and growing that part and increasing the depth and breadth of prescriptions gives us a solid foundation from a revenue basis that will form the base of building for potential commercialization of Denufosol in 2012. On a standalone basis, very cost-efficient, profitable in its own right, and obviously building up financial bridge, if you will, to what we hope will be a very exciting year, not just next year but obviously into 2012 and beyond.

Operator

Your next question comes from the line of Ian Sanderson with Cowen & Company.

Ian Sanderson – Cowen & Company

First, you mentioned that you're evaluating second generation delivery devices, and you're very early on here, but is there any more color you could provide on the timing of that and whether you have seen any early evidence that you can reduce the frequency of dosing?

Adrian Adams

We continue to assess the potential and possibilities with regard to a second-generation device. We're doing that as part of our overall integrated franchise development activities, which include the REACH study and other aspects of potential opportunities to broaden the patient population. In doing those assessments, we clearly were driven by an objective to see what, over the course of time, as part of those franchise development activities, whether we can enhance the patient experience by looking for any potential opportunities of either simplification of dosage or indeed simplification of the length of administration. We do recognize that a product with three times a day dose is something that we're able to enhance the patient experience, that that would be a beneficial aspect, which is what's driving our franchise development activities.

That said, any franchise development activities that we're assessing at this point in time will not take away from the core aspect of getting the results from TIGER-2, on the assumption of positive results getting that submission in the second half of next year, and driving toward potential commercialization in 2012.

We recognize that as part of building what we hope will be a successful brand in the cystic fibrosis market, that it is not just important to look at the core aspects of the core NDA submission in the second half of next year, but to look for other, further opportunities to broaden the franchise and enhancing the patient experience. We continue to do that right now in anticipation of planning for success.

Ian Sanderson

And as a follow up to that, two questions. First, is the intention with the DEFY trial to ultimately generate data for disease modification language in the Denufosol label? Or do you believe you'll need a placebo controlled trial for that claim? And then secondly, is REACH, is your intention there for this to be a registration trial to extend the age indication on the label or is this just simply safety data, which will make physicians feel comfortable with off-label use?

Adrian Adams

In relation to the DEFY trial, as we mentioned in an earlier question and on the call we do anticipate a significant number of patients who will have been on Denufosol for 2 to 2.5 years at the time of submission, and obviously the DEFY trial is a four-year trial. So with regard to any potential for that being included on a label, all of that will be subject to review on an ongoing basis. We do not anticipate that that particular trial will lead to a disease-modifying claim.

That said, we do recognize that one of the things that is of extreme importance among key opinion leaders, care givers, and indeed the patients, one of the very big differences in this market compared to a lot of other chronic disease areas is that there is a thirst for information on anything with regard to new drugs that help to perhaps have an impact on this disease. So we're hoping that in terms of the [place of] Denufosol going forward, that as results come out in looks at the DEFY [inaudible] over the course of time, and to discuss those on an ongoing basis with the FDA and to look for opportunities to discuss those with opinion leaders. We do not anticipate this will lead to a disease-modifying claim, but we do think there will be high levels of interest in that.

On the REACH study, as we mentioned, this is a small safety study in the two- to four-year-olds. We anticipate results from that in the first quarter. We will submit that data as part of the NDA submission. We do anticipate that depending on those results and any further discussions with the FDA that further clinical trial activity will be required in order to secure a potential claim in that particular group of patients. But clearly given the focus on positioning Denufosol as early disease intervention therapy it's important for us to assess the safety in the two- to four-year-old patient population.

Operator

Our next question comes from the line of Biren Amin with WJB Capital.

Biren Amin – WJB Capital

I wanted to ask you on Denufosol, how many patients have enrolled in the DEFY?

Adrian Adams

We've not been public on that. We're still in the active phase, so when we're in a position to share that data then clearly we will disseminate that, but we've given no indications of that at this point in time. Jenny, I don't know if you want to add anything to that?

Jenny Kobin

As we've said before, about 80% or so of patients who are eligible to enroll in the study, which is completers of TIGER-2 are choosing to go into the extended study.

Biren Amin

And followup to the two- to four-year-old REACH study. After completion will you be starting the phase 3 next year based on the safety data? Or will you wait for the readout of the ISIS trial, which NIH is conducting for hypertonic saline, before you initiate a phase 3?

Adrian Adams

From our perspective, we're focused on what we believe is overall right in terms of the development of Denufosol. We always do that within the context of what is happening in general within the cystic fibrosis area from a clinical trial perspective. Any future clinical trial activities in relation to this patient population and initiated any further studies will be subject to the data that we get out from this small safety study, at a time that's not going to impact our core focus in terms of getting the TIGER-2 data and submitting it to the FDA in the second half of next year. Clearly, any additional clinical trial activity would require further review internally and would be subject to discussions with the FDA. And we'll comment on that at that particular time.

Biren Amin

Any updates in terms of the development of Denufosol in Europe?

Adrian Adams

Not at this stage. As you can imagine, given the potential transformational impact of these key milestones next year for Inspire, we're focused and making sure that we get the data from TIGER-2 and submit to the FDA in the second half of next year. We have been doing a significant amount of work this year in discussions with key opinion leaders in Europe around the data and looking at whether there are any potential comparators in Europe.

But a lot of that feedback that we'll be getting has been of a high level of interest and very interestingly, when it comes down to the potential positioning of the product in Europe, most of these opinion leaders cannot see a comparator drug to Denufosol given its novel method of action and the fact that it has a very different approach than other therapies that are currently available.

When it comes down to potential development to commercialization of Denufosol outside North America, we are still assessing the options that we have in relation to potential commercialization, whether that's through partnership, whether that's through some other aspects of commercialization. And as part of that, in a timely basis, again without impact on the core focus of submitting to the FDA, we are very interested in as quickly as possible moving to putting together a package for the European community as well.

Biren Amin

One question on AZASITE. You've seen some pretty excellent growth in terms of prescriptions. Have you seen any changes in the average units of AZASITE dispensed per prescription?

Adrian Adams

Not at this stage. We've not seen any significant increases or changes. That said, I think one of the things we've been particularly pleased with as we've progressed through the course of this year is that there is a seasonality in this marketplace. Usually in the September-October timeframe you tend to see within the market a softening in terms of prescription growth. We've not seen that. In fact we've seen some pretty good prescription numbers during what is generally a seasonally soft period. So that, in many ways, gives us confidence and optimism as we move into 2011, and certainly I'd hope you'd agree that the prescription growth that we're experiencing at this point in time is very impressive. And I think it gets to the essence that our core targeted marketing strategy of growing prescribers and growing the depth of prescribers in a precision, targeted way is being very effective.

Operator

Our next question comes from the line of Liana Moussatos with Wedbush Securities.

Liana Moussatos – Wedbush Securities

Can you just tell us what stock-based compensation was in the quarter?

Tom Staab

The stock-based comp for the actual quarter, and more information will be given when we file the Q tomorrow, was about $1.3 million for the quarter, and it's totaling right at $9 million for the nine months ending September, which is well within our range that we guided in February, which is unchanged.

Operator

Your next question comes from the line of David Amsellem with Piper Jaffray.

Misha Intwala – Piper Jaffray

Hi, this is actually Misha for David. Just a quick follow up on AZASITE. Have you seen any changes in the reimbursement landscape as far as formulary wins, either Part D or commercial plans? Anything that you want to call out there?

Tom Staab

As I mentioned in my remarks, both in the second quarter and the third quarter we've seen an overall increase in mix in Part D plans, but as you're probably well aware, we're very, very comfortable with our overall coverage. With that said, we continually look at getting on additional plans, or exiting plans that are not performing well for us. And it's a complex and delicate evaluation about getting scripts and giving rebates and that type of thing. But we have seen a little higher Part D mix in 2010 associated with some recent wins this year.

Misha Intwala

And then just a follow up on an ex-U.S. potential partnership, or not. Assuming that you get successful TIGER-2 data, is it your plan to submit to the EMEA yourself? Would you be able to do that on the TIGER-2 data? Or would you ideally prefer to partner and then have the partner submit?

Adrian Adams

There are a number of considerations there. We're of the view that as we've transitioned through this year into next year that any aspects of destiny that we can control we like to control and therefore, from a regulatory pathway in Europe, and potential plans that may crop up in relation to potential partnerships, that will be driven by ourselves at this point in time. Clearly, any consideration as to any involvement from potential partners will be assessed at the time of any discussions that may take place with partners, on the back of a general assessment as to what our commercialization strategy is outside North America.

As you well know, with corporate [inaudible] licensing there are many, many different opportunities and ways of structuring potential partnerships or indeed many ways of commercializing assets. And we'll be assessing all of those and the ingredients of those potential areas as of when we get to those particular milestones. We remain very focused on getting the data, submitting in the second half of next year. And we are planning for success, and in the event that TIGER-2 is positive we anticipate that there will be some good, strong interest and we'll leverage those opportunities at that point in time in the best interest of shareholders of Inspire.

Misha Intwala

Hypothetically, let's say TIGER-2 is not successful. What would be the focus then? Would you cut down R&D and just focus on profitability through the ophthalmic franchise? What kinds of plans would you have there?

Adrian Adams

I wouldn't want to comment on specifics in that area? We are planning for success, and we feel that a number of the enhancements that we've made to TIGER-2, particularly in relation to the length of trial, the focus of the target population, we believe, and [inaudible] successful. That said, we need to develop contingency plans and we will develop that as part of the natural course of business. But I think it would not be value-added at this point in time to speculate on those aspects. Clearly in the event that there was a negative result, we would manage, organize, and resource this organization with shareholders in mind.

Operator

Our final question comes from the line of Jon Stephenson with Summer Street Research/

Jon Stephenson – Summer Street Research

Just a quick follow up. I was wondering in terms of the G&A, on the expense side, were there any one-times in there related to the hiring, or was this pretty much the good jumping point for future quarters?

Tom Staab

There was some small additional G&A expenses associated in the third quarter. As you look at the full year, a lot of that was earlier in the year, so it's relatively small in comparison. But as I said in my remarks, there was a $2.8 million difference, which a component of that was associated with some changes to the organization.

Jon Stephenson

And is there any hint from the wholesale channel of ELESTAT generics in the near term, or are we just assuming it's happening?

Adrian Adams

We have no further information on that. We do continue to expect a generic at any time, but we've certainly not seen any signs of it as yet.

Operator

I would now like to turn the call back over to Mr. Adrian Adams for any concluding remarks.

Adrian Adams

Thank you operator, and I'd like to thank you all for joining us this morning, and as always we look forward to updating you on our progress on the next quarterly call. So thank you so much, and I hope you have a wonderful day.

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