Anacor Pharmaceuticals' (ANAC) CEO Paul Berns on Q2 2014 Results - Earnings Call Transcript

| About: Anacor Pharmaceuticals, (ANAC)

Anacor Pharmaceuticals, Inc. (NASDAQ:ANAC)

Q2 2014 Results Earnings Conference Call

August 7, 2014 5:00 PM ET


DeDe Sheel - Senior Director, IR and Corporate Communications

Paul Berns - CEO

Vince Ippolito - EVP and Chief Commercial Officer

Geoff Parker - EVP and CFO


Eric Schmidt - Cowen and Company


Good day, ladies and gentlemen and thank you for standing by and welcome to Anacor's Second Quarter 2014 Financial Results Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions).

As a reminder, today's conference maybe recorded. Now its my pleasure to turn the floor over to Ms. DeDe Sheel, Head of Investor Relations. Ma'am, the floor is yours.

DeDe Sheel

Thank you. Good afternoon and thank you for joining us today for Anacor's second quarter 2014 financial results conference call. On today's call from Anacor are Paul Berns, our CEO; Vince Ippolito, our Chief Commercial Officer; and Geoff Parker, our CFO. Lee Zane, our Chief Medical Officer, is also on the call and will be available for the Q&A session.

Before we get started, I would like to note that during our call and question-and-answer session today, we will be making certain forward-looking statements. Listeners are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date of this call and we undertake no obligation to update any forward-looking statement made on this call, except as required by law. These forward looking statements are based on estimates and assumptions by our management team that, although we believe to be reasonable, are inherently uncertain and subject to a number of risks and uncertainties.

The following represent some, but not necessarily all, of the factors that could cause actual results to differ from historical results or those anticipated or predicted by our forward-looking statements. The timing of the successful launch of KERYDIN with our new partner Sandoz, any issues or delays arising during the course of our Phase 3 studies or other studies relating to the development of AN2728, any delay or failure by the FDA to approve AN2728, our ability to timely and successfully launch either alone or with the partner, AN2728, and other risks identified in our periodic filings, including our quarterly report on Form 10-Q for the quarter ended March 31, 2014.

And now, I'd like to turn the call over to Paul Berns, our CEO. Paul?

Paul Berns

Thank you, DeDe. And good afternoon and thanks to all for joining us on this call. Although, we are a little over mid-way 2014, this has already been the significant year for Anacor, with three important accomplishments relating to our product development and commercialization efforts.

First, on July 8, we announced that KERYDIN, our internally discovered and developed lead compound, was approved by the FDA for the topical treatment of onychomycosis of the toenails.

Second, on July 21, we announced that we had entered into an exclusive distribution and commercialization agreement with Sandoz, a Novartis company, under which Sandoz agreed to sell and distribute KERYDIN in the U.S. PharmaDerm, the branded dermatology division of Sandoz, and an established player in the U.S. dermatology and podiatry market, will be responsible for the commercialization of KERYDIN.

Third, in March of this year, we initiated two pivotal Phase 3 studies of our second lead compound, AN2728, an investigational non-steroidal topical PDE-4 inhibitor in development for the potential treatment of patients with mild-to-moderate atopic dermatitis. An indication, for which we believe there is a significant market opportunity.

Now since we recently discussed the Sandoz deal in detail, and we discussed the AN2728 Phase 3 studies on our call in May, today I will simply highlight a few key takeaways on each of those topics. But before I get to those items, I'd like to pause a moment, to discus the significance of KERYDIN's approval.

While we hear Anacor has set high expectations of ourselves, and believe that we would reach this important milestone, obtaining FDA approval for any product in today's environment is a significant accomplishment. We believe the approval of KERYDIN is reflective of the quality of our evolving organization. From our research platform, to our CMC clinical groups who designed and conducted the studies that demonstrated KERYDIN safety and efficacy, and to our regulatory group, who oversaw very smooth process, that ultimately achieved a great outcome with the FDA approval.

In addition, as KERYDIN is our first approved product, we are very excited to offer physicians and our patients suffering from onychomycosis, this new treatment option.

Given that approximately 35 million in the United States have onychomycosis, with 5 million to 6 million of these people diagnosed and actively seeking treatment, culminating approximately 2 million patients per year receiving prescriptions for currently approved products, we recognize, there was a significant need and market opportunity for a new effective, safe and easy to use topical treatment for all patient types, and we designed KERYDIN to meet that target product profile.

Now moving on to the Sandoz transaction, little over two weeks ago, we announced our collaboration with Sandoz to commercialize KERYDIN in the United States. Today, I want to reiterate that we believe this transaction represents an important value creating opportunity for our company and our shareholders for the following reasons.

First, PharmaDerm has established commercial capabilities in the branded prescription dermatology and podiatry markets, and those are significant portion of the physician audience for KERYDIN.

Next, PharmaDerm's commercial team views the opportunity for KERYDIN as we do, and sees KERYDIN as an important growth driver in their product portfolio. And finally, we believe this transaction strengthens our financial position. We are entitled to receive a minimum of $110 million in payments through 2016. The 50-50 gross profit split with Sandoz allows us to share in the future success of KERYDIN, and Sandoz is responsible for all expense related to the commercialization of KERYDIN. We are looking forward to PharmaDerm launching KERYDIN, which we expect by the end of this quarter.

Now moving on to AN2728, since we initiated two pivotal Phase 3 clinical studies of AN2728 to treat patients with mild-to-moderate atopic dermatitis in March of this year, enrolment in both studies has been going very well. Just to remind of you of the trial design, we plan to enroll 750 patients in each study. Patients will be ages two and up, and have mild-to-moderate atopic dermatitis, involving at least 5% of their treatable body surface area. Patients will be randomized two-to-one, AN2728-to-vehicle, and will be treated twice daily for 28 days.

Overall, disease severity will be measured, using the Investigator Static Global Assessment, ISGA scale. The primary endpoint will compare the proportion of subjects in the AN2728 treated group to the proportion of subjects in the vehicle treated group will achieve, an ISGA score of clear or almost clear, with a minimum two grade improvement from baseline, after 28 days of treatment. Key secondary endpoints include a proportion of subjects in each group, achieving an ISGA of clear or almost clear at day 29, as well as time-to-treatment success.

As we have stated previously, we continue to expect to have top line data from both studies in the second half of 2015.

I will now turn the call over to Vince, who will provide more color on our view for the market opportunity for AN2728. Vince?

Vince Ippolito

Thank you, Paul. Before I talk about the potential market opportunity for AN2728, I want to mention that since we signed the deal with Sandoz, our commercial team has been working closely with PharmaDerm's commercial team, primarily to transfer our knowledge of the marketplace, and share relevant launch planning materials. We are pleased with our level of engagement, and anticipate a successful launch.

We look forward to working closely with our new partner Sandoz, to ensure the future success of the KERYDIN brand. We believe that any and all promotion, by all companies, that helps enhance the awareness of onychomycosis, will help build the overall market opportunity.

With PharmaDerm taking the deal on the commercial side of KERYDIN, our commercial team has intensified its focus on the market opportunity in mild-to-moderate atopic dermatitis, which will assist us in our overall planning for the potential approval and commercial launch of AN2728.

At this time, our view of the market opportunity for a safe and effective non-steroidal topical treatment for atopic dermatitis is based on our knowledge of the disease and how its treated today, as well as some interesting historical and recent treatment trends.

Atopic dermatitis is a chronic inflammatory skin disorder, characterized by an itchy red rash, which affects about 18 million people in the United States. The condition negatively impacts patient's quality of life, which drives them to seek treatment.

The severity of the disease is classified as mild, moderate or severe and 80% to 90% of the cases are considered mild-to-moderate. 85% of the cases present in patients aged five years. So given the chronic nature of the disease, and the prevalence in children, safety is an important feature in the consideration of treatment options.

Topical treatments are the mainstay of atopic dermatitis therapy. Prescription topical treatments include corticosteroids, topical calcineurin inhibitors such as Elidel and Protopic.

Systemic or phototherapy is used in a small number of severe or refractory cases, but these are still often used in conjunction with topical therapies. However, there are limitations surrounding currently approved topical treatments. Topical corticosteroids have side effects including skin thinning, acne, stretch marks and HPA axis suppression. Few are indicated for under the age of 12, and Protopic and Elidel have black box warnings, and are indicated as second-line therapy and not for use in patients under two.

Prior to the launch of Protopic and Elidel in 2001 and 2002, the only approved prescription treatments for atopic dermatitis were corticosteroids. The launch in early success of these drugs are helpful to understand the demand for non-steroidal treatment for atopic dermatitis.

First, as noted, they had an extremely successful launch. Within three years, the two drugs have almost 5 million combined total prescriptions in the United States, and this number was projected to grow significantly, until the FDA recommended that the labels for each product include a black box warning.

Second, the launch of these two products significantly influence patient's and physician's behavior, especially in the pediatric and adolescent patient population. First, there was a large increase in the number of pediatric and adolescent patients, who sought treatment for atopic dermatitis. Second, there was a decrease in the proportion of these patients, who are prescribed topical steroids.

An analysis of treatment trends during the years before and after the launch of Protopic and Elidel, demonstrates these changes. Between 1997 and 2000, that's before the introduction of Proptopic and Elidel, there were approximately 2.8 million pediatric and adolescent visits to physicians for atopic dermatitis. Between 2001 and 2004, that's after the introduction of Protopic and Elidel, there were approximately 4.6 million pediatric visits to physicians for atopic dermatitis, that's an increase of over 50%.

Second, to illustrate the change in physician prescribing behavior, as physicians were increasingly writing prescriptions for Protopic and Elidel, they were writing prescriptions for topical steroids less frequently.

Since the FDA recommended the black box warning for Protopic and Elidel in 2005, the combined annual prescriptions for Protopic and Elidel have decreased almost 80%. Without any new prescription alternative treatments, many physicians have returned to prescribing topical steroids for acute disease control.

In a survey of dermatologists conducted after the black box warning, 60% said they replaced prescriptions for Elidel and Proptopic with topical steroid. In some cases, they even restored to therapies such as chronic topical steroids, systemic corticosteroids and systemic immunosuppressants.

We believe that these trends demonstrate a need for a new treatment for atopic dermatitis, with a target product profile of AN2728, a safe and effective non-steroidal topical. Assuming AN2728 is approved, the lack of non-steroidal topicals in clinical development to treat mild-to-moderate atopic dermatitis, suggest that we have little competition from such products, as we look to the potential approval, and launch of AN2728.

The current clinical development pipeline for atopic dermatitis treatments, primarily consists of systemic therapies to treat moderate to severe and refractory atopic dermatitis, for patients who cannot be treated topically, which is only a small subset of the patients with this disease.

We will continue to conduct market research and prepare for our launch strategy for AN2728. But we believe this is a very attractive opportunity.

And with that, I am going to turn the call over to Geoff. Geoff?

Geoff Parker

Thanks Vince. Financial results for the second quarter are as follows; revenues were $2.9 million compared to $3.4 million for the second quarter of 2013. The decrease from last year is primarily due to a decrease in research funding from our collaborations with Lilly, GSK and not-for-profit organizations for our neglected disease programs, partially offset by an increase in revenues for research services performed under our contracts with the Bill and Melinda Gates foundation, and the Defense Threat Reduction Agency or DTRA.

Research and development expenses were $19.3 million for the second quarter of 2014, compared to $10.1 million for the same quarter in 2013. The majority of the increase is due to the initiation of our two pivotal Phase 3 trials, and our long term safety trial for AN2728, and costs associated with manufacturing drug supply, for certain regulatory activities, and clinical trials.

General and administrative expenses for the second quarter of 2014 were $7.1 million, compared to $5.1 million for the same period in 2013. The increase from the prior year period, is primarily due to increases in stock based compensation, salaries and benefits, and pre-launch sales and marketing expenses for KERYDIN, offset by a decrease in legal fees, due to the settlement and conclusion of our dispute with Valeant in October 2013.

Cash, cash equivalents and investments totaled $130.5 million at June 30, 2014, compared to $166.8 million at December 31, 2013. Investment balances at June 30, 2014 and December 31, 2013 includes short term and long term investments, as well as $3.9 million and $4.6 million of restricted investments respectively.

Now I will provide financial guidance for the remainder of the year. As previously discussed in our conference call to announce our Sandoz collaboration, we will not be providing guidance for KERYDIN sales. Of course, going forward, Sandoz will report sales for KERYDIN, and we will report our 50% share of gross profits one quarter in arrears.

Contract revenue related to our neglected disease partnerships is expected to continue to be approximately $3 million per quarter. R&D expense is expected to be in the range of $20 million to $22 million per quarter in the third and fourth quarters. Approximately $3 million of this R&D expense per quarter is directly related to our neglected disease partnerships, and is offset by contract revenue, which I just mentioned.

G&A expense is expected to be approximately $9 million per quarter. This G&A expense guidance is substantially lower than our prior guidance from our first quarter results call, given that Sandoz is now responsible for 100% of the KERYDIN sales and marketing expense.

Interest expense will continue to be approximately $1.1 million per quarter in 2014. We are continuing to analyze the appropriate method to record the revenue for the $40 million upfront payment, which we will receive in the third quarter, related to our agreement with Sandoz. At this time, we have not completed the analysis, regarding the recognition of this revenue. However, it is likely that we will amortize the upfront payment over a significant period of time, such as the life of the KERYDIN patents, which extend to 2027, before any expected patent term extension, under the Hatch-Waxman Act.

If this is the final conclusion to our analysis, this would result in approximately $700,000 in revenue related to this upfront payment in each of Q3 and Q4 of this year. We currently expect that we will have at least $110 million in cash at year end 2014. We believe that such funds, together with the $25 million launch milestone payment we expect to receive in January 2015, and our minimum profit sharing payment of $45 million which we expect to receive in 2016, will be sufficient to fund our operations through at least the end of 2016.

And now I will turn the call over to the operator for questions and answers.

Question-and-Answer Session


Thank you, sir. (Operator Instructions). And it looks like our first phone question will come from the line of Eric Schmidt of Cowen and Company. Please go ahead. Your line is now open.

Eric Schmidt - Cowen and Company

Good afternoon and thanks for taking my questions. I guess your competitor has thrown out some targets for Jublia sales in 2015 and 2016. I am wondering whether those are reasonable targets for KERYDIN, and whether you guys will be providing with your partner, any official guidance?

Paul Berns

Thanks Eric, its Paul, and I will have Geoff field that question.

Geoff Parker

So Eric, the short answer is no, at this time, we are not planning on providing guidance for KERYDIN sales. We are aware of the guidance that Valeant has given. I would comment though, that based on our payments from Sandoz. So the $25 million we received next year or expect to receive in Q1, we do not have a right to a gross profit payment, until Sandoz recognizes $50 million of gross profits in 2015, and in 2016, the $45 million minimum payment, obviously represents a $90 million total gross profit payment. So we would only recognize amounts above that to the extent sales of KERYDIN did exceed those numbers. But at this time, Eric, we are not expecting to provide any guidance on KERYDIN sales.

Eric Schmidt - Cowen and Company

Just to clarify, you are entitled to receive half of the gross profits in 2014 on a one quarter lag as you mentioned?

Geoff Parker

Yes. So whatever the gross profits are in 2014, we have a 50% share.

Eric Schmidt - Cowen and Company

And I missed, I am sorry Geoff, but I missed what you said on the SG&A expense guidance for this back half?

Geoff Parker

Basically, approximately $9 million per quarter.

Eric Schmidt - Cowen and Company

Okay. And last question in terms of the accounting on the gross profit share with Sandoz, is it just basically a single line impact on your top line or would you be recording any cost of goods associated with that? I guess I am asking how the transfer works?

Geoff Parker

Eric, we are still looking at that, but you should know that the cost of goods -- to the extent we did recognize any product revenue for transferring the drug to Sandoz, that would be offset directly by our cost of goods, so there would be no margin to that component.

Eric Schmidt - Cowen and Company

But you don't know whether your P&L will just show the net 50% gross profit that goes to Anacor, or the two lines offsetting one another?

Geoff Parker

We are still working that through.

Eric Schmidt - Cowen and Company

Okay. Great. Thanks a lot and good luck for the launch.

Paul Berns

Thanks Eric.


Thank you Mr. Schmidt. (Operator Instructions). And it appears gentlemen, there are no additional questioners in the queue. I'd like to turn the program back over to Paul Berns for any additional or closing remarks.

Paul Berns

Okay. Thank you, operator, and thanks to all of you for joining us this afternoon. We recognize that we have, as I noted in my opening comments, [indiscernible] just over -- little over two weeks ago with the announcement of our Sandoz collaboration; and again, we appreciate the time you took this afternoon to join us for our quarterly update, and look forward to speaking with you in the future. Have a good evening.


Thank you, gentlemen. And again, thank you ladies and gentlemen for your participation. This does conclude today's conference call. You may now disconnect and have a wonderful day.

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