XenoPort's (XNPT) CEO Ronald Barrett on Q2 2014 Results - Earnings Call Transcript

| About: XenoPort, Inc. (XNPT)

XenoPort, Inc. (NASDAQ:XNPT)

Q2 2014 Earnings Conference Call

August 06, 2014, 05:00 PM ET

Executives

Jackie Cossmon - Senior Director, Investor Relations

Ronald Barrett - Chief Executive Officer and Director

Vincent Angotti - Executive Vice President and Chief Operating Officer

William Harris - Senior Vice President, Finance and Chief Financial Officer

Analysts

John Chung - RBC Capital Markets

Shin Kang - Wells Fargo

Operator

Good afternoon. My name is Jennifer, and I will be your conference operator today. At this time, I would like to welcome everyone to the XenoPort's second quarter financial results conference call. (Operator Instructions) And Ms. Jackie Cossmon, you may begin your conference.

Jackie Cossmon

Thank you, Jennifer. Good afternoon, and thank you for joining us on the call. Here with me today are Ron Barrett, our Chief Executive Officer; Vince Angotti, our Chief Operating Officer and Bill Harris, our Chief Financial Officer.

Before we begin our discussion of today's news, I would like to note that the information to be discussed on this conference call and webcast, including answers to questions asked during this call, will include forward-looking statements that involve risks and uncertainties, including all statements related to our current and future XP23829 clinical development programs plans and clinical trials and the timing thereof, regulatory actions and submissions and the timing thereof, the future sales of and all commercial and promotional plans and opportunities for HORIZANT and the timing thereof, potential patent coverage, future clinical development plans for arbaclofen placarbil, operating plan cash used and the therapeutic and commercial potential of XenoPort's product and product candidates.

XenoPort can give no assurance with respect to these statements and we assume no obligation to update them. For detailed information about the risks and uncertainties that could cause actual results to differ materially from those implied by, or anticipated in these forward-looking statements, please refer to the risk factors section of our most recent annual and quarterly report filings, including our discussion of the inherent risks of commercialization, clinical trials and regulatory matters.

In addition, we will be discussing HORIZANT, and as such, we encourage you to review the HORIZANT package insert, which includes important safety information that can be found on the FDA website. This webcast is a copyright of XenoPort.

At this time, I would like to turn the presentation over to Ron.

Ronald Barrett

Thank you, Jackie, and thank you all for joining us today. We made great progress since our last quarterly update. I will first provide some highlights; then Vince will discuss HORIZANT's performance and plans; followed by Bill, who will review the financials. We will then take your questions.

An important milestone in the quarter was the initiation of the Phase 2 clinical trial of XP23829 patients with moderate-to-severe chronic plaque-type psoriasis. Richard Kim covered the details of this trial on our last call. But to briefly reiterate, the trail is at double-blind, placebo-controlled study, expected to enroll approximately 200 subjects in clinical sites in the United States.

The treatment duration is 12 weeks. The primary endpoint is designed to examine the percent change in PASI score from base line to week 12. Based on historical enrollment rates of similar studies, we anticipate that they'll have the topline results of the study in Q3 of next year.

We believe the trial will provide information on the effective dose and dosing regimen on efficacy, safety, tolerability of 829 over 12 weeks of treatment. We will also be gathering information on the time course of 829 modulation of blood immune cells.

Finally, there is a four week post-treatment period that is designed to allow us to study the duration of 829 effects, once the drug treatment is stop. We believe that the information from this trial will be relevant to further development, not only in psoriasis, but other conditions such as relapsing forms of MS.

We are also advancing other parts of our 829 development program. After consultations with the FDA regarding doses and species, we have initiated two chronic tox studies. We have also worked on processes to scale up the manufacturing, both of API and the formulation, to supply a potential Phase 3 program.

In June, we announced the licensing deals with Reckitt Pharmaceuticals, which offers an exciting new opportunity to potentially develop and commercialize arbaclofen placarbil. Reckitt has substantial experience in the treatment of addiction disorders and the intent to develop AP as a potential treatment for alcohol use disorders.

We were happy to strike a deal to leverage the investment we have made in AP, and we are excited by the potential to provide a new treatment that addresses an important public health problem. The details of the deal are in the press release, but I will point out that we have already received $25 million in non-dilutive cash that we can put to use on 829 and HORIZANT.

Before I turn it over to Vince, let me say a few words about HORIZANT. When we started our commercialization in last June, we told you that we felt strongly that the performance of the drug under our former partner's watch did not represent HORIZANT's potential.

We decided to take a focused and measured approach to selling the product to generate the data to make an informed decision about the product's future. I'll remind you the physicians we call on by are approximately 40% sales gain, generate less than 10% of the national prescriptions for drugs approved for RLS and PHN. Vince will discuss in more detail, the recent performance of HORIZANT.

We believe that we have shown that HORIZANT sales can be grown by target education of physicians and patients. The important question now becomes, where do we go from here? After careful analysis, we strongly believe that additional sales reps should be added to our existing sales force, and this will increase the awareness of HORIZANT and thereby drive further sales.

I'll remind you that we have six Orange Book listed patents with expirations from 2022 to 2026. This past quarter we received notification from the FDA that we are eligible for the maximum allowable patent term extension for composition of matter patent, which could therefore extend this key patent to 2025.

With continued growing sales and a long patent life, we remain focused on evaluating all means to increase the value of HORIZANT to our stockholders. We believe these are exciting times for XenoPort as 829 is now in Phase 2 and HORIZANT use grows.

I'll now pass it over to Vince for details on HORIZANT's performance and our plan.

Vincent Angotti

Thank you, Ron. 2Q '14 completes our first full year for HORIZANT commercialization. And as Ron indicated, we think we've made very good progress.

Before I discuss the details of our future plans, I'd like to report our results for the second quarter of '14 compared to the first quarter of '14. As you know, we acquired HORIZANT in May of 2013 in the midst of a stockout from our previous partner, delaying our in-field promotion to June of 2013. So year-over-year comparisons are not that useful this quarter, but should be moving forward.

As reported last quarter, we look at not only prescriptions, but also prescribed pill count when we asses our promotion of HORIZANT. We include these measures, because HORIZANT has two indications with different label dosing. Moderate-to-severe primary RLS have one 600 milligram tablet per day and postherpetic neuralgia at two 600 milligram tablets per day. So the nationwide, total HORIZANT prescriptions and prescribed pill count for the second quarter ended June 30, 2014, increased 21% and 24% respectively over the first quarter of 2014.

And specifically, in the territories, where XenoPort is promoting HORIZANT, total prescriptions and prescribed pills for the second quarter ended June 30, 2014, increased 25% and 30% respectively over the first quarter of 2014 versus minimal to no growth in non-promoted territories. As a result, essentially all of the national growth is being driven by XenoPort's promotion in selected geographies. 85% of HORIZANT prescribed pills are now coming from our promoted territories.

In the second quarter, there were approximately 4,345 prescribers of HORIZANT, of whom about 1,175 were first time prescribers. Now, based on these metrics, we believe we've demonstrated that HORIZANT is a promotionally sensitive product that we can continue to grow through our educational efforts.

And as mentioned previously, HORIZANT has two indications with different doses, the 600 mg QD for moderate-to-severe primary RLS and 600 mg BID for PHN. As a reminder, the PHN indication was never promoted by our former partner.

With our education efforts on this indication, there's been a steady increase in prescriptions for the higher dose. As a consequence, the average number of tablets per prescription has grown in a year we've been promoting HORIZANT, reaching approximately 49.5 tablets per prescription in June. Therefore, both increases in prescriptions and the number of tablets per prescription are contributing to our revenue growth.

During the second quarter of 2014, the method of payment for HORIZANT prescriptions was approximately 68% from commercially insured patients and approximately 22% from Medicare Part D patients. The remaining HORIZANT prescriptions were from cash, Medicaid and other forms of reimbursement.

This along with our commercial and Part D approval rates have remained relatively constant for the past year. We'll continue to work with select payers to potentially expand the unrestricted access for HORIZANT, where appropriate, in particular with the Medicare Part D plans.

So as we've assessed the impact of our promotional efforts throughout this past year, inclusive of a focused sales team effort, a digital direct-to-consumer campaign, peer-to-peer programs and various other typical first-year launch efforts, we have identified solid insights into the most impactful efforts, which we believe is personal education to doctors.

As Ron mentioned, our targeted promotional efforts have been focused on a small segment of physician specialists who represent less than 10% of the RLS prescriptions nationally. And when we launched HORIZANT promotional efforts last year, we knew we were addressing a small portion of the potential business, but we did not believe that expending greater resources is appropriate until we've demonstrated promotional responsiveness.

Based on the positive results to date, we plan to increase the size of our sales force, again in a measured stepwise fashion to approximately 65 sales representatives, to educate more physicians, which we believe will further increase sales and thus increase the value of HORIZANT to our stockholders.

Importantly, the incremental territories have been designed, based on characteristics similar to our original 40, with a focus on high concentrations of total prescriptions for products that are approved for RLS and postherpetic neuralgia, also consideration of managed care access and the concentration of target specialty physicians within a geography.

Now, our first 40 territories have generated sufficient revenue to cover the cost of these sales reps in less than a year. Given the similarities of the new geographies, we believe these new territories will offer a similar rate of return.

Finally, we plan to begin conversion of some of the CSO sales representatives to XenoPort employment during the fourth quarter, while continuing to maintain much of their operational support through a third-party.

With that as a backdrop to our second quarter results and plans, let me simply state that our objectives remain unchanged; to grow HORIZANT sales through a continued targeted promotional efforts, addressed unrestricted managed care access, in particular, Medicare Part D, and manage our cost to increase the value of HORIZANT. We'll continue to closely monitor our progress towards these objectives and look forward to reporting our future results.

So with that, I'll turn the call over to Bill.

William Harris

Thanks, Vince. I'll spend a few minutes reviewing our financial results for the second quarter of 2014 and we'll then take your questions.

Total revenues for the second quarter ended June 30, 2014 were $5.3 million compared to $2.1 million for the same period in 2013. As Ron, highlighted the increase in revenues in the second quarter of this year was principally due to increased HORIZANT net product sales.

HORIZANT net product sales for the second quarter were $4.9 million, representing a 66% increase compared to last quarter. This increase was due not only to growth in prescriptions, but also an increase in prescribed pill count, as well as the full quarter impact of a price increase we took late last quarter.

Research and development expenses decreased in the second quarter 2014 to $5.2 million compared to $10.2 million for the same period in 2013. This decrease is principally due to decreased net costs for AP, as well as decreased personnel costs, primarily due to decreased headcount and decreased non-cash stock-based compensation.

Selling, general and administrative expenses for the second quarter were $18.9 million, compared to $15.8 million for the same period in 2013. The increase in selling, general and administrative expenses in the second quarter was principally due to the increased professional fees, marketing and personnel cost associated with our commercialization efforts for HORIZANT.

Net loss for the second quarter of 2014 was $19.4 million compared to a net loss of $24.4 million for the same period in 2013. Basic and diluted net loss per share were $0.31 in the second quarter of 2014 compared to basic and diluted net loss per share of $0.51 for the same period in the prior year.

Finally, we ended the quarter with cash, cash equivalents and short-term investments at a $124.9 million, which included a $20 million cash payment from Reckitt Pharmaceuticals. As Ron mentioned, we have also received a $5 million of payment last week for the delivery of certain materials to Reckitt.

In terms of our cash runway with the combination of the $25 million from Reckitt and the expected impact of our sales team expansion, we believe that our cash will fund currently planned operations into the fourth quarter of 2016, an extension of approximately three quarters.

Importantly, given that we believe our next steps for 829 will be informed in part by the result of our Phase 2 trial, and the fact that those next steps could be conducted with a potential partner, our current plan do not include any development activities beyond those Ron noted earlier.

So with that, I'll open the call for questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Michael Yee with RBC Capital Markets.

John Chung - RBC Capital Markets

It's actually John on behalf of Michael. First question, on the sequential growth in HORIZANT in this Q was particularly strong. So just remind us what is the form of price now versus Q1? And how much of the sequential growth was volume versus price? And then I have one follow-up.

William Harris

So let me break that out. So in terms of the price that we took a price increase in the last week of March, that increased the per tab price to $7.02. In terms of the demand growth, those numbers were included in Vince's numbers in terms of the strip and pill growth. And then, the other piece, being the full year effect of the price increase this quarter.

Vincent Angotti

So when you hear about the 66% quarter-over-quarter in revenue, I'll remind you again that our total prescriptions in the second quarter grew by 21% versus the first quarter, and our total pills importantly in the second quarter grew by 24% over the first quarter. So you consider that with the price increase, and it's roughly almost 50-50.

John Chung - RBC Capital Markets

And then as a follow-up. With the increased sales force for HORIZANT, do you still expect to be operationally breakeven by yearend?

William Harris

Sure. So the guidance that we provided, we did at the beginning of the year in our plan, and our practice is that we don't update that. Now, having said that, I think one way to think about this is the following, that the primary expense driver to the expansion is the selling expense, the cost of the increased reps. So you'll expect -- we could expect that you'll see a step-up in selling expenses, when we deploy the sales team and that over time as the revenue ramps in these new territories, the revenue will cover the cost of those reps.

Now, based on what Vince said earlier, we would expect that timeframe to happen within a year, based on the performance of the initial reps deployed. And then, assuming the revenue continues to ramp beyond that, that will incrementally extend our cash outdate relative to the cash update we have previously guided to.

Operator

And our next question is from the line of Brian Abrahams with Wells Fargo.

Shin Kang - Wells Fargo

This is Shin Kang calling in for Brian. I have a question on 829 and the 505(b)(2). I was wondering what's your latest thinking on the viability of 505(b)(2) pathway, especially in light of the FDA's new draft guidance of bioequivalence of Tecfidera and their apparent endorsement of the idea that MMF, indeed, is the active ingredient of Tecfidera.

Ronald Barrett

So we continue to believe that the statute support of 505(b)(2) potential pathway for 829 for relapsing forms of MS. You probably know that 505(b)(2) applications come in a variety of flavors, and can range from simple bioequivalents to, as was the case for HORIZANT in PHN, a single pivotal Phase 3 study.

So we had a couple of interactions with the Neurology Products Division in the last year, including some more recently. I would say, at this point the door is not closed to 505(b)(2), but we are trying to understand exactly what the requirements would be. Obviously, we have a different metabolites, the pro moieties, than dimethyl fumarate.

And I think the FDA is curious as we generate new information, both pre-clinically and clinically, what impact, if any, that those metabolites might have on the safety and efficacy of the MMF that we're delivering. So at this point I think there is still the possibility to 505(b)(2) for MS. And hasn't the door is still opened, but we are still trying to define what exactly that might look like.

Now, I'll remind you that for psoriasis, we are going to be doing, if we decide to pursue the Phase 3 program, we'll be doing a full 505(b)(1) type of NDA. And so a lot of that information that will be generating, including for instance, the chronic tox studies that we've initiated will be relevant independent of which indication we plan to pursue.

Shin Kang - Wells Fargo

Maybe a related question is, how does your approach based on ProDrug compare to other approaches like deuterated form of Tecfidera in terms of 505(b)(2) pass, since you mentioned 829 having different metabolites?

Ronald Barrett

Sure. So public knowledge, I happen to be on the Board of a company Concert Pharmaceuticals that works in the deuterated technology space. And so there have been some examples of cases where the FDA has permitted the deuterated form of the drug to be pursued under more accelerated pathway. I think that the Avanir and Concert collaboration is an example of that. So I don't know that it's directly analogous, but it certainly is possible in circumstances that a deuterated compound could be developed under a (505)(b)(2) process.

Operator

And your next question is from the line of [ph] Christina Janelle with Cowen.

Unidentified Analyst

The first one is about HORIZANT and the recent price increases. Do you have any visibility on the pricing environment? And can you share with us what might we expect going forward?

Vincent Angotti

Yes. We don't give guidance, as it relates to pricing strategy. What I can tell you, as it relates to price. Based on our current price, we are now competitive with the other branded agents within our market space, at least for postherpetic neuralgia. And when we look at pricing, we not only just look at WAC, we look at DACON, and we considered the other branded agents for postherpetic neuralgia rolling in about 5% of one another for DACON.

Now, if you look at it for RLS, there is another branded agent on the market. It is a dopamine agonist, it is a patch, and they are significantly higher priced than we are, more than double on a daily dose. So with that being said, the pricing strategy we've taken to date is at least to get us competitive with the other branded postherpetic neuralgia agents, but we're still far behind as it relates to the other branded RLS agents.

Unidentified Analyst

And then the other question was about 829, just to clarify. First of all, what would make it a competitive profile in psoriasis? And, second, just to clarify, would we wait for the data from psoriasis to see if we move forward in MS?

Ronald Barrett

Sure. So obviously, we won't know what our profile is in psoriasis until we generate more information, but we do have some historical information about products in the same class Fumaderm and Tecfidera. So I think the Tecfidera Phase 2 and Phase 3 studies are maybe the most relevant here, because they are most recent and they are the best quality studies for the class that's out there.

So the PASI-75 responder scores were around 40%. I think that compares favorably to apremilast. We're obviously want to know what the tolerability of our 829 is. We believe that there is the opportunity for improvements and flushing and GI side effects. We won't know that until we get the results of this study.

So I think it's premature to define what our product profile will in this first study will go significant way in helping us define how we would be competitive in the psoriasis space. You know the psoriasis in the U.S. is segmented between the injectable biologics and the orals. And I think we really see the place that we'll compete is in the oral space. In Europe, it's different. There is less use of biologics and more use of orals. In fact, Fumaderm is the by far the leading oral products in Germany. And so the dynamics of the two market is maybe slightly different.

Unidentified Analyst

And will we wait for the data to move forward in MS?

Ronald Barrett

Well, we'll continue to work on trying to define what the clinical development program will be. But I think that this space, this psoriasis data will be particularly instructive with regard to dose, dosing regimen is a once-a-day, is a twice-a-day. And we'll be generating other information about the effect on blood cells, which should be relevant, independent of the indication. We'll also be looking at the recovery time for the blood cell changes. And so I would think that the prudent thing would be to use that information before launching an MS trial. That doesn't mean we won't be working, talking to experts and so on, ahead of that data.

Operator

And we have no other questions in queue at this time. And I would like to turn the conference back over to our presenter.

Ronald Barrett

Well, thank you all for participating in today's call. If you have any further questions, don't hesitate to contact Jackie. Everyone have a good day. Thank you.

Operator

Thank you. And this does conclude today's conference call. And you may now disconnect.

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