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BioSpecifics Technologies Corp. (NASDAQ:BSTC)

Q2 2014 Results Earnings Conference Call

August 11, 2014 4:30 PM ET

Executives

Beth DelGiacco - Stern Investor Relations

Tom Wegman - President

Pat Caldwell

Analysts

Ram Selvaraju - Aegis Capital

Operator

Good day. And welcome to the BioSpecifics' Second Quarter Financial Results Conference Call and Webcast. All participants will be in listen-only mode. (Operator Instructions) After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference call over to Ms. Beth DelGiacco of Stern Investor Relations. Ms. DelGiacco, the floor is yours ma’am.

Beth DelGiacco

Good afternoon, everyone. And welcome to BioSpecifics' second quarter 2014 financial results conference call. Today, I'm joined by Tom Wegman, the President of BioSpecifics, as well as Pat Caldwell. Tom will provide you with a corporate update and a financial summary for the quarter and after that we will open the call for your questions.

Before we begin, let me remind you that during today's call BioSpecifics will make forward-looking statements within the meaning of and made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

All statements other than statements of historical facts are forward-looking statements. Forward-looking statements include statements concerning among other things, Auxilium's option to license rights in the human lipoma indication and future payments related to human lipoma, data from the new phase clinical trial in human lipoma and expected patient enrolment and timing to complete patient enrolment, timing for data from the preclinical study of CCH in uterine fibroids, the future growth potential in frozen shoulder and cellulite, and timing for reporting topline data from clinical trials.

The continued commercial success of XIAFLEX for Peyronie's disease and Dupuytren's contracture, the number of patients diagnosed at Peyronie's disease and the potential for sales, timing for approval of XIAPEX by the EMA for Peyronie's disease, the timing of regulatory approvals in Canada and Australia, the timing for approval by the PMDA in Japan for XIAFLEX for the treatment of Dupuytren's contracture and potential milestone payments related to such approval, continued momentum of the initial launch strategy for XIAFLEX, continued demand for XIAFLEX to Peyronie's disease including viral shift, the potential for the XIAFLEX label to be expanded in the Dupuytren's contracture indication for MULTICORD and the potential effect on the market opportunity and timing for FDA approval, the likelihood that Auxilium will exercise its opt-in rights for canine lipoma and future payments from Auxilium related to canine lipoma, and the impact of new Board members and the inclusion on the Russell 300 Index.

In some cases these statements can be identified by forward-looking words such as believe, expect, anticipate, plan, estimate, likely, may, will, could, continue, project, predict, goal, the negative or plural of these words and other similar expressions. These forward-looking statements are predictions based on BioSpecifics' current expectations and its projections about future events.

There are a number of important factors that could cause BioSpecifics' actual results to differ materially from those indicated by such forward-looking statements including the ability of Auxilium and its partners to achieve their respective objectives for XIAFLEX, XIAPEX or CCH, the uncertainties is inherent in the initiation of future clinical trials.

The market for XIAFLEX or XIAPEX in a given indication being smaller than anticipated, the potential of CCH to be used in and an initiation and outcome of clinical trials for additional indications, the receipt of any applicable milestone payments from Auxilium, the timing of regulatory filings and actions, and other risk factors set forth in BioSpecifics' annual report on Form 10-K for the year ended December 31, 2013, its quarterly reports on Form 10-Q for the quarter ended March 31, 2014 and June 30, 2015 and it’s current report on Form 8-K as filed with the Securities and Exchange Commission.

All forward-looking statements made on this call are made as of the date hereof, and BioSpecifics assumes no obligation to update these forward-looking statements.

I will now turn the call over to Tom.

Tom Wegman

Good afternoon, everyone. Several notable updates to share with you this afternoon on our own pipeline development in the lipoma indications and also the exciting commercial progress that is made during the second quarter for XIAFLEX, particularly in Peyronie’s disease in the U.S., as well as in Dupuytren’s contracture.

Following my review of these exciting developments, we will provide a run down of upcoming milestones, we can expect in the reminder of 2014 and early 2015, and we will also discuss a few corporate updates from the second quarter and some more recent ones.

As we reported last week, the first patient was injected in our placebo controlled Phase II clinical trial of CCH for the treatment of lipoma. This is a very exciting development because this trial qualifies as an optimum study, which means that based on our full analysis of the final data Auxilium will have the option to license, development and marketing right to the human lipoma indication.

This would transfer responsibility of all future development cost to Auxilium and also trigger an optimum payment and potential future milestones, and royalty payments from Auxilium to us.

We had previously reported positive data from the Phase II clinical of CCH in the same indication earlier this year. Highlighting that CCH reduce the lipoma size as measured by caliper, we hope to be able to reproduce these results in this new trial.

The Phase II clinical trial that initiated last week is randomized double-blind placebo controlled study to assess the safety and efficacy of CCH for the treatment of lipoma or encapsulated benign fatty tumors often detected as bulges under the skin.

The study will be conducted at two centers in the U.S. and is expected to enroll 20 adult men and women who present with at least two benign lipomas of similar size. The patients will be randomized to receive either CCH or placebo and we will two lipomas treated in immediate succession.

The partner endpoint to the trial was the reduction in the measurable surface area of the target lipomas as determined by caliper six months post injection. We expect to complete patient enrolment in the trial during the first quarter of 2015.

We also made progress in the canine lipoma indication this past quarter. In July 2014, we submitted the final study report to Auxilium for Chien-804 our Phase II study of CCH in canine lipoma, which started the clock to the 120 day optimum period for Auxilium to decide whether to exclusively license this indication.

As with the human lipoma indication, the decision to exclusively license CCH or for canine lipoma Auxilium would assume responsibility for future development costs and also provide us with an upfront optimum payment and potential future milestones and royalty payments.

To round up my updates on a proprietary pipeline, I will also mentioned that we are progressing with pre-clinical studies with Duke Medicine of CCH in the uterine fibroids indication and we expect to report data from these studies at the Mechanotransduction in the Reproductive Tract Meeting schedule for October 14th and 15th in Durham, North Carolina.

As you can see, we have been busy in recent months progressing CCH forward into potential new indication that we manage ourselves. It is vital to point out that one of the many reasons so we can continue to study CCH in new indications is due to the commercial success of XIAFLEX.

CCH is currently market in the U.S. by Auxilium as XIAFLEX or Dupuytren’s contracture and Peyronie’s disease, and in the EU by Auxilium’s regional partner Swedish Orphan Biovitrum or Sobi as XIAPEX for Dupuytren's contracture.

In June 2014, Sobi filed to an expansion the label for XIAPEX with the European Medicines Agency or the EMA to include the indication of Peyronie's disease as stated in the earnings call last week. Auxilium anticipates the marketing approval in this indication could be granted as early as late in the first quarter of 2015.

Auxilium has two other partnerships for the potential future marketing of XIAFLEX for Dupuytren's contracture and Peyronie's disease. Upon necessary regulatory approvals in these regions, these partnerships include Actelion in Canada and Australia where XIAFLEX is approved the Dupuytren's contracture and Asahi Kasei in Japan.

We were pleased to hear last week that Asahi Kasei successfully submitted a regulatory application to the Japanese Pharmaceutical and Medical Device Agency or PMDA for XIAFLEX for the treatment of Dupuytren's contracture and the PMDA review is expected to be completed by mid-2015. The regulatory submission by Asahi Kasei triggered a $10 million regulatory milestone payment to Auxilium of which we will receive 5%.

The geographic expansion of the XIAFLEX label is very compelling, particularly given the growth we have seen commercially with the product in the U.S. As reported by Auxilium last week, U.S. XIAFLEX revenues for the second quarter of 2014 reached $26.3 million, which is a 75% increase from the second quarter of 2013.

This increase was primarily driven by the launch of XIAFLEX and Peyronie's disease in January 2014 making the only FDA approved treatment proven effective for this condition.

Auxilium also updated the total number of patients believed to be diagnosed with Peyronie’s disease in the U.S. The new assessment is based on claims filed in 2013 which shows that they were 95,000 patients diagnosed with the disease last year.

We have previously presented the number of diagnosed patients to be between 65,000 and 120,000. So this new assessment will allow us to more accurately depict the market potential. Auxilium stated that this new data on the population of 95,000 allows for a very significant increase of potential sales over the current levels.

Now onto launch metrics, demonstrating the positive momentum seen in April, May and June of this year. As you recall, the initial launch strategy targeted approximately 400 physicians who performed 90% of current surgeries for Peyronie’s disease, discovered about 5,000 to 6,500 patients who received surgery or verapamil injection each year.

As part of the REMS program required by the FDA, physicians must be certified to offer XIAFLEX. To achieve early REMS certification in a disciplined and effective way, Auxilium focused on a subset of these 400 physicians which ended up being 235 top targets. They have now expanded well beyond this first small group due to market and patient demand. And since launch, over 1100 physicians and 650 sites have been REM certified, including 88% of those initial 400 top target urologists.

On the reimbursement front, 3,535 Peyronie’s disease patients have submitted for reimbursement through the second quarter as compared to 2,373 patients who had submitted as of April 30, 2014. This is an increase of 49% in just two months. The Auxilium Advantage program designed to assist patients in securing reimbursement approvals and streamlining the deep treatment experience has been very effective.

In 53% of patients where reimbursement decisions have been made, Auxilium reported an impressive 93% approval rating and improvement from previously reported 86% rate at the end of the first quarter. All eight of the Medicare administrative contractors or MACs have confirmed coverage for XIAFLEX for Peyronie’s disease as well as 29 major commercial insurers with some even instituting former policy changes.

Perhaps the most impressive metric was the dramatic uptick in the number of XIAFLEX vials shipped to physicians for Peyronie’s disease patients. The sales launch has exceeded Auxilium’s expectations and we are delighted with the recent data concerning the short trajectory of the sales ramp.

In total, since launch, Auxilium has shipped 3,350 vials. This breaks down to 598 for the entire first quarter, followed by 565 in April, 775 in May and then almost double that in June with 1,412 vials shipped. Auxilium also stated that the vast majority of these shipments were for specific patients rather than for stocking purposes by the physicians. This is another indication of the growing patient demand and we look forward to seeing how this momentum continues throughout the remainder of the year.

Now moving on to updates on XIAFLEX in Dupuytren's contracture. Auxilium continue to report steady growth of XIAFLEX or Dupuytren's contracture while sales increased 7% in the second quarter of 2014 as compared to the same period in 2013. Overall XIAFLEX market share in the U.S. of all procedures for Dupuytren's contracture has reached 29%. Additionally, over the last 12 months, there was approximately 5% increase in procedures indication -- indicating growing awareness and demand.

Beyond commercial growth in Europe and Japan, we also look forward to potential label expansion here in the U.S. The action date under Prescription Drug User Fee is October 20, 2014 by which the FDA is expected to decide on the supplemental Biologics License Application or sBLA submitted by Auxilium to include the treatment of multiple Dupuytren's contracture cords concurrently.

As we have stated before, it is believed that 35% to 40% of Dupuytren's contracture surgeries in the U.S. are performed to treat two or more cords concurrently. This expansion potentially ramp up the vial sales even further in this indication and add to the growing XIAFLEX revenues in both approved indications.

The financial benefit we realized from our partnership with Auxilium is very satisfying. We are excited about the future growth potential to develop and license new indications in addition to the pipeline programs that Auxilium is managing in frozen shoulder syndrome and cellulite, which I’ll update you on now.

The studies are ongoing in both indications with Phase 2a study of CCH for the treatment of cellulite is progressing ahead of schedule and topline data for the randomized double-blind multi-dose trial are now expected in the fourth quarter of this year. For the frozen shoulder indication, topline data from the double-blind placebo-controlled Phase 2b study are expected in the first quarter of 2015.

These updates remain the same from last quarter. But we would like to reiterate our excitement to see these data and better lose today how CCH may benefit new populations of patients.

Before we move into our financial results, I want to quickly update you on some exciting corporate developments. First, we will notify at the end of June, we were added to Russell 3000 and Russell Global Indexes as part of Russell Investments' annual reconstitution.

We always prioritize dosing shareholder value. We hope that this inclusion may improve our general liquidity in our stock. We also announced last week some changes to our Board of Directors. First Henry Morgan will be retiring from the Board after 24 years of offering excellent guidance to the company. He will remain a trusted consultant.

To replace his seat, we appointed Max Link to the Board as a Class II director effective as of August 4th and a Chair of the Compensation Committee and as Financial Expert on the Audit Committee, effective upon Mr. Morgan’s retirement on August 15th. Dr. Link has been actively involved as a Director in numerous marquee companies in the biopharmaceutical and medical device fields including Discovery Laboratories, Celsion Corporation, CytRx and the Alexion Pharmaceuticals where has served as a Director since 1992 and is the Chairman since 2002.

He also previously served as Chairman and CEO of Centerpulse, a medical implant company which was acquired by Zimmer, CEO of Corange Limited, the holding company for Boehringer Mannheim, Boehringer Mannheim Diagnostics and Deput International and from 1992 to 1993, was President -- was Chairman of Sandoz Pharma where he served as CEO as a member of the Executive Board of Sandoz for five years.

We feel very fortunate to have some one join our Board with such significant experience. I believe he will be crucial to our growth as we progress our pipeline and hopefully broaden our partnership with Auxilium through the licensing and other additional indications.

With that, I will now review our financial results for the second quarter of 2014. As a reminder, we recognized royalties and mark-up on cost of goods with one quarter layout. Therefore, we will be reporting revenues from sales which occurred in the first quarter of 2014.

In this afternoon’s press release, we reported a net income of $0.6 million for the second quarter of 2014 or $0.09 per basic share and $0.08 per diluted share compared to net income of $1 million, or $0.16 per basic share and $0.15 per diluted share for the same period in 2013.

Total revenue for the second quarter 2014 was $2.7 million, compared to $3.3 million for the same period in 2013, which represents a decrease of approximately 19%. Royalty and mark-up on cost of goods sold for the second quarter of 2014 were $2.6 million, compared to royalty, mark-up on cost of goods sold, and earn-out revenue of $3.2 million for the same period in 2013.

Royalty and mark-up on cost of goods sold revenues recognized under agreement with Auxilium for the second quarter of 2014 were $2.6 million, compared to $1.7 million for the same period in 2013. This represents an increase of approximately 53%.

Licensing revenue consists of licensing fees, sublicensing fees and milestones. For the second quarter of 2014, we recognized total licensing and milestone revenue of approximately $17,283 and $44,880 respectively. Certain licensing fees recognized are related to the cash payments received on your agreement with Auxilium in prior years and amortized over the expected development period.

Research and development expenses for the second quarter of 2014 were $0.3 million compared to $0.5 million in the same period in 2013. General and administrative expenses for the second quarter of 2014 were $1.5 million compared to $1.2 million for the same period in 2013.

Income tax expenses for the second quarter of 2014 were $0.3 million as compared to $0.5 million for the same period in 2013. As of June 30, 2014, we had cash and cash equivalents and investments of $16.6 million compared to $16.9 million on March 31, 2014.

We continue to be in a very solid financial position, which will allow us to advance our own pipeline, studying new potential indications for CCH. We feel very excited about our own programs and those in which we are partnered with Auxilium and look forward to several upcoming events, which I’ll quickly review before we turn the call over for questions.

These include data from our preclinical studies with the medicine of CCH in uterine fibroid indication in October 2014. Auxilium’s decision during the 120-day opt-in period on whether to exclusively license CCH in the canine lipoma indication based on the whole study report of Chien-804.

The action date of October 20, 2014 by which, we expect the FDA to decide on the sBLA to expand the label of XIAFLEX and Dupuytren's contracture. Topline data in the fourth quarter of 2014 from the Phase 2a study of CCH in cellulite being run by Auxilium. Complete enrollment in the first quarter of 2015 in the placebo-controlled Phase 2 clinical trial of CCH in human lipoma.

Topline data in the first quarter of 2015 from the Phase 2b study of CCH in frozen shoulder syndrome being run by Auxilium, a decision as early as late in the first quarter of 2015 by the EMA on whether to approve the Marketing Authorization Application submitted by Sobi for XIAPEX in Peyronie's disease. And finally, a decision in mid 2015 by the PMDA on rather to approve XIAFLEX to our marketing in Japan for Dupuytren's contracture.

And now I would like to open up the call for your questions.

Question-and-Answer Session

Operator

Thank you, Sir. (Operator Instructions) Our first question comes from Ram Selvaraju of Aegis Capital. Please go ahead. Again that comes from Ram Selvaraju, your line might be muted.

Ram Selvaraju - Aegis Capital

Hello. Can you hear me?

Operator

Yes.

Tom Wegman

Yes. I can hear you now, Ram.

Ram Selvaraju - Aegis Capital

Okay. Just a couple of housekeeping questions if I may. Firstly, can you just recap for us what you anticipate to do on the share buyback front for the remainder of this year and potentially going into early next year just in terms of share buyback activity? And then secondly, if you could summarize for us, a, the stock-based compensation in this quarter and b, how you anticipate that potentially evolving going forward obviously, probably as negligible that I just wanted to make sure that I check that?

And then on the clinical development front, can you give us an idea of what might happen if Auxilium decided not to option in the right to develop XIAFLEX in lipoma upon the conclusion of this recently initiated Phase 2 human clinical study. What would you envisage would be your strategic option for that point? Thanks.

Tom Wegman

Okay. So Ram, as we said before we have approval to buy back up to 2 million shares. And I mean, we were doing that pretty aggressively. The only thing I would caution is at some points, depending on open windows or whether windows can be closed for various purposes. It’s difficult to buyback at those points. But given open windows and everything okay, we will continue to go forward on our buyback -- buyback aggressively, I think, which we’ve seen. But it is subject to windows, which do close from time to time.

On the stock based compensation, that’s probably a better question for Pat Caldwell. Pat, if you want to handle that?

Pat Caldwell

Could you repeat the question, Ram.

Ram Selvaraju - Aegis Capital

Yeah. What was the amount of stock-based compensation recorded in the quarter and how do you anticipate that evolving going forward?

Pat Caldwell

Yes. Stock-based compensation was actually relatively small this quarter, was only approximately $10,000. Going forward, we expect with the addition of the new Board member in Max Link that there will be a stock-comp charge going forward. But as far as existing employees and Board members and most of that -- and consultants, most of that stock-compensation has already been charged to the income statement.

Ram Selvaraju - Aegis Capital

Okay. That’s very clear. And then, Tom, just your strategic options on the lipoma indication front?

Tom Wegman

So, if I understood the question, Ram. I mean, are you asking about both canine and human…

Ram Selvaraju - Aegis Capital

Just about human.

Tom Wegman

Okay. So, just on human, well, it’s, in the event that Auxilium shows not to obtain, we would have the opportunity to find another partner. And I think, well, I am not going to handicap whether or not Auxilium will optimum or not. I think that lipoma -- I believe that it’s an excellent indication, it’s very prevalent. So, if Auxilium choose not to do it for whatever reason, I am sure, we would be able to partner with somebody else on that indication. So I think it’s a very worthwhile indication.

Ram Selvaraju - Aegis Capital

Just to clarify, I guess, they don’t have the right to come back to you after this Phase II and ask you to do another Phase II and continue to like defer their option until you do another Phase II, right. They have to obtain after this Phase II and if they obtain, you have the right to license it to someone else, is that correct?

Operator

Yeah. I apologize, Mr. Caldwell. Mr. Selvaraju, we currently just lost Mr. Wegman location, so we just had to contact him back momentarily.

Ram Selvaraju - Aegis Capital

Okay.

Operator

I do apologize. We’re trying to reconnect with Mr. Wegman location. Again, Mr. Caldwell just stay on the line sir.

Pat Caldwell

Yes.

Ram Selvaraju - Aegis Capital

I don’t need to hold up the question-and-answer queue. I can jump back in later.

Tom Wegman

Ram, I’m sorry. I got cutoff some reason, that was..

Ram Selvaraju - Aegis Capital

So I just wanted to clarify, if they don’t obtain after this Phase II study, they can ask you to do another Phase II study. You would then have the right to license it to someone else?

Tom Wegman

We would have the right to license it to someone else, that’s true. They have -- just to clarify, the agreement exactly. What they have is the second light of refusal. So if for instance, let say, we -- they said they don’t want to obtain and then we go to some another partner and they offer us a great deal, like just say for example, Auxilium would have the right to top that bid shall we say. So it’s almost a second right of the refusal on that. Just to clarify the exact agreement. But I don’t see, no, Auxilium is already -- Auxilium already acknowledged this is an optimum trial sometime ago. So I don’t see that as being a realistic possibility what they say, it wasn’t.

Ram Selvaraju - Aegis Capital

Okay. Thank you. That’s very helpful.

Tom Wegman

You’re welcome.

Operator

(Operator Instructions) Well, at this time, we have no further questions. We’ll go and conclude our question-and-answer session. I would to turn the conference back over to management for any closing remarks. Gentlemen?

Pat Caldwell

Okay. This concludes this afternoon conference call. I thank everyone for their interest and we look forward to updating you on our progress in coming months.

Operator

And we thank you sir and to the rest of management team for your time today also. Again, the conference is now concluded. We thank you all for attending today's presentation. At this time, you may disconnect your lines. Thank you and have a great day.

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