Auxilium Pharmaceuticals' (AUXL) CEO Adrian Adams on Q2 2014 Results - Earnings Call Transcript

Auxilium Pharmaceuticals (NASDAQ:AUXL)

Q2 2014 Earnings Call

August 07, 2014 8:30 am ET

Executives

Adrian Adams - Chief Executive Officer, President and Director

Keri P. Mattox - Senior Vice President of IR & Corporate Communications

James E. Fickenscher - Chief Financial Officer and Principal Accounting Officer

Mark A. Glickman - Executive Vice President of Sales & Marketing

Analysts

Michael J. Yee - RBC Capital Markets, LLC, Research Division

Eric Schmidt - Cowen and Company, LLC, Research Division

Gary Jay Nachman - Goldman Sachs Group Inc., Research Division

Annabel Samimy - Stifel, Nicolaus & Company, Incorporated, Research Division

Joseph P. Schwartz - Leerink Swann LLC, Research Division

Mario Vincent Corso - Mizuho Securities USA Inc., Research Division

Difei Yang - R.F. Lafferty & Co., Inc., Research Division

David Friedman - Morgan Stanley, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Q2 Auxilium Pharmaceuticals Incorporated Earnings Conference Call. My name is Stephanie, and I will be your operator for today. [Operator Instructions] I would now like to turn the call over to Mr. Adrian Adams, Chief Executive Officer and President. Please proceed, sir.

Adrian Adams

Thank you, Stephanie. Good morning, everyone, and thank you for joining us for Auxilium's webcast to discuss our second quarter 2014 financial results, portfolio performance and priorities for the remainder of 2014. With me this morning is Chief Medical Officer, James Tursi; Executive Vice President of Sales and Marketing, Mark Glickman; Chief Financial Officer, Jim Fickenscher; and Senior Vice President of Investor Relations and Corporate Communications, Keri Mattox. Before I proceed, I would like to ask Keri to say a few opening remarks. Keri?

Keri P. Mattox

Thank you, Adrian. Earlier today, we issued a press release summarizing our financial results and key achievements for the quarter ended June 30, 2014, which can be found on our website at auxilium.com. Additionally, I would like to remind everyone that we have a slide presentation to accompany our conference call this morning, which also can be viewed at our website. If you are listening to this call in your telephone, you may access the synchronized slide deck on our website by choosing the link on our webcast page that says Click Here to Listen.

During today's call, we will be making forward-looking statements based on our current expectations. These statements are subject to certain risks and uncertainties which can be found in our SEC filings, on our website or at sec.gov, and which are provided in more detail in Slide 2 of the accompanying presentation, all of which I urge you to review in detail. While these forward-looking statements represent our views as of today, they should not be relied upon as representing our views in the future. We may update these statements in the future but we are not taking on an obligation to do so. Please also note that this communication does not constitute an offer to sell or a solicitation of an offer to buy any securities or solicitation of any vote or approval. In connection with the proposed merger, QLT has filed with the SEC a registration statement on Form S-4 that include the preliminary joint proxy statement of Auxilium and QLT that also constitutes the preliminary prospectus of QLT. The Form S-4 has not yet been declared effective by the SEC and is not completed and will be further amended. After the registration statement has been declared effective by the SEC, QLT and Auxilium will mail the definitive joint proxy statement prospectus to their respective stockholders. You should review materials filed with the SEC carefully as they will include important information regarding the proposed merger. With that, I'll turn the call back over to Adrian.

Adrian Adams

Thank you, Keri. This is a time of tremendous potential opportunity and ongoing transformation for Auxilium. We continue to drive the launches of innovative new treatments, work to grow our core products and manage our mature testing franchise. Additionally, we anticipate closing our merger transaction with QLT in the fourth quarter of this year. This makes 2014 another year of change and growth for the company. And with this progress, we continue to work towards moving closer to achieving our goal of increasing the value and realizing the potential of Auxilium for our shareholders.

With that, let's turn to Slide #4, where you'll find the agenda for this morning's call. We will begin with our recent corporate progress, specifically the announced merger with QLT and how we feel it could create an enhanced platform for growth for Auxilium. We will then discuss our financial and commercial performance, followed by a summary of Auxilium's strategic priorities and upcoming milestones. And finally, we will open up the call for your valued questions.

Let's look at Slide #5 and discuss how we are executing our multiphase growth strategy. We believe the merger with QLT is an important step in Auxilium's strategic transformation, creating a North American specialty biopharmaceutical company and a more compelling growth platform from which we can drive long-term value creation. Auxilium's strong foundation has been built up over the past 15 years, marked by targeted innovation and the successful commercialization of 2 core products, Testim and XIAFLEX for Dupuytren's contracture.

In 2013, we executed on Phase I of our strategic plan with the acquisition of Actient and the in-licensing of STENDRA for erectile dysfunction, we expanded our product portfolio from only 2 to 12 products. This not only diversified our product portfolio, but also helped to establish Auxilium as a leader in the men's health care area. Now, in 2014, we are executing on Phase II of our strategy, we believe the merger with QLT creates a more competitive growth platform and provides us with the financial and corporate profile to accelerate our transformation. It also expands Auxilium's geographic footprint across North America and continues our product and therapeutic care diversification, in this case, in ophthalmology and the orphan drug space.

During our next phase of growth, in 2015 and beyond, we plan to further build out our men's health care portfolio and establish new specialty therapeutic areas. We expect to leverage our commercial expertise, competitive platform and financial resources to aggressively pursue partnering and strategic M&A opportunities.

Now for a review of our second quarter financial performance, I'll turn it over to Jim. Jim?

James E. Fickenscher

Thank you, Adrian. Let's begin on Slide #6. Please note that my comments this morning will discuss our results on a non-GAAP basis. I encourage all of you to review the appendix accompanying the presentation for a reconciliation of the non-GAAP financial measures to the closest GAAP financial measures and our reasoning as to why we believe these non-GAAP measures are useful to investors.

Total revenues for the 3-month period ended June 30, 2014, were $83 million compared to $100.5 million for the second quarter of 2013. This 17% decrease was primarily due to a decrease in Testim and TESTOPEL revenues, partially offset by an increase in XIAFLEX and STENDRA revenues driven by the recent product launches in Peyronie’s disease and erectile dysfunction, respectively.

Gross margin on net revenue was 64% for the second quarter of 2014 compared to 77% in 2013. The decrease is primarily due to $9.3 million in charges recorded during the second quarter of 2014, the impact of a less profitable mix of product revenues and a decrease in Testim gross margin resulting from a lower net selling price. The $9.3 million in charges taken during the second quarter included $7.4 million related to the launch of the Testim Authorized Generic. Specifically, a $6.7 million inventory charge related to excess Testim branded inventory and $0.7 million in additional product return provision for Testim. We also booked $1.9 million in additional return -- product return charges and provisions related to various Actient products.

R&D and SG&A expenses for the second quarter of 2014 were $10.6 million and $58.9 million, respectively. The decrease in R&D spending compared to the second quarter of 2013 resulted principally from lower spending on XIAFLEX's Phase III clinical trials in Dupuytren's contracture and Peyronie's disease and was partially offset by increased spending on the ongoing CCH Phase II trials for cellulite and frozen shoulder syndrome. The increase in SG&A compared to the second quarter of '13 was driven primarily by added expenses of the acquired Actient operations and an increase in marketing and advertising spend related to the January 2014 launches of XIAFLEX for the treatment of Peyronie's disease and STENDRA.

Net loss for the second quarter 2014 was $21.8 million or $0.44 per share compared to net income of $11 million or $0.22 per share for the same period in 2013. As of June 30, 2014, we had $44.7 million in cash, cash equivalents and short-term investments.

On Slide 7, let's provide some updates regarding our 2014 guidance. First, we are reaffirming key aspects of 2014 guidance, including revenues of $380 million to $420 million. Non-GAAP R&D expense of $40 million to $45 million. Non-GAAP net interest expense of $20 million to $22 million. And non-GAAP net income of breakeven to a $15 million loss. We are updating our expectations on spending levels throughout the organization and believe that SG&A expense for the full year will now be in the range of $245 million to $250 million rather than the previous guidance of $255 million to $260 million. As I noted earlier, the company incurred a charge cost of goods sold in the second quarter, which when combined with the mix of products sold, caused gross margin for the quarter to be lower in the second quarter than historical levels. While the ongoing gross margin for the balance of 2014 is expected to be in the 78% to 80% range, we believe the impact of the second quarter's gross margin will result in a full year gross margin of 76% to 77% rather than the previous guidance of 79% to 80%. Please note that this guidance does not take into account the effect of the company's proposed merger with QLT.

Let's look at Slide #8. Here, you will see a non-GAAP snapshot of the anticipated 2014 and actual 2013 net revenues from all of the products across our portfolio, with the exception of Testim. We believe that discussing our revenue on a pro forma basis without Testim revenue provides investors with a useful tool to understand where management sees opportunity for future revenue growth. Importantly, what we see across that portion of our portfolio is a 66% expected growth rate in 2014 over 2013. While we will continue to address the TRT general market challenges and manage Testim as a mature product, we believe this projected revenue growth represents an exciting future for Auxilium.

With that, I'll turn the call back over to Adrian. Adrian?

Adrian Adams

Thank you, Jim. In terms of diversifying and growing the Auxilium business, let's look at Slide #9. We have built a leadership position in men's health care and continue to see exciting momentum from our recent launches of STENDRA and XIAFLEX for Peyronie’s disease. We believe 3 other core products, TESTOPEL, edex and XIAFLEX for Dupuytren's contracture will also help to drive overall growth. We continue to manage Testim as a mature product and have recently launched its Authorized Generic in a proactive strategic effort to gain broader and fuller access into the TRT gel market.

Now in 2014, we are continuing to expand into new specialty therapeutic areas, potentially adding QLT's ophthalmology program and building a corporate growth platform that we believe will enable us to further diversify our research and development pipeline, product portfolio and overall revenue return.

Now let's turn to Slide #10 to look across the portfolio of the second quarter performance. First, our TRT portfolio. As you know, we are managing Testim as a mature product and with our launch of its Authorized Generic in June, this is now a product franchise that we believe has expanded access and a stronger competitive position. We proactively executed on our AG strategy to address the confusing managed care environment and the continued downward pressure on the TRT gel market, which continues to shrink, demonstrating a year-to-date decline of 19%. We believe our launch of the Authorized Generic helps drive a full access strategy and that we have gained first mover generic status, enabling us to penetrate further into the TRT gel market than we would have with the Testim branded products alone.

Let's look at Slide #11 to see how our strategy appears to be working. As of July 25, approximately 6 weeks after the launch of our AG, there has been strong initial traction with total U.S. net revenues of $25.2 million. Of that total, $11.9 million came from branded Testim and $13.3 million from our Authorized Generic. Overall, our Testim franchise has achieved a combined 14% share of new prescriptions in the TRT gel market. This is the highest level for Testim since the end of 2011 and is encouraging as it shows that we are increasing access. Importantly, we've seen approximately 10% of the switches to the Testim AG come from other branded gels and injectables. Also of note, we have seen strong progress on the Managed Care front, multiple plans have added an AG to their Tier 1 status, and the AGs are already listed as preferred generic alternatives for 75% of covered lives. Finally, Upsher-Smith launched its branded products and its authorized generic to its branded testosterone product in early July and, nevertheless, we still continue to see very nice results for the Testim franchise.

Here on Slide 12, we will talk about TESTOPEL. TESTOPEL is an important product for Auxilium and we remain encouraged by its potential. TESTOPEL, as you know, is the only FDA-approved, long-acting implantable testosterone pellet available. As you recall, we saw a significant buy-in of approximately $12 million to $14 million in the first quarter in advance of the 15% price increase that went into effect on April 1. As a result, a second quarter impact to TESTOPEL was expected. In the second quarter, we realized TESTOPEL net revenues of $4.2 million. When you look at the first half of 2014 as a whole, TESTOPEL is averaging approximately $80 million -- $18 million in net revenues per quarter. This is slightly lower than our average quarterly net revenues in the second half of 2013, which were approximately $21 million, excluding the $3 million to $4 million impact in the fourth quarter for our change in the distribution channel. We believe the decrease we are seeing in the first half of this year is due to the larger than expected delay in physician purchases during the pricing book reset process. This is underway with many resets completed late in the second quarter and we expect nearly all of them to be fully reset in the third quarter.

Further, while we continue to hear directly from urologists about their support and continued use of TRT products, including TESTOPEL, the overall TRT market dynamic could be a factor, although we don't think it is having the same impact as it has been seen on the TRT gel market. Importantly, early in the third quarter of this year, we've already seen evidence of a normalization of buying habits and we remain optimistic about TESTOPEL's long-term growth potential.

Now let's move on to our erectile dysfunction franchise. Moving on to Slide #13. STENDRA is the first erectile dysfunction drug in nearly 10 years and we've launched it with a sophisticated and fresh marketing campaign. We believe that STENDRA offers an exciting and distinct product profile that could impact the PDE5 market dynamics, in firstly, its rapid effect; secondly, its ability to be taken with food and modest alcohol consumption; and thirdly, its favorable side effect profile. We believe this exciting product profile paired with our focus and targeted marketing approach has yielded strong early market success.

Let's now turn to Slide #14. You'll see how this profile is driving product sales. A total of $6.1 million in revenues in the second quarter. New prescriptions and total prescriptions continue to trend positively, with total prescriptions hitting nearly 50,000 in the second quarter. Importantly, in the second quarter, we not only increased the total number of prescribers by 99%, we also increased the productivity by prescriber by 62%. Further, our average pills per prescription continues to climb, now reaching 5 pills, a good sign, but while we are continuing to utilize our 3 free pill prescriptions to start off new STENDRA users, we are also getting closer to the industry average of approximately 6 pills per prescription. Overall, we are very pleased with this progress, and with the favorable anecdotal feedback we've been receiving from leading urologists and primary care physicians about patient exposure and experience with STENDRA.

On Slide #15, you will see our progress in capturing share in the erectile dysfunction market. STENDRA has already captured 3.2% of total prescriptions amongst our targets, according to the most recent IMS data released. These targets include the urologists and high-prescribing primary care physicians that write 45% of all PDE5 inhibitor prescriptions. Overall, amongst all physicians, STENDRA has achieved a 1.4% market share for total prescriptions. We acknowledge that after a sharp uptake by the market, STENDRA market share growth has slowed over the past 1 to 2 months, which is not unexpected for this type of product launch. We are currently developing and kicking off new commercial initiatives that we believe will enable us to reach a broader base of prescribers and patients, and in turn, grow that market share over time.

Here on Slide #16, you'll see that our prescription and switch data continue to trend nicely. Most importantly, please note, the purple portion of the bars in the chart on the left, which shows patients continuing on STENDRA, both getting refills and staying on the drug over time. While it is still early, we are very happy to see that segment growing considerably from the first to the second quarter as we continue to build on launch momentum. You'll also see in the pie chart on the right, that patient switches continue to come from a broad range of competitive PDE5 products, mostly from CIALIS and VIAGRA. In summary, we continue to be extremely encouraged by the launch of STENDRA and its growth potential.

Next, let's look at edex. On Slide #17, we provide an overview of performance in the second quarter. We were very pleased to see the continued retail market share growth for edex, now reaching almost 52%, and total second quarter revenues of $7.5 million. It's important to note that this continued growth in market share and an increase in revenues comes at a time when a competitive product has just been relaunched. We're encouraged by this traction and our ability to maintain Edex's market leadership amongst injectable erectile dysfunction treatments.

Next, let's move onto XIAFLEX. On Slide #18, we've outlined our U.S. revenues in the second quarter of this year. We are delighted with our total of $26.3 million, up 75% from the second quarter of last year. This growth was driven predominantly by our launch in Peyronie's disease.

Let's talk first about XIAFLEX in Dupuytren's. Turning to Slide #19, the second quarter brought continued stable growth of XIAFLEX in Dupuytren's contracture. Overall, our vial sales have climbed steadily, with a 7% increase over the same period last year. Additionally, we continue to see solid and increasing market share for XIAFLEX in Dupuytren's, hitting 29% year-to-date through May. Also, broadly and over time, we are seeing both increased awareness and demand for treatments for Dupuytren's contracture with an approximately 5% increase in procedures over the past 12 months.

Moving on to Slide #20. As you know in January, we launched XIAFLEX for Peyronie's disease, the first and only FDA-approved treatment proven effective for this condition. Here on Slide #21, we have updated the assessment of total patients diagnosed with Peyronie’s disease, using the most up-to-date claims statistics available. Based on all claims filed in 2013, there were 95,000 patients diagnosed with Peyronie's disease last year. Historically, our evaluation of patient charts showed that Peyronie’s could be under-diagnosed by 50% or more, but we are opting to focus on the formally diagnosed patient metrics as this is still a considerable and growing number. Within this patient population, our initial launch strategy is focused on the approximately 5,000 to 6,500 patients who receive surgery or Verapamil injections each year and the approximately 400 physicians who performed 90% of the surgeries. With this disciplined product rollout, we're aiming to build a beachhead with those leading physician experts and then grow and expand XIAFLEX penetration into the broader and we believe substantial Peyronie's disease market.

Now turning to Slide #22. Let's talk about our initial launch momentum with getting our target physicians REMS certified. After great success certifying our first core group of 225 physicians, we've now expanded to our full Phase I and Phase II group of target urologists, which is now at a total of 432 physicians. As of June 30, we had already certified 380 of them or 88%. We are also pleased to see overall market and patient demand to continue to drive physician interest beyond our core targets. As of June 30, we successfully certified more than 1,100 total physicians in nearly 650 sites. Importantly, we're working closely with these physicians to ensure that they have the support needed for a smooth and seamless product rollout and patient experience. We could see more patient details on our next slide, Slide #23. You will see that as of June 30, 2014, we now have more than 3.5 -- 3,500 Peyronie’s patients submitted into our Auxilium Advantage White Glove program. We are extremely pleased with this number as we believe it shows considerable continued patient demand for XIAFLEX for Peyronie's disease and use of Auxilium Advantage, which is designed to assist patients in securing reimbursement approvals and streamlining the treatment experience. The chart indicates that of those 53% of patients where reimbursement decisions have been made, we are seeing a very nice 93% approval rating, an improvement from an already high 86% rate at the end of the first quarter. To date, we're also very pleased to report that all 8 of the Medicare administrative contractors or MACs have confirmed XIAFLEX for Peyronie’s disease coverage. Additionally, 29 major commercial insurance plans representing approximately 118 million insured lives and approximately 73% of commercial health plan lives in the United States have approved patients seeking treatment, and in some cases, have already instituted formal policy changes.

Finally, XIAFLEX for Peyronie’s disease is also a covered benefit of the VA and the TriCare. Overall, we are encouraged by this significant coverage progress only 7 months into the product launch, and we will continue to keep you updated as we work toward securing additional coverage.

Moving to Slide #24, you will see a chart that perhaps best illustrates our excitement around the very encouraging XIAFLEX for Peyronie’s disease product launch. Here, we have mapped the XIAFLEX vials shipped to physicians in the first and second quarters for Peyronie's patient treatments, a total of 3,350. You'll note that while 598 vials were shipped in the first quarter, in April alone, we nearly matched all of those total first quarter shipments. In May, we hit 775 vials and in June, we shipped nearly double our May total, hitting more than 1,400 vials shipped to physicians for patient treatment. The XIAFLEX launch in Peyronie’s disease is exceeding our initial expectations, and we are very encouraged by its early traction with patients and top urologists.

In conclusion, let's look at Slide #25 for our upcoming priorities and milestones and what we are most excited about at Auxilium. We have outlined our key goals moving forward.

First, we're going to work to drive growth from our product portfolio, the XIAFLEX for Peyronie’s disease launch momentum is a prime example.

Second, we are looking forward to the PDUFA date for the STENDRA 15-minute label expansion and XIAFLEX for Dupuytren's contracture label expansion this fall. We also have important data expected in the fourth quarter of 2014 and the first quarter of 2015 for cellulite and frozen shoulder syndrome, respectively.

Third, we will be opportunistic around new corporate development and licensing opportunities, including aggressive partnering and M&A to maximize the benefits of the new platform provided by the QLT merger, which we will work to close successfully in the fourth quarter of this year.

Fourth and finally, we will endeavor to maintain financial discipline and manage financial performance.

This continues to be an exciting and important time for Auxilium. We believe that in 2014, our broad and diverse product portfolio positions us as a leader in men's health care. We will continue to be -- to strategically invest into our assets, to support our launches and our key products and we will remain focused on executing our corporate strategy. We thank you for your continued interest and support. I would now like to open the call for your valued questions.

Stephanie, can you please give the instructions?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Michael Yee from RBC Capital Markets.

Michael J. Yee - RBC Capital Markets, LLC, Research Division

A couple of questions. First on Peyronie's, I just want to make sure my math is right. So it looked like, if I did up the vial numbers and multiply by price, it was about $8 million, $8.5 million of revenue in Peyronie's. Is my math right? And then, when you look at the patients where that is coming from generating that revenue, where do you think they're coming from? What buckets out of that market slide, just trying to figure out if you're actually expanding the market or if these are patients that already had surgery? What do you know about these types of patients that are coming in?

Adrian Adams

Well, I think, that's a very good question. It's difficult to get precise data on that. As we've mentioned, Mike, we have been focused on that population that encompasses surgeries on both the Verapamil injection. There are 2 points I would like to make. I think, we do not feel that the patients that have been generated so far are specifically all within that bucket. We believe that, that's kind of a mix of patients that cover both those spectrums. In addition, I think this is one of the things that we've tried to make clear. I think, there was a kind of -- they're not being questions over the course of time as to whether or not this represents a bolus of patients by 1 or 2 individual physicians. We are not seeing them. And so we're very encouraged by that. And clearly, the update statistics that we've put in the slide deck this time, the 95,000 patients that were diagnosed in 2013. That's why we believe that things are going very well for us and that we believe that the kind of -- the opportunities moving forward are considerable as we broaden into the commercial opportunity into that broader spectrum of patients. So I think whilst the data is not too precise, we believe that this kind of a broad spectrum of patients that are being treated at this particular point in time.

James E. Fickenscher

And Michael, with respect to your first question, obviously, we don't provide revenues specifically by indication, but I think looking at your math and the number of vials in the quarter times our whack at 3,300 plus, you're probably in the right ballpark, but we don't specifically give those numbers.

Michael J. Yee - RBC Capital Markets, LLC, Research Division

Okay, right. And then 2 last questions, one, you made a comment about the ED market having some slowdown there. You may have suggested that that's seasonal maybe you could explain that a little bit better, why the market would actually be slowing? And then last question is, you made a comment on how you're trying to be aggressive with PD and in-licensing, et cetera. Is it unreasonable to think that, that would not really be until you complete the QLTI transaction, or you would actually do stuff still this calendar year?

Adrian Adams

Well, I think -- I'll take the last question, and then I'll ask Mark to comment on the first question as it relates to the ED market. I think, as we've mentioned, from a corporate licensing [ph] perspective, one of our absolute focal points at the moment obviously is efforts to move towards closing the QLT merger, and we're very excited about the platform that, that creates. I think and more certainly, I think we've referenced within our corporate evolution the fact that Phase III of our plan, as it relates to 2015 beyond, involves a very aggressive approach to partnering and looking for M&A opportunities. I think obviously, and with a strong focus on revenue generating opportunities and I think more certainly, I think in corporate development on licensing, as we've talked about on several occasions, I think. In the event that we see something over the course the next number of months and as we move into 2015 that we think fulfills the goals of being strategic, financial and in the interest of shareholders, then clearly we'll take a look at that, but obviously, our absolute priority at the moment is on executing with the portfolio that we have, executing in relation to the opportunities we see in research and development and very specifically making sure that we have a successful closure of the QLT merger. And on the erectile dysfunction side?

Mark A. Glickman

Yes, we've seen this single -- low single-digit decline in the PDE5 market for some time and we really attribute to what we're seeing in a lot of the other markets, as well, which is just more expensive, higher out-of-pocket for patients that's slowing down the overall market and I think we see that with kind of our own demand being driven to coupons. So I think it's the overall market slowing down with the cost and out-of-pocket becoming higher overall. That low single-digit decline has been stable for some time.

Adrian Adams

That said, I think, Michael, as we showed, I think we've been very encouraged by the standard traction we've had today. We acknowledge that there's been a little bit of slowing down on the market share growth but we're quite encouraged by a number of the initiatives that we have in place and the profile of the product that we have appears to be resonating quite well with physicians and more importantly, with the patients that take it.

Operator

Your next question comes from the line of Eric Schmidt from Cowen and Company.

Eric Schmidt - Cowen and Company, LLC, Research Division

Just a few quick ones for Jim, initially. Was -- do you think there's any stocking of the Testim Authorized Generic in Q2 and might we see that come out in Q3?

James E. Fickenscher

So clearly, with the timing of the launch of the AG being in June, I'm sure that there is some portion of that revenue that's stocking. Maybe just a real quick recap on how we're going to book the revenues associated with this. Basically, we sell the Testim generic product to Prasco. We have a very small modest margin on the units that we shipped to them. We then, on a quarterly basis, get a profit split that comes from Prasco. And that reflects basically the sales that they make to their customers into the pharmacies. We net out all the cost to goods and royalties, et cetera to come to a net distributable profit and we get a share of that and they keep a share of that. And so that's what we booked in the second quarter. So yes, I'm sure that there is probably some amount of stocking but I think, and maybe Mark could address it, I think we've been pleased to see that there are continued repeat purchases from Prasco and from Prasco out to their customers.

Eric Schmidt - Cowen and Company, LLC, Research Division

Okay. And on the milestone payment that you earned for filing in Japan, $10 million, is that lump sum Q3 or is that going to be amortized?

James E. Fickenscher

Yes, so what will happen is, as we've done in the past, there will be a little bit of a makeup recognition of that income. And then the balance will be over the life of the agreement with Asahi. So if you recall, it's similar to what we had in the past with Pfizer, where you basically will take from the beginning of the time until now, that portion as a percentage of the total time of the contract. So there will be a little bit of a makeup in the revenue recognition but then it will be amortized over the balance of the contract.

Eric Schmidt - Cowen and Company, LLC, Research Division

Okay. And then, maybe for Adrian, he mentioned a few times that you're monetizing Testim as a mature product. Is -- are the cash flows actually positive for that franchise right now? And what might you do if they turn negative?

Adrian Adams

Jim, maybe you just want to comment on the cash aspects of the [indiscernible].

James E. Fickenscher

Yes, I think when we look at it and, in particular, now that we have the primary sales force detailing multiple products, I think that the answer is yes, we're still seeing positive gross margin and certainly, we believe that with the guidance not changing on Testim as a whole, we will consider the AG and Testim brand, that $85 million number for this year. I believe that it is still a profitable brand for us, the franchise of [indiscernible].

Adrian Adams

Again, I think as we referenced in the call, I think the fact that we strategically moved with this product and launched it at the time we did obviously gave us that very important first mover advantage and obviously, as we thought, I think when Upsher-Smith launched their product, they launched both their branded and their Authorized Generic and we feel that kind of first mover advantage of that, it gives us this opportunity over the remainder of this year and into 2015 to leverage in the full access strategy to broaden our access into the broader Tier 1 position within the market.

Eric Schmidt - Cowen and Company, LLC, Research Division

And lastly, would you care to share any expectations or thoughts ahead of the September 17 [indiscernible] panel?

Adrian Adams

Well, I think, with -- from our perspective, you recall when we, in the first quarter, when we had the challenges within the overall TRT market as it relates to the faster-than-expected decline, we referenced the fact that there are an awful lot of aspects of litigation, et cetera that had caused that decline and that we will be pleased if there was the opportunity to obviously have a fuller review of the TRT space. So we are very pleased that, that outcome is taking place. And clearly, we, amongst an industry group participated in that and we look forward to put in a balanced view in relation to what we see, not just on sort of the kind of the negative aspects that have been public over the course of the last 6 months or so, but also the very positive impact of the TRT treatment. So that's all I want to say at this particular point in time, we're looking forward to that meeting. Meanwhile, we have been encouraged to see that the FDA have continued to approve products in this space, as well.

Operator

Your next question comes from the line of Gary Nachman from Goldman Sachs.

Gary Jay Nachman - Goldman Sachs Group Inc., Research Division

Adrian, on XIAFLEX in Peyronie's, you mentioned 1,100 physicians that are REMS-certified. What percentage of those are actually treating patients currently? Maybe tell us what some of the feedback has been on the results in these patients? Did they come back for multiple treatments? And then, the 1,400-or-so vials shipped in June, any reason to think that, that won't be sequential growth of that going forward?

Adrian Adams

Yes, I mean, well, certainly, I think, if you were to look broadly at the patient base, I think, just to pick up one of your questions, I think it's still relatively early for us to give a kind of a precise average number of the vials that our patients are actually receiving. We've -- we know that the patients are progressing into cycles 2 and 3 and 4. I think but really, as it relates to getting a very good feel for how that is going to average out, I think -- we've always said that, that will be a better feel in the third and fourth quarter of this year, I think. As it relates to the total -- the kind of run rates of vials, et cetera, I think, obviously, the chart that we showed, as it relates to what we saw in June, I think we are very, very pleased with the doubling of vials in June versus May. And obviously, I think the systems that we have in place and certainly, the Auxilium Advantage program gives us a kind of a broad opportunity being able to track patients over the course of time. So those patients who indeed had treatments that were initiated in the kind of April timeframe, I mean, whilst we can't be too precise at this particular point in time, we are tracking both in relation to the time between cycles and obviously, when they complete treatment. So from a broader overall perspective, I think, the number that we're particularly pleased with, I think is the total number of patients that we've seen treated to date. And that if you that -- as we've said, I think if you average out and just use kind of average numbers of 5 or 6 vials per patient and you just look at the patients we currently have to the end of the year, it kind of demonstrates the potential for this product moving forward.

Gary Jay Nachman - Goldman Sachs Group Inc., Research Division

And on the physicians, I mean, how concentrated is the use right now? You seem to have a lot certified but are people actually jumping in and are comfortable doing the treatment? Or are they waiting to see more experience out there from their colleagues?

Mark A. Glickman

This is Mark Glickman. About 40% of the REMS-enrolled physicians have already injected. Quite honestly, we don't hear of anyone waiting. I think it's a matter of getting into the Auxilium Advantage program. Going to the process, having the patient clear for benefits and starting the process. So I don't think we have too many physicians on the sidelines.

Adrian Adams

I think, it's been -- I think one of the things that we -- it's an interesting challenge really because we've obviously been very focused on developing this kind of beachhead of users, in particular, with the very experienced users to perform the base of our initial target. The biggest challenge that we've had, as I've mentioned, I think, is holding back physicians. So I think as we have now accelerated our Phase II part of our plan and that's led to a broader number of physicians being REMS certified and a lot of those being driven by the demand and interest and the kind of feedback they are getting from current injectors. So I think that gives a little level of encouragement. I think what we see happening is in this -- in that broader group is that -- they'll start to use the products and obviously, gain confidence and experience with it over the course of time. And that speaks, again, to the potential opportunities. So as we said, we remain optimistic and certainly, encouraged with the projections today and most certainly, I think the momentum that we've seen has exceeded our expectations.

Gary Jay Nachman - Goldman Sachs Group Inc., Research Division

Okay, and then on STENDRA. How optimistic are you that you can get the 15-minute onset claim? And if you do, would that be a trigger to do greater, more extensive DTC? And then, talk about some of the other plans to accelerate growth, after Rx [ph] have flattened a bit, you talked about some initiatives, so maybe just expand on that?

Adrian Adams

Yes, I mean, clear as it relates to the 15-minute claim, I think we've referenced that as being a very exciting possibility in the event that we do get approval for that because I think no one else has that particular claim at this point in time. So I think there have been ongoing dialogue, an active dialogue with the FDA. But clearly, we have the PDUFA date in September. And I would say that things are progressing nicely against that PDUFA date at this particular point in time. Clearly, I think with the kind of slowing down in market share evolution that I referred to in our script, I think, we remain very encouraged by the kind of depth of use we're starting to see in some of our prescriber base that gets to the aspect of TRX growth. I think investment decisions and the kind of aspects related to that, that we might make with the 15-minute claim in the event that we get approval for that, I think, clearly, will be dictated by the platform of use and evolution we see at that particular point in time. As I've mentioned, I think we do see this as being a very nice opportunity in a very large market with a product that has a very distinct product profile. So we're looking at all different investment scenarios just to make sure that we fully leverage and maximize on that product moving forward. And what are some other points you wanted to make, or?

Mark A. Glickman

Just we are already continuing to adapt our targeting and our offerings on the coupon to get ready to grow STENDRA now and to get ready for that launch date. So we're already taking action to increase the market share that we hope to see some uptake here in July.

Adrian Adams

Yes, yes. So I think, again, we remain very optimistic with STENDRA and now we're looking forward to hopefully moving towards that 15-minute claim.

Operator

The next question comes from the line of Annabel Samimy from Stifel.

Annabel Samimy - Stifel, Nicolaus & Company, Incorporated, Research Division

I had several. First on XIAFLEX, you had a really nice jump between May and June vials that were shipped. To what extent is there any of that? Is this any stocking on the physicians part and what kind of pull through are you seeing of those vials in terms of usage? And then in terms of the timing of Peyronie’s growth, you mentioned that you're right now, targeting 5,000 to 6,000 patients who are getting procedures. What takes you -- what's the timing of taking it to the next level to start reaching those patients who are diagnosed but not treating at this point?

Adrian Adams

Yes, I think on the latter point. I think, one of the earlier questions was in relation to, do we have any kind of a feel as to what physicians are starting to use the products and where they fit within the overall spectrum. And also, I think related to that, do we have any kind of feel as to whether or not the proportion of patients that we have and we've seen treated today as other patients that fall predominantly within that kind of surgery or Verapamil injection sector. We're not seeing that. Clearly, we're seeing -- we're picking up a significant proportion of overall [ph] but we're seeing the utility of this product being on a much wider field at this particular point in time. So I think, and again, it's not -- it's difficult to be too precise on that. It's too early, in a long cycle for us to get that granular information. I think the slide that we show, which talks about the commercial opportunity and moving beyond, obviously, those aspects of the people who have surgeries of Verapamil injection, we already see that we're getting patients in those categories and we see that as being a very nice opportunity moving forward. And on the first point?

Mark A. Glickman

So as far as the stocking question, a vast majority of those vials that were shipped were through our specialty distributor and those are specific patient shipments. So there really is no stock at all in these numbers. These are all shipped for the most part with patients and again, specialty pharmacy will not ship those vials until there's a patient and an appointment approved and set up. So vast majority of those are patient specific.

Annabel Samimy - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay, great. And if I can ask some questions regarding Testim -- I'm sorry, TESTOPEL rather. Since I guess some of the changes in the testosterone gel space with the launching of AGs, are you seeing any need for step edits, or are there any kind of prior authorizations that you need for TESTOPEL? And then regarding the underlying growth, you mentioned that, on a quarterly basis it's averaging about 18 versus about 21 before, do you have a sense of what the underlying growth is, it was growing quite nicely in the double digits before. And I guess, I'm trying to understand where you see it going forward?

Adrian Adams

Yes, I think, on the latter point I'll ask Mark to address. The first one on the platform, I'll tell you we tracked the overall kind of decline rates in the overall TRT gel market under the metrics overall in the TRT space and also within the non-gel market. The surrogate that we've kind of used for implantables is indeed the injectable proportion of the market. We're still seeing growth in that segment of the market and that gives us the encouragement with TESTOPEL. As we mentioned within the overall script, I think the kind of revenue kind of impact we saw in the second quarter on TESTOPEL was predominantly driven by the kind of buying we saw ahead of the price increase on April 1. And also, I think, it takes time for the price books to reset within the overall volume buy and bill process, I think. And that's probably been delayed a bit more than we thought although we're seeing some very encouraging signs in that area. Also the key aspects of that -- but also I think whilst it is difficult to be too precise, I think there's no doubt that the overall kind of noise levels within the overall TRT space maybe having an influence as well. Although all the feedback we get from the urologists points to the fact that they remain very committed to continued treatment of TRT. And Mark?

Mark A. Glickman

Going to the first point on prior-auths, we have seen an increase in prior auths throughout the testosterone replacement market overall. I wouldn't say at this point on those prior-auths that TESTOPEL has been in any way singled out from what's going on in the rest of the replacement market. For example, additional blood tests before starting a gel -- a testosterone replacement in the gel market and the TESTOPEL market, as well. So nothing specific with TESTOPEL but we are overall seeing more prior-auths in the market.

Operator

And your next question comes from the line of Joseph Schwartz from Leerink Partners.

Joseph P. Schwartz - Leerink Swann LLC, Research Division

I was wondering if you could talk a little bit about the contracting side of things for STENDRA. How aggressive have you been there or passive for that matter? I noticed that it was excluded from the Express Scripts formulary. Have you been allowing this product to basically sell itself based on its own merits and waiting until a later date, perhaps after your labor expansion to contract more aggressively to move Scripts? What is your strategy with regard to this important influence or of uptake?

Adrian Adams

Yes, thanks for the question. I think obviously, we, for competitive reasons, we won't get into specifics around this area and obviously we made commentary when we launched STENDRA to one of our overall kind of pricing dynamics where within this market. What I would ask Mark to do is to comment on some of the kind of differences within this market that you would typically see in some of the chronic disease areas. And I'd also like him to make any specific comments in relation to the Express Scripts point that you raised, as well.

Mark A. Glickman

Sure, I mean, and to answer your question, I mean, we're always involved with the managed care plans but this market does behave differently in that there's a significantly higher level of cash pay in this market than we see in any other market. Almost 2.5x the amount of cash than in other typical markets. So while we are picking our battles as far as managed care plans, I wouldn't say we're going out with blanket offers at this point with a lot of our business right now being dependent on coupons and just kind of parity with the other players. Specific to ESI, while we are on the 2015 exclusion list, we do continue to work with ESI, but I think it's important to note that, that is their national formulary, approximately 14% of their lives. But we have had success with one of their largest contracted customers in securing an exclusive Tier 2 deal. So that is with an ESI customer. So what we're still working very closely with ESI, we're still working closely with their underlying customers and we'll continue to make smart decisions for contracting where we can.

Joseph P. Schwartz - Leerink Swann LLC, Research Division

Okay, that's helpful color. And then one quick one on XIAFLEX. How many vials or are patients getting in -- are Peyronie’s patients getting on average? And then the number of patients that are signed up for Auxilium Advantage is bumping up against the targeting numbers that you gave. So that gets invasive over surgery each year. So can you tell us at what point do you want to expand your per view there? How are you thinking about the broadening the targeting, at what point?

Adrian Adams

Yes, I think a number of points to reiterate there, I think. As we said, I think, when we launched XIAFLEX in Peyronie's, we wanted to have this very focused disciplined approach and obviously, this focus to that group who were obviously earmarked for surgery or were getting Verapamil injections. What we have seen is that the kind of utility of the product has been much broader than that. And we do not see that -- this is -- that, that business that we are seeing today and more certainly, the very nice vial uptick we've seen is not focused predominantly on that group. We see this has being a situation where we're starting to really go into that expanded category that we're seeing, so we feel that there's still significant business to get from that group of the physicians and patients but we're very encouraged by the vial uptick we're seeing in a broader physician and patient base. As I've also mentioned, I think, clearly, I think, we want to try and get a good feel for the average number of vials that patients actually get in the kind of natural world. As you well know, in our Phase III trials, 90% of patients got 6 or more vials. And I think -- but we think it's going to be probably towards the end of the third quarter into fourth quarter before we get a precise number that things seem to be average out in as it takes time for patients to move through their cycles. And I think we'll get a much better feel for that particular point in time. Meanwhile, I think the uptake that we've seen and the evolution from April to May and in particular, June, we find very encouraged and then it more certainly is exceeding our expectations and is not reflective of just patients going from a very precise category. We already moved from Phase I into that broader Phase II category as a result of demand and interest levels.

Operator

Your next question comes from the line of Mario Corso from Mizuho.

Mario Vincent Corso - Mizuho Securities USA Inc., Research Division

Just a couple of things I wanted to expand upon. In terms of Testim for the second half of the year, obviously, a lot of moving parts there with the AG and the brand. And I'm just wondering how you see that total Testim trajectory in the next couple of quarters and, I guess, within the context of your prior guidance of less than $85 million for the year and when you think about your total revenue guidance for the year, are you within that? Are you seeing Testim going down and maybe Peyronie’s going up? And then on Peyronie's disease, are you seeing any plans limit use in any way whether it's number of injections or evidence of benefit before continued use? And then finally, on the SG&A side, where are you finding those savings and is that impacting potential DTC timing for 2014 versus 2015?

Adrian Adams

So a lot of questions there, I appreciate those. I think on Testim, I think as we said, we took step after the first quarter to -- although we don't give specific revenue breakdown by all our individual products, we've reiterated our guidance range for the overall year on total revenues. I think, we did mention that we'd anticipated that revenues would be below $85 million for the year. We have not changed that kind of perspective as it relates to our proactive strategic kind of rollout of the Authorized Generic. We have been encouraged by the early impact of the Authorized Generic and the first mover advantage that comes with that, in particular, one of the dynamics and metrics that we looked at is the proportion of plans that cover Authorized Generics in Tier 1 status and that particular metric where we saw 10% of our switches coming from other injectables and brands, I think we find that being an important metric which finds our reiteration of the fact that we anticipate revenues of Testim being below $85 million. We still stick with that at this particular point in time. We see no reason to change that. On the Peyronie’s disease, I think just the question there again, just remind me?

Mario Vincent Corso - Mizuho Securities USA Inc., Research Division

So any -- are any plans limiting the number of use either by vials or by evidence of benefit?

Mark A. Glickman

At this point, you see that, of the 53% that we have made decision, 93% have been approved, so there's been a small percentage that have -- on first pass, been rejected. We do have an appeals process and many of the appeals have been successful. As far as vial limits, I have not -- I'm not aware of any vial limits that have been put in place for any of the plans. So what we've seen is a very high percentage -- continue to see a very high percentage of patients approved and in line with that 93%.

James E. Fickenscher

But some plans certainly do require that they -- after the first cycle they get approval for a second cycle, so that does happen.

Mark A. Glickman

Correct, and again, we haven't seen any indication second cycle has been affected at all.

James E. Fickenscher

That's right. And with respect to the change in the expense guidance. So I think that's the kind of normal operating business at Auxilium. Every year, we put together plans and as the year goes by, depending on how things are moving, we sometimes will cut back a little bit on our spending. We're obviously getting closer to the end of the year so we're firming up our plans better at this point in time. So I think that it's a prudent thing for us to do and I think with respect to life after QLT merger, I think that gives us some interesting options and opportunities to look at the DTC if that's a place where we want to spend some of the cash.

Operator

Your next question comes from the line Difei Yang from R.F. Lafferty.

Difei Yang - R.F. Lafferty & Co., Inc., Research Division

Just a quick one with regards to the TRT [ph] film gel market. So we were a bit surprised the way ESI puts 1% testosterone gel on exclusion list for the upcoming 2015. And do you have any comments to share and how that might change the market dynamics?

Mark A. Glickman

This is Mark. From our perspective, as you are probably aware, Testim wasn't covered on the ESI national formulary. So again, that 14% alive that a national would not have at this point exposure to the Authorized Generic. But again, and I want to stress more so here with Testim, many of the underlying plan and states that a part of ESI have actually already put the Authorized Generic in the first tier, several of the states have already. So that actual listing of -- on the ESI exclusion list for the gel really has no bearing on where we projected the AG to go or the access we have for the AG. I think, it's a small percent of overall lives and quite a few of the states that make up ESI plans have already been forced to put Tier 1 AG in place.

Adrian Adams

And that was a very important part of our proactive strategic kind of move with the Authorized Generic. I've mentioned already the first mover advantage but clearly, I think the core principle behind that was to get a full access strategy, which provides the opportunity, I think, to get onto a much higher proportion of the managed care plans, the Tier 1 status, and we've been very encouraged by the uptake of the plans in that arena. So again, it was strategic, proactive and with a bigger picture in mind which we're leveraging at this point in time.

Operator

We have time for one more question which comes from the line of David Friedman from Morgan Stanley.

David Friedman - Morgan Stanley, Research Division

I'm wondering if you could review just the accounting of the Prasco generic in terms of what exactly you'll be booking and how any transfer payments occur. And then also, just on, in terms of your cash balance, how comfortable are you with where your cash balance is right now and how does that factor in, at all, to any debt covenants that you have?

Adrian Adams

So first on the Prasco accounting, again, we basically manufacture the Authorized Generic through our third-party manufacturing company. We ship it to Prasco labeled as testosterone 1% gel. We make a small markup at the time that we sell a lot of product to Prasco. Prasco then will sell the product into their customers, the pharmaceuticals -- pharmacies throughout the United States, and at the end of each quarter they do an accounting for basically the net distributable profit, which is basically their revenues less the cost associated with the product and royalties, things like that. And then we have a profit split at a certain percentage. So based on that profit split, that's where we will book our revenues for the Testim Authorized Generic. With respect to your question on the cash situation, we have just about $45 million in cash. And I think at this point, there's nothing within our term loan debt covenants that requires us to maintain a balance. Obviously, we feel comfortable that we can meet our interest payments and amortization schedule of those loans and should be able to move on. Clearly, one of the benefits that we see in the QLT merger is the fact that they do have a substantial cash balance. And so, I think that's certainly something that will address what we either recognize last quarter was a cash balance that started to have a cash overhang prior to the announcement of the QLT transaction.

David Friedman - Morgan Stanley, Research Division

And then sorry, just to be clear, in terms of what the profit split that comes from Prasco, will you recognize that as Testim revenue? Or is that going to be like a contract revenue?

Adrian Adams

If you see on our press release, today, David, we basically break Testim into 2 pieces. It's Testim, the branded product, and Testim, Authorized Generic. So the sale of the units to Prasco, as well as that profit split get shown in that revenue number. That's where we do the accounting.

David Friedman - Morgan Stanley, Research Division

Okay, so you'll keep recording that line going forward?

Adrian Adams

That's correct. Thank you, David.

Well, I think, I'd like to thank everybody for joining us this morning and we will certainly look forward to updating you on our progress and against corporate milestones and general performance on an ongoing basis. And thank you so much, and you have a great day. Thank you.

Operator

Thank you. Ladies and gentlemen, that concludes your conference call for today. You may now disconnect. Thank you for joining and enjoy the rest of your day.

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