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Sucampo Pharmaceuticals, Inc. (NASDAQ:SCMP)

Q2 2014 Results Earnings Conference Call

August 05, 2014 08:30 AM ET

Executives

Silvia Taylor - SVP, IR and Corporate Communications

Peter Greenleaf - Chief Executive Officer

Cary Claiborne - Chief Financial Officer

Dr. Peter Lichtlen - Chief Medical Officer

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

Analysts

Irina Koffler - Cantor Fitzgerald

Ed Arce - Roth Capital

Jason Aryeh - JALAA Equities

Jason Kolbert - Maxim

Operator

A very good day to ladies and gentlemen and welcome to the Q2 [2013] Sucampo Pharmaceuticals Inc. Earnings Call Conference Call. At this time, all participants are in a listen only mode. At the conclusion of today's conference call instructions will be given for a question-and-answer session. The conference call will be recorded today August 5, 2014. (Operator Instructions).

I would now like to turn the call over to Silvia Taylor.

Silvia Taylor

Thank you Gary and good morning everyone. Thank you for joining us today. The earnings release and its attachments announcing Sucampo's second quarter 2014 financial and operational highlights was distributed this morning. For those of you who have not yet seen it, you will find it posted in the Investors section of our website at investor.sucampo.com. In addition, slides for this morning's call are also posted in the same section of our website. We also plan to file our 10-Q on or before August 11th and once filed a link to that document will also be posted on our website.

Joining me for the call today are Peter Greenleaf, Chief Executive Officer and Cary Claiborne Chief Financial Officer. Dr. Peter Lichtlen, Chief Medical Officer; and Stan Miele, Senior Vice President of Sales and Marketing and President of Sucampo Pharma Americas, LLC are also present to answer questions in the second half of our call.

Before we begin, please note that various remarks management makes on this conference call and the information contained in today's earnings release are as of today, August 5, 2014. The company assumes no obligation to update forward-looking statements contained in this conference call, earnings release or the attachments as a result of new information or future events or developments.

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

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

Peter Greenleaf

Thank you, Silvia, and good morning, everyone. I am excited to be with you all today and it’s been very busy as an organization since our last call and today I am looking forward to discussing with you our excellent quarterly performance. In addition I’ll also be providing you all with an outline of our merging company strategy which we’ve been busily working on. When you leave today’s call you’ll walk away with four important pieces of information; one, our financials are on track, meeting or beating both internal and external analysts’ expectations. We’re in the process of strengthening our partnerships that underpin that performance. We have and are continuing to invest in critical areas of organizational capability. And finally we’ve completed a broad strategic review of the organization and are becoming to move on elements of data assessment.

In the second quarter we continue to make excellent progress on all areas of the business. We’ve achieved strong financial performance driven by significant gains in product royalty and product sales revenue. We met or beat both internal estimates and external analyst consensus and as a result of this performance are raising full year guidance of full year 2014 GAAP net income to be in the range of $4 million to $6 million and earnings per share to be in the range of $0.08 to $0.13 per diluted share. Cary Claiborne will discuss in more detail when we outline our financial performance for the full quarter.

Continued work with our partners, Takeda in the U.S. and Abbott in Japan is only getting stronger in delivering results. And through our own targeted efforts we continue to see expansion in markets across Europe. Multiple new approvals and recommendations will help drive AMITIZA growth across the globe. Lastly, our pipeline work continues to progress well against our 2014 plan.

In addition to working our base plan, we’ve strengthened our team with new additions to management and finalized the long-term strategy review with our Board of Directors. I’m very pleased with the progress we’ve made as a company during my first 120 days onboard as the CEO and look forward to driving and evolution and success of the business.

Shortly after joining Sucampo in March, we initiated a comprehensive review of our strategy. This review included taking a deep dive and to every aspect of Sucampo. From our people and our partners to our science and operating model as well as our investor base and our capital structure, the main objective was to create a plan to build sustainable long-term performance and value for shareholders.

This assessment includes both internal discussions with employees, with management and the Board and our partners. Additionally, we went external to the markets, investors and customers. I have personally conducted numerous calls in direct meetings with you, our current shareholders, our analysts and potential future investors. I’d like to thank those of you who are on the call today, who provided us with valuable insights on Sucampo, where we have been but most importantly on your eyes ideas and opportunities yet on tap. After participating in these calls and meetings, I can say that we are very much aligned in our belief that Sucampo has incredible promise and value to build.

Our strategic recommendations have been developed after evaluation of both the business and the external marketplace. Significant opportunity remains to be realized if we focus on the core strengths of the company and evolve our overall operating model. At the same time, we need to not to forget our heritage. We are company that’s been built scientific innovation and entrepreneurialism and focused primarily on changing patients’ lives.

Our longer term vision is to create a biopharmaceutical company that is truly global and fully integrated. We see an expanding revenue base and new products in new therapeutic areas, exploring new targets and new science, expanding into new therapeutic areas and new modalities.

In order to realize this vision in the near-term, we need to focus on four strategic imperatives which I will cover in detail. First, we must focus all our internal efforts and strengthen our organizational capabilities. Second, we need to secure and grow revenue from our flagship product, AMITIZA. Third, we must focus on our investment in prostone based technology and accelerate those programs. And finally, we must diversify our science and therapeutic area approach. In each one of these areas, you will hear today that we have already made significant progress. Our sense of urgency is great and I look forward to sharing our results with investors and analysts as we progress on each one of these imperatives.

First focusing our efforts on strengthening our capabilities is critical. We have a strong foundation to build from, a foundation that many emerging companies’ CEOs would find enviable. Sucampo was built on a proprietary technology platform that we continued to invest in. We have two commercial products with continued growth prospects for the foreseeable future. We have a strong historical performance and we have a passionate and entrepreneurial culture filled with talented people. We will continue to strengthen this foundation as our base to grow from in the future. We will work hard to educate investors on the intrinsic value that really exists here at Sucampo.

While we have an historical track record of success in developing products and achieving regulatory approval in numerous global markets, there remains opportunity to better focus our efforts in the areas where we can affect the best return on investment of resources. We will focus on our core capability and value driving elements and exit those areas that are diluting the efforts of the company or providing little return. You will hear this as a common and continued theme from me and you should see plenty of proof points as we move forward on our new vision.

We have a very real commitment to making prudent use of shareholder capital to drive value and in that spirit, a key part of my work over the past few months has been to determine which activities we can accelerate, which we will stop and we have already done so in many important areas that we will discuss during today's call.

Lastly, as I stated during the first quarter earnings call, it is in top imperative to strengthen our organizational structure and management team. In particular, leadership in the scientific and medical areas. I'm excited and pleased to let you know today that Dr. Peter Lichtlen has been promoted to Chief Medical Officer with accountability over our medical and scientific organization.

Dr. Lichtlen has joined us for the background as an accomplished scientist and researcher. He has built and co-founded biotechnology companies and he is truly an entrepreneurial heart. Peter will focus his efforts on accelerating the development of our pipeline and helping to drive strategic investment decisions across the portfolio.

Additionally, Max Donley joined us as Executive Vice President of Human Resources and will play a critical role as we transform the company's capabilities and optimize our operating model. Max joined us after a long career in Human Resources and Corporate Affairs in healthcare and consumer products, most recently as the head of Global Human Resources and Corporate Affairs at MedImmune. In the near future we plan to strengthen our management team further in the areas of science and deal making with addition of a new Chief Scientific Office and Head of Business Development and Licensing. Of course we will struggle to realize our plans without securing and continuing to grow our flagship product AMITIZA. Our revenue from AMITIZA provides us a stable and growing base. You will hear from Cary today that in the second quarter AMITIZA total prescriptions in the U.S. grew 4.3% and net sales reported by Takeda for royalty calculation purposes increased 16% to $77 million. A key factor in the success of the product in the U.S. as it’s been the fact that AMITIZA is capitalizing on overall market growth as new competitors increase overall consumer awareness in the market and as an increasing number of patients switch from over the counter prescription options to new options like AMITIZA.

Likewise, our Japan sales of AMITIZA grew $7.2 million, an increase of $3.9 million compared to the second quarter in 2013. These results are before we see any significant market expansion outside the U.S. and Japan and before any new life cycle management of the brand. Due to all of these factors we believe that with increased execution and focus continuing to see achieve percentage growth in the mid to high single-digits on AMITIZA, AMITIZA is achievable, even in a market that has become increasingly competitive and more complex.

Obviously in order to protect this revenue our first priority is to resolve of our patent litigation on AMITIZA. We believe strongly in the defensibility of our intellectual property and we have a strategy that we believe will achieve the best possible outcome for the company and its shareholders. We look forward to sharing more as we progress on this front. We have a commitment, we have committed focus on our efforts on areas where we will achieve the best return and therefore we've made the decision today to exit all direct selling and marketing of RESCULA effective immediately.

We believe that RESCULA provides the patients and healthcare providers and we'll continue to make RESCULA available to the marketplace for glaucoma and ensure that patient who need it have access to it. However, we believe that exiting direct commercial support by Sucampo and seeking partners who can execute on RESCULA commercially now for glaucomas is the best course of action.

This shift and focused will allow us to bring greater attention to maximizing the value from AMITIZA in the U.S., so you are probably asking how; first, by being an excellent partner. Our goal is to increase the value provided to our partners Takeda and Abbott to greater market inside and more sophisticated scientific support. Through my own meetings with leadership of both companies I know that we're aligned in our objectives for the brand and that they value our seat at the table. In the U.S., we collaborate with Takeda in selling the pain specialists for non-cancer opioid-induced constipation despite the prescribing games we see and a subset of pain doctors we believe it’s still an untapped market. Exiting RESCULA will increase our coverage and impact against these targets. Today, we are also collaborating with Takeda to start an initial launch of the DTC campaign in the U.S. during the third quarter, which we believe will generate patient demand in the markets where we campaign this overall project.

Finally, other areas for collaboration with Takeda as a potential expansion into Canada. We expect to file for approval for AMITIZA in its CIC and OIC in Canada during the fourth quarter of this year. In Japan Abbott has told us they remain committed to achieving their 2014 targets for AMITIZA while we are waiting the closing of their sale of certain branded and specialty assets including AMITIZA to [Milan]. This deal is currently anticipated to close early in 2015. We are very encouraged by the fact that Milan prominently highlighted AMITIZA a unique product that currently has no other branded prescription competitors in Japan and announcing their intended acquisition of Abbott’s portfolio.

We believe that partnering AMITIZA in global markets outside the U.S. and Japan including Europe is critical to delivering addition value to the brand. We have recently made meaningful progress on increasing access in Europe with a nice recommendation for AMITIZA in CIC in the UK and approval of AMITIZA in OIC in Switzerland. In the UK we have already started to see formulary adoption by healthcare payers as a result of the nice endorsement.

We are also preparing to initiate the mutual recognition procedure with the UK serving as our referenced member state to secure approval of AMITIZA for CIC in additional 29 European countries which we expect to be achieved in the first quarter of 2015. While we have been engaged in direct selling and marketing in the UK and Switzerland, our core strategy remains to partner AMITIZA in Europe as well as in other global and emerging markets around the world.

While I cannot today report to you that agreements have been signed I can assure you that this has been a key focus of ours during the past few months and is a highly active area. I look forward to updating with tangible progress by year end.

One last area I wanted to point to is our relationship with R-Tech Ueno on the manufacturing front. We continue to work on strengthening this partnership. This focus will be critical for us and providing us greater operational flexibility to lowering our overall cost of goods manufactured and providing us with greater margin control. Obviously, this is critical to our global expansion plans around the world for AMITIZA.

Our third imperative is to focus our investment in prostone based technology and accelerate those programs. As I stated before, Sucampo has a rich heritage to build upon. Our prostone platform has yielded both on market products and a broad pipeline comprised of life cycle management of AMITIZA and RESCULA as well as development of new prostone based compounds in entirely new therapeutic areas outside of gastroenterology and ophthalmology. We believe that there is opportunity to refine our focus on prostones, optimize our investments against our highest value targets and accelerate our decision making on priorities in the pipeline. Our highest priority in the pipeline is to accelerate the development of additional formulations and indications for AMITIZA, which is the key component of Sucampo's growth over the next five years and beyond.

We are working hand in hand with our partner Takeda who is funding a 100% of the cost of a new formulation work and 70% of the cost of our pediatric functional constipation program. To en-cover all opportunities to shorten our time to market for both the new formulation as well as the initiation of the second pivotal trial in children six months to six years of age, which we expect to be able to share our revised timelines with you as early as our third quarter earnings call.

Having a new indication for AMITIZA in pediatric constipation will give us a competitive advantage while serving our patient community that has few viable options for chronic care. That will help us to maintain stable growth in the GI market space that will become increasingly competitive.

Moving on to our next program, our ion channel activators in the development for lumbar spinal stenosis. In the second quarter, we obtained results from a phase 1b program, evaluating the safety and pharmacokinetics of our oral ion channel activator, which was found to be generally well-tolerated. These results add to the body of scientific evidence we’ve been generating on our entire ion channel activator program and LSS, because they supplement the efficacy data of our IV compound that we announced in late last December 2013. With both in hand we’re currently evaluating the program in order to decide which compound to move forward in development. We will update you on that decision on or before our next quarter earnings call.

Next for unoprostone isopropyl, the compound currently marketed as RESCULA in glaucoma and which has orphan drug status in retinitis pigmentosa in both the U.S. and Europe. In the first quarter of 2015, we will obtain a first look at one year data from the two year development program in RP in Japan. This trial is being funded by our partner R-Tech Ueno. In the meantime, we’re working with regulators in the U.S. and in Europe to determine a go forward plan for development in these markets. Taken together, these will provide us with information we will need to decide on our next steps in RP by mid 2015 with the potential to expand the program outside of Japan into the global markets.

Additional clinical data has also emerged supporting the therapeutic potential of unoprostone in dry AMD or more specifically, geographic atrophy. We believe that this may offer proof-of-principle for a parallel path development and dry related macular degeneration, another disease affecting the back of the eye. Dry AMD is the most common type of macular degeneration and it’s anticipated that by 2020 more than 12 million patients will have dry AMD. More than a 1 million of these patients suffer from its advanced form of geographic atrophy in the U.S. alone with an even higher number of patients in Europe that are threatened by this debilitating loss of vision. There are currently no drugs approved for its treatment, so this is a disease area with significant potential.

Next, we’re currently developing cobiprostone for the areas of oral mucositis and other opportunities and our confident that we can progress the program in oral mucositis by the end of this year with the initiation of a Phase II proof-of-concept trial. In addition, we are conducting early exploratory work in patients with non-erosive esophagitis, who are refractory to proton-pump inhibitors. Available scientific evidence shows that anywhere from 10% 40% of GERD patients or about 11 million to 42 million people in North America alone have a low response rate to proton-pump inhibitors. We believe that cobiprostone could hold promise for this large patient population whose needs are currently not met by the standard of care and we'll update you on this work as it progresses.

Finally, our fourth imperative is to diversify our overall scientific approach. We have commenced an external assessment of new therapeutic areas and targets both early and mid to late-stage. We started with our core type capabilities and ophthalmology and gastroenterology as a starting point, but at this same time, we will be opportunistic and value at attractive assets and other therapeutic areas where we believe we could add value.

Moving forward, deal making will be an important component of our company strategy; and done correctly, you could see as much as 50% of our portfolio diversified into non-prostone compounds, providing us with new innovation and increased optionality. While we will be active on this front, however I can assure you that will be smarten our sourcing and our use of capital including our over $100 million in cash that we currently have on our balance sheet.

In summary, through the systematic execution against these four strategic imperatives, we will realize our vision to become a global integrated biopharmaceutical company: First, by focusing our efforts and strengthening our overall capabilities as an organization; secondly, by securing and growing revenue from our flagship product AMITIZA; third by optimizing our investment in prostone based technology; and finally, by diversifying our science.

The slide before you summarizes the milestones for the remainder of 2014 and through to mid-2015 that I have discussed with you this morning. While my discussion today has primarily been focused on the execution against our strategy over the next 3 months to 12 months, we have a very clear idea of where we will take the company in the short, mid and long-term.

Having secured our foundation in the near-term, we will use this as our entry to build a larger platform for sustained growth in the mid-term that will be driven by initial new program launches and significant clinical development in prostones, in new compounds and in new therapeutic areas. Finally in the short five years we will have the ability to be truly transformational, launching addition products into new therapeutic areas, strengthening in already sizable revenue base, and creating a sustainable company that is built to last.

I believe that we have a solid plan to grow the value of the company and deliver both near, mid and long-term shareholder return. I'm confident that we have a strong foundation to build upon and I can tell you that the management team and I are excited and really reinvigorated by our new direction.

I look forward to taking your questions, as I know there will most likely be many and I will also look forward to one-on-one discussions with many of you later today and in the days to come.

Now I would like to turn the call over to Cary Claiborne to provide an overview of our financial results for the quarter. Cary?

Cary Claiborne

Thank you Peter, good morning everyone. As Peter mentioned earlier, we continue to demonstrate progress by delivering a second continuous quarter of strong financial performance. First, despite the fact that we don't provide quarterly guidance, we met the first quarter consensus estimate for earnings per share and surpassed those estimates for net income. Secondly, we achieved positive net income for the quarter and the first six months of the year. Our net income was $1.6 million or $0.04 per diluted share for the quarter and $2.4 million or $0.05 per diluted share for the first six months of 2014.

AMITIZA royalty revenue in the U.S. and product sales revenue in Japan were two key catalyst for strong revenue growth in the second quarter and the first six months of 2014. In the U.S. AMITIZA as reported by our partner Takeda for royalty calculation purposes, increased 16% to $77 million this quarter and increased 16% to a $152 million for the first six months of 2014. Both of these increases were driven by a 4% total prescription growth as well as higher price.

Product royalty revenues increased by $1.9 million to $13.9 million for the quarter and by $3.7 million to $27.4 million for the first six months of the year. In Japan, our product sales revenue from AMITIZA more than doubled to $7.2 million this quarter, growing 120% and increasing nearly 2.5 times to $13.3 million in the first six months of the year, a growth rate of 143%. AMITIZA’s robust performance indicates a solid foundation for future growth to be built upon.

With our strategic partnership with Takeda, we continue to benefit from the sales for AMITIZA. Our co-promotion revenue represents reimbursement by Takeda on a per detail basis of a proportion of the cost of our contract sales force for co-promoting AMITIZA to U.S. physicians. Our co-promotion revenue climbed to $0.7 million this quarter from nil in the prior quarter and to $1.1 million for the first six months of 2014 compared to $0.1 million in the same period last year.

Our R&D revenue decreased by $9.8 million to $1.7 million in the quarter and decreased by $10.8 million to $3.5 million for the first six months of 2014, reflecting the one time receipt in 2013 of the $10 million OIC milestone that we received from Takeda which was triggered by the first commercial sale of AMITIZA in the U.S. for the OIC indication.

Total revenue decreased by $2.9 million to $24.1 million in the quarter and increased by $2.3 million to $46.2 million for the first six months of 2014. Our total costs and expenses have increased by $3.4 million to $20.3 million in the quarter an increase by $3.3 million to $39.7 million for the first six months of 2014. These expenses included a $1.9 million increase in cost of goods sold to a total of $3.8 million for the quarter and an increase of $4 million to $7.2 million for the first six months of the year, both fueled by the rapid sales growth of AMITIZA in Japan.

R&D expenses slightly decreased by $0.2 million to $4.3 million this quarter and by $0.7 million to $9.4 million for the first six months, reflecting lower costs in lumbar spinal stenosis trial. These lower R&D expenses were partially offset by increased spending associated with our pediatric functional constipation trial for lubiprostone and our Phase Ib trial for oral mucositis.

G&A expenses increased $2.2 million to $8.2 million this quarter and increased $2.3 million to $15.5 million for the first six months of 2014, reflecting increased legal fees from prosecuting our patent infringement lawsuit as well as cost associated with our strategic initiatives as Peter described earlier. Selling and marketing expenses decreased $0.5 million to $4 million this quarter and decreased $2.3 million to $7.7 million for the first six months of 2014, reflecting the replacement of our in-house sales force in 2013 with a lower cost contract sales force in 2014 as well as lower samples expense for RESCULA. This decrease was partially offset by increases from co-promotion activities for AMITIZA in the U.S. of our newly deployed contract salesforce as well as support for our commercial activities in the UK and Switzerland.

Now moving to our balance sheet. We continue to have a strong cash position. Our total cash, cash equivalents, restricted cash and investments as of June 30, 2014 were $103.6 million. Our notes payable as of June 30th were 49.5 million compared to 52.7 million at December 31, 2013.

Finally as Peter mentioned earlier we are announcing today that we are raising our full year earnings guidance for net income and earnings per share. So capital now expects full year 2014 GAAP net income to be in the range of $4 million to $6 million an increase over our prior guidance of $3 million to $5 million and earnings per share to be in the range of $0.08 to $0.13 per diluted share an increase over our prior guidance of $0.06 to $0.11 per diluted share.

And now I will turn the call back over to Peter for concluding remarks before we go to Q&A. Peter?

Peter Greenleaf

Thanks Cary. To wrap up the call before we go into Q&A I want to reinforce that we had a strong second quarter with solid financial and operational results. I hope today, investors have a clear picture of our strategy for the organization since this will represent the framework for all of our progress moving forward.

I am looking forward to taking your questions now. So operator you can open you the line.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen your Q&A session will now begin. (Operator Instructions). Our first question one moment, first question comes from the line of Irina Koffler of Cantor Fitzgerald. Over to you Irina.

Irina Koffler - Cantor Fitzgerald

Hi, Peter. Thanks for the strategic transparency, it's very helpful. I just wanted to follow up on your acquisition strategy. Maybe you could help us understand the size of the deals you would be interested in and whether you are leading more to on market of that to a more early stage programs. And then maybe you could comment on how are you thinking about financing? Thanks.

Peter Greenleaf

Thanks Irina and I'll ask my management team to jump in where appropriate here. The first takeaway message we want investors to walk away with today is that diversification is key. And we know that we've got a strong base to build from prostone based technology and we have strong and growing incoming revenues from our currently marketed products, which I think as those products continue to be secured and produce revenue that will be one way of sourcing pipeline flow both on prostones and also deal sourcing.

We have good cash on our balance sheet and if revenues continue to grow that will give us good ammunition to go out there and do deals with cash that we are bringing from our currently marketed products.

We are also open to other alternatives, focusing debt vehicles and potential for capital raise, but only using equity, but only when we find the right use of proceeds. So, we're hoping to the continuum of a house to finance deals. On your question on specific therapeutic areas, in stage of asset acquisition and/or licensing I think we’re opened to all areas. I think we’ve been realistic in looking at the core capability of the company, the historical proven core capability of the company which has been developing drugs and getting them regulatory approved. So I think our first pass on assessment is going to be in the therapeutic areas where we have been set so far operationally that would be in ophthalmology and gastroenterology and it would be at development stage assets post proof-of-concept.

Now that being said we’re also sourcing and looking at diversifying outside of those areas, those therapeutic areas and looking at new therapeutic areas and we’re also opened to on market or later stage assets. But being realistic Irina at least for growing on market assets or late-stage innovative assets in areas like oncology immunology and others we want to balance our ability to compete with some of the larger pharmaceutical companies and more well-capitalized companies. So I think we will be opportunistic in explore all areas but we want to really protect and build our pipeline and diversify sort of with post proof-of-concept assets as NA priority.

Irina Koffler - Cantor Fitzgerald

Okay. And then directionally, can you help us think about your R&D expenditures as you develop your own portfolio, is it expected to grow significantly or kind of stay in this current range?

Peter Greenleaf

Yes, I’ll let Cary jump in here. But I think right now our current thinking with the portfolio we’ve factored in the programs that we have on hand and with normal attrition in the portfolio, I think from, for just looking at AMITIZA revenue that we bringing in, we should be able to absorb most of the cost of our current pipeline. Of course any new deals without attriting any of the assets or getting -- sort of emphasizing any of the assets in our portfolio, we would have to resource that with new capital or different types of raises. But right now, I think we’ve factored adequately with revenue we’re making for the programs that we have. Cary, any comments?

Cary Claiborne

Yes. I think Irina obviously we’ve increased our guidance, so I think in terms of 2014, our R&D spending is in line with our previous estimates. And longer term I’m comfortable with what you've got in what I’ve seen in your longer term model so far based on what Peter just talked about. I think if the things change in terms of acquisitions, new things that come in, then we would update from that standpoint.

Irina Koffler - Cantor Fitzgerald

Okay, great. And then I just have a quick one on the Takeda DTC. Can you just provide a little color as to what combination the media and so forth that will entail? Thanks.

Peter Greenleaf

Yes, thanks Irina. Let me turn that over to Stan Miele, who’s our Head of Commercial, who will walk you through the details of what’s planned so far. Stan?

Stan Miele

Yes. Hey Irina. So, at this point in time, we’ve been working with Takeda for quite a while to get a DTC campaign. It will be all sources of media; it will be in select markets in the U.S., unlike the Linzess DTC campaign. We’re going to be focused primarily on the CIC indication which we believe we have a strong label and we can also have a very compelling message to give to those patients suffering from that condition. And we’re also going to be focused on a little bit of different patient population than our competitor’s campaign. In the end however, we believe that and that the targeted markets that we’re focused on we believe and we have always said that consumer awareness is critical and we are excited that this is something we intend to launch in this upcoming quarter.

Peter Greenleaf

Okay. So, the only that I would add on there is we are in discussions and Stan’s team is working directly with the Takeda management team on other tactics as well. And I am a firm believer that in a world where there is lots of money being spent on increasing consumer awareness about new innovative products available for the treatment of constipation and different types of constipation that once those patients come into the office, there is a great opportunity to flip them to other alternatives. While they have branded awareness coming in, many do not. And if we do our job in the office well, we continue to educate physicians, we have adequate samples on hand, and we’ve sort of littered the office in terms of marketing material that we have an opportunity to flip beating competitive patients when they get into the office. So this double down on AMITIZA, execution on AMITIZA should be a key take away from the call today.

Irina Koffler - Cantor Fitzgerald

Alright, thank you.

Peter Greenleaf

Thanks Inira.

Operator

Thank you. Our next question comes from the line of Ed Arce of Roth Capital.

Ed Arce - Roth Capital

Hello everyone. And thank you Peter for a very comprehensive review, a lot of good announcements I think we do all receive by investors I think few questions here, takeoff of Irina’s comments. In the UE, you mentioned you expected the MRP process to conclude in first quarter of ‘15 and you’re active right now with partnerships. I am just wondering if you could give us a little more detail around how you see the rollout early next year in Europe.

Peter Greenleaf

Okay. Thanks Ed. Let me -- I’ll start with that question and if you have others, we can build. But Europe, we see as the first foray for the company into other global markets outside of the U.S. or North America and Japan. Obviously, we have been going it alone in Europe at this stage, but it’s primarily been in access and early selling opportunity to build basic proof of principle that the product not only will get regulatory acceptance, but also reimbursement in the markets, which I think we have, so the work the team in Europe had done an excellent job of building the case for the viability for AMITIZA across the European markets.

We want to expand that by doing the full neutral recognition process across all countries and continue to build the overall access there. But our goal is partnership and we’ve been actively discussing partnership deals and we feel very strongly about getting these deals done with both global and regional players around the world and that is Europe, but that's also outside of Europe and we hope to report progress there in the near future, hopefully by the end of year as I reported.

If we do our job well, the product then gets put into the bag of regional or a large pharmaceutical company that has reach, has the ability to get both primary care, Gastroenterology and pain specialist frequency and has the ability to leverage their infrastructure much more adequately than we do today.

So, our cost will come down hopefully in Europe, we can ship those resources over the pipeline development and of course we hope to see product revenue growing there accordingly. But I would say pretty much in line with what we’ve previously seen, we’ll have to look at what deal terms look like in terms of what our share of product sales will be once we’re able to execute a deal. So, kind of tough to give you specifics until we’re able to close on a deal but right now we feel comfortable that the access strategy is moving in the right direction and partnership discussions are moving at a good clip as well.

Ed Arce - Roth Capital

Okay. And follow-up question on Japan, this moves from Abbott to [Mylene], how do you see the commercial partnership perhaps improving further or expanding beyond Japan or what do you see with [Mylene] at this point?

Peter Greenleaf

As emphasized and I would ask Stan, if he has any comment as well. We’re excited about the announcement. Abbott has been a great partner and has executed exceptionally well in Japan, but we like the fact that Mylene has featured us a product -- basket of products that they acquired from Abbott and one of the most featured products was AMITIZA in Japan. So we like the visibility. We like the fact that where we’ve been featured in our early communications, I have been back in forth with their CEO, primarily because she has been swamped with media inquiries. And I look forward to having a conversation with her about the specifics of transition which as you know, the deal won’t close until early 2015 and Abbott has confirmed 2014 execution of the plan. So, we feel confident about this year. And my hope would be that we can continue to work even more closely with Mylene and improve upon the partnership which is already an excellent partnership with Abbott in Japan. So we actually see this as a net positive.

Ed Arce - Roth Capital

Okay. And then just one last one, of all of the pipeline activities that you have ongoing, I am particularly intrigued by the new announcement of interest in the dry AMD space, I know it's very early on, I mean I know that there is some data around that going back a few years, but if you could -- it would be helpful if you could just I guess go over some of your thoughts on how you see that developing and what you're looking for in following that indication?

Peter Greenleaf

Thanks Ed. I'm going to actually as Dr. Peter Lichtlen introduce online with us from Switzerland, if he can give his thoughts on AMD. While it's early, we think there is decent proof of principal there and we think that the retinitis pigmentosa data in the first half will actually help to reinforce that. But Peter would you maybe comment on the thoughts around AMD and that program moving forward.

Dr. Peter Lichtlen

Yes, sure. So I think the data that you're referring to is a trial that to complex both of about two years with all that was a short-term trial where we look at the impact of unoprostone on ocular blood flow which case some positive indication, but the recent stage that was really attractive to all flows actually and investigator initiated study that was conducted in Japan in collaboration with our partner company are R-Tech Ueno where at the Kabbalah University people really look at the effect of topically applied unoprostone on the size of geographic atrophy over treatment of patients for a year. And they saw a significant difference in the growth or actually a reduction or stabilization of geographic atrophy growth versus the placebo control in that one year trial. And we are currently in discussions with R-Tech Ueno on the transferability of that data for the western population. And therefore considered it as a basic proof of concept, however there a number of details we still need to clarify before potentially deciding to move forward with a trial in the U.S. term population.

Peter Greenleaf

Thank you, Peter.

Ed Arce – Roth Capital

Alright. That’s it.

Operator

Thank you. (Operator Instructions) We have our next question from the line of Jason Aryeh of JALAA Equities. Over to you Jason.

Jason Aryeh - JALAA Equities

Good morning, everybody. Peter first of all, let me commend you for deciding to stop marketing RESCULA and to not go forward with yourself with AMITIZA in Europe I think, both very prudent decisions. A question when you talk about core competencies of the company and you talk about GI and ophthalmology and you talk about wanting to become a fully integrated company, it seems to me that the core competency of the company is prostone development and you sort of refer to that as well, whereas the commercial efforts of the company particularly in ophthalmology have been a complete failure. And in GI obviously we are piggybanking nicely off of Takeda and Abbott. So, I guess I'm confused to as why you want to be a global fully integrated pharmaceutical company, when that doesn't seem at all to be the core competencies at the company rather than focus on what the company has historically done very well which is drug development in the prostone area.

Peter Greenleaf

Yes, good question and thank you Jason. Let me start and if others on the team want to build, please jump in. I think as we looked through the strategy of the company, you are hitting on exactly where we landed, which is if there is a core and tested and proven capability that we have historically had and continue to work on, it has been development. Now that's a capability demand and the question becomes development of what and then there is the asset we have been developing prostones.

What we need to do in strengthening the capability of the organization is with addition to people like Peter and others, build a capability in development that can take other assets outside of prostones and develop those as well. So, we are saying, I'm saying to you today that focusing on development and continuing to strengthen that capability is key. Your call out on commercial and whether that's a core capability of the organization, I think is dead on, I think you need to find what you mean by commercial. In some cases, that is being a great partner and that's what we are telling you today, our goal is to be a great partner, to ensure that we work very closely with our partners, to expand those partnerships globally, both on the commercial side and then sequentially even as we develop the pipeline looking for partners there as well.

So, a few years from now we have the ability when launching a new indication or having the ability to enter in new market or reinforce up to co-promotion the current markets that we’re in we will build up and strengthen our commercial capabilities. But our goal today is to drive the most commercial revenue possible so that we can use that revenue to go down different paths and ways of development for the company. So, I think we’re saying the same thing Jason and I think we’re in line the commercial activity that we do will be in the areas where we get the absolute best return on investment and return on investors’ capital.

Jason Aryeh - JALAA Equities

Right, thank you. And then I guess one quick last question for you or Cary, the just financial productivity of the switch from an in-house sales force which I also commend you for to a contract sales work, is that financially is that a net cash positive in having this contract sales force to co-promote AMITIZA in the U.S.?

Cary Claiborne

This is Cary, Jason. It’s approaching that, now the goal is to for to be marginal, breakeven to marginal and I think this is being the first year there is obviously there is ramp, there is a learning curve but when you combine the fact that these are lower cost outsourced sales force where we don’t have that fixed cost, we don’t have that infrastructure and we get the partial reimbursement back from Takeda and you factor in the royalty that they bring in with the incremental script that they drive, the goal was always for that to be marginal for us.

Peter Greenleaf

So right now Jason, I would say almost more than washes its own face. We wanted to be very clear with investors that areas where we thought we were getting good return and emphasizing the areas of largest growth to the organization we wanted to reconfirm those areas and in some cases with the move on RESCULA to not double down on the effort, but to shift that effort over to our salesforce. This is a sales force that’s washing its own face, that’s helping to sustain and grow the brand whereas on the RESCULA side of the equation was more of an inverted view on the financials.

So we'll continue to see what we do here, but we did not want to say to investors, we don't believe putting effort, more effort against AMITIZA was not a good decision, we actually think that's a good decision and the fact that this is reimbursed even more or so reinforces that.

Jason Aryeh - JALAA Equities

Great. So I guess you sort of answer it there. But I guess I am kind of wondering what if it’s just expected to be marginal and it's fairly going to take time of yours Peter and your entire organization’s time and focus. Kind of what's the grand plan here, what's the real purpose of having something that is going to be somewhat time consuming for you even though it is contract which is better? But it is only supposed to be of marginal financial benefit?

Peter Greenleaf

Yes. So our hope is that we've got objectives for our team that is out there. And the increase in prescriptions in the reinforcement and emphasis on pain specialists with the newly launched [last year] opioid-induced constipation is going to be important. And hopefully this team along side of Takeda can continue to move that market and as other competitors comment hopefully we can work with Takeda to ensure that we have the right defense and offense for that indication. I can reinforce and make you feel comfortable that our goal here is not to shift management team attention and investor time attention to just our commercial activities. We fully plan to leverage the promotional items that are produced through Takeda to work handing glove with them to leverage the majority of their capability and not to continue to dump significant amount of cost against this activity that is exclusive to Sucampo. We want to leverage our partners and have these be more feet on the street reinforcing the brand and to be complementary with Takeda and not pull time and attention away from our pipeline activities with this. But we thought it would be the wrong message to send to say in a time of growth that we were pulling away skin in the game for AMITIZA when we actually think skin in the game is critically important for us and for the brand at this stage.

Jason Aryeh - JALAA Equities

I appreciate the further clarifications, Peter. Thanks very much.

Peter Greenleaf

Thanks Jason.

Operator

Thank you. The next question comes from the line of Jason Kolbert of Maxim. Over to you, Jason.

Jason Kolbert - Maxim

Hi guys, good morning. And I am little bit confounded by the numbers and the way you’ve presented them. For example, you didn’t beat all of analyst expectations, certainly didn’t beat mine. And I am trying to understand why you are presenting versus the same period a year ago versus the sequentially prior period? Specifically, if I look at the Takeda royalties at 13.5 million in first quarter and 13.8 million or 13.9 million in the second quarter, the growth, it’s there but it’s just sequentially not that robust. And I am trying to understand the earnings guidance with $0.02 in the first quarter and $0.04 in the second quarter, guiding to a range of between I think you said $0.08 and $0.13. It just seems like you are not assuming -- you are assuming a flat second half. So help me understand why your guidance seems to be at the low end of the range or assuming flat second half growth?

Cary Claiborne

Sure, Jason. Let me take -- start with your response on the sequential part. There is some seasonality in AMITIZA. So, we typically don't talk sequential growth, we do talk quarter over quarter. So there is solid growth quarter over quarter. From an overall…

Jason Kolbert - Maxim

I think that’s very misleading.

Cary Claiborne

Well, that's most companies talk year-over-year, math sequentially. Secondly, Europe from our earning standpoint year-over-year, last year there was a $10 million milestone in the results. So, if you call that out, last year we were breakeven versus $0.04 this year, significant growth year-over-year.

Regarding -- we said versus our consensus, now versus our analysts, so versus consensus, we did meet or exceed the consensus first call numbers which is again the consensus of all the analysts that first call picks up, not every single analyst consensus. So, I think we are consistent with what we said there.

And then regarding guidance, we are increasing our prior guidance. I think what you have to look at the in the second half of the year is we do have a generic challenge, so we have increased legal expenses associated with that. We do have pipeline, R&D that we’ve always said we were increasing in the second half of the year. So you can't just normalize the first half and expect the second half to grow and that's been consistent with our guidance.

So, we are increasing our guidance over what we said previously. So, it's an increase from our standpoint.

Peter Greenleaf

I guess to try to understand better what you are saying, let me try this just from a more simplified different angel. Prescriptions quarter on quarter and year-on-year are growing, product royalty revenue and absolute sales are growing quarter-over-quarter year-on-year, we believe that we can sustain this growth in the mid to high single-digit from a percentage standpoint. And because of that performance taking out one-time events and taking out revenue driven from operations, we actually are taking up our guidance range. I want to make sure that it isn’t misleading that it’s about as simple as that and I would like to qualify what you see is problematic in those numbers.

Jason Kolbert - Maxim

What I see is that $22.1 million in total revenues in Q1 and $24 million in Q2 if I hold revenues flat from Q3 and Q4 and I hold the expenses flat then I get to a high-end of $0.13. If I assume sequential even single digit growth on top-line revenues assuming you could go from $22 million in Q1 and $24 million in Q2 looks that a $26 million and to $28 million then I would go right through the end of that range. And so what I am trying to understand is, are you really guiding to flat revenues or are you guiding to increased expenses, should we expect the revenues to continue to rise at this sequential growth rate that we’ve been seeing which is good, it is the solid sequential growth rate even though it’s relatively small, but will we see are you really guiding towards increased expenses and therefore essentially flat growth because if it’s flat growth that’s how you get to the $0.13?

Cary Claiborne

Yes. We’re not guiding to and we don’t provide specific revenue guidance but I will tell you we have revenue growth in our second half as I said it was driving the overall EPS is expense growth, it is self-funded R&D so pipeline R&D that we fund ourselves as opposed to R&D that Takeda funds. So you can’t just look at overall R&D, you have to look at the self funded piece and G&A expenses going as a result of the legal expense associated with the trial that is going to be starting in December. That is what's driving, I think what you're seeing.

Jason Kolbert - Maxim

Okay, I understand, thank you. And so can you help us understand in the competitive landscape in terms of AMITIZA's market share and what the challenges are that you see particularly in the U.S., which has the largest challenge of AMITIZA revenues how that will be driven going forward?

Peter Greenleaf

Well, first let me give you at least the mixes I see of go forward growth contributors for the AMITIZA brand. One is obviously prescription and unit growth driven primarily by the market growing. I don't want to see, I hope I don't see a world where the market tops in combined prescription of novel products and it becomes a share stealing more. My hope is that with new competitors coming in that the market grows and we grow with the market. So one is consistent unit growth overtime, hopefully growing at a rate of what the market is growing and staying out of the share stealing work.

Second is continued price leverage on the brand within the U.S.. Third would be of course Japan sales continuing to grow and then added on to that, new areas of approval through partnership. So first would be Canada as we told you, we believe that should be coming our way next year and then expanded use in Europe and other global markets around the world.

Lastly, I would add the other factor that's probably not contributed in there is new indication launches, the pediatric work that we're doing and the potential from new formulations. So all of those added together lead me to be confident that the brand can continue to compete in the market space but we are watching closely prescription trends in the aggregate and brand by brand to ensure that things are not slowing down and that this is becoming a share stealing war for a limited number of patients.

Jason Kolbert - Maxim

Peter that’s a great answer, thank you and very detailed. The only thing I would like to ask you to expand upon is what you meant by price leverage?

Peter Greenleaf

We don’t control overall price in the marketplace or at least in the U.S. our partners Takeda who we are very aligned with do but within the market space I think prices one lever I am not guiding you today in any way to specifically what that means I am just saying that complement and mix gives me confidence that we can continue to grow revenue for AMITIZA with each one of those components over the long haul and of course ensuring that we resolve our generic litigation is paramount to that.

Jason Kolbert - Maxim

And can you give us any insight into probability that there could be a settlement around the generic litigation is that one of the options that you are considering?

Peter Greenleaf

I would tell you that we have a strategy that first of course is gearing up for a trial in December but that keeps all options on the table and I can’t tell you anything specific today outside of we are getting ready trial and we feel very confident from the last win at the Markman hearing a few months back we’ll continue to look at all alternatives moving forward.

Jason Kolbert - Maxim

Thanks for taking my questions.

Peter Greenleaf

Thanks Jason.

Operator

Thank you. (Operator Instructions). That now concludes the conference call for today. Thank you very much for joining ladies and gentlemen. You may now disconnect. Thank you.

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Source: Sucampo Pharmaceuticals' (SCMP) CEO Peter Greenleaf on Q2 2014 Results - Earnings Call Transcript

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