Insys Therapeutics' (INSY) CEO Michael Babich on Q2 2014 Results - Earnings Call Transcript

Aug.12.14 | About: Insys Therapeutics, (INSY)

Insys Therapeutics Inc. (NASDAQ:INSY)

Q2 2014 Earnings Conference Call

August 12, 2014 11:00 AM ET

Executives

Lisa M. Wilson – Investor Relations, President, In-Site Communications

Michael L. Babich – Chief Executive Officer

Darryl S. Baker – Chief Financial Officer

Analysts

Michael E. Faerm – Wells Fargo Securities, LLC.

Jason N. Butler – JMP Securities LLC

Rohit Vanjani – Oppenheimer & Co

Operator

Good morning and welcome to the Insys Therapeutics' Second Quarter 2014 Earnings Call. This call is being recorded.

I would like to turn the call over to Lisa Wilson, Investor Relations for Insys Therapeutics. Please go ahead.

Lisa M. Wilson

Thank you, Good morning, and welcome to the Insys Therapeutics' second quarter 2014 earnings conference call. This is Lisa Wilsone of In-Site Communications, Investors relations for Insys. With me on today's call are Mike Babich, Chief Executive Officer and Darryl Baker, Chief Financial Officer of Insys.

This morning the company issued a press release detailing financial results for the three months ended June 30, 2014. This can be accessed through the Investor Relations section of the Insys' website at insysrx.com, and you can also access the webcast of the call from there.

Before we get started, I would like to remind everyone that any statements made on today's call that express a belief, expectation, projection, forecast, anticipation or intent regarding future events and the company's future performance may be considered forward-looking statements as defined by the Private Securities Litigation Reform Act. These forward looking statements are based on information available to Insys’ management as of today and involve risks and uncertainties including those noted in this morning's press release and Insys' filing with the SEC.

Such forward looking statements are not guarantees of future performance. Actual results may differ materially from those projected in the forward-looking statement. Insys specifically disclaims any intent or obligation to update these forward-looking statements except as required by law.

A telephone replay of the call will be available shortly after completion through Tuesday, August 26. You will find the dial-in information in today's press release. The archived webcast will be available for one-year on the Company's website at insysrx.com. For the benefit of those who may be listening to the replay or archived webcast, this call was held and recorded on August 12, 2014. Since then Insys may have made announcements related to these topics discussed, so please reference the Company's most recent press releases and SEC filings.

And with that, I’ll turn the call over to Mike Babich.

Michael L. Babich

Thank you, Lisa. Good morning everyone and thank you for joining us today. The second quarter of 2014 was our best quarter to date and we continue to drive topline growth and profitability. Net revenues increased to $55.7 million, up $36.9 million compared to the second quarter of 2013 or 196% growth year-over-year. Our net income for the quarter was $9.5 million more than double our net income of $4.5 million in the prior year quarter.

Non-GAAP adjusted EPS increased $0.58 per diluted share compared to non-GAAP EPS adjusted of $0.24 for the second quarter of 2013. This strong quarter provides us with a solid financial foundation upon which to advance our pipeline candidates and continue to grow the business. In addition to our strong financials, we reached several notable milestones in our pipeline programs that I will discuss in greater detail following Darryl's remarks.

With that, I'm going to ask Darryl Baker, our CFO, to review our second quarter financial results. Darrly.

Darryl S. Baker

Thanks, Mike. Total net revenue for the second quarter of 2014 was $55.7 million, which was an increase of 196% as compared with $18.8 million for the second quarter of 2013. Our primary revenue driver continues to be Subsys which contributed $54.6 million in net revenue during the second quarter of 2014. This represents a $36.1 million from Subsys revenues of $18.5 million in the prior year quarter.

Demand for Subsys as reflected in prescriptions written, was at its highest level since we launched, our repeat patient use continues to increase and we expect to see further growth in Subsys prescriptions going forward. We believe the TIRF, REMS data most accurately captures actual Subsys prescription and we are pleased to report continued double-digit growth in Subsys scripts. Gross margin was 88% for the second quarter of 2014, up 2% as compared with 86% in the prior year quarter. Once again, the improvement in gross margin is primarily attributable to the shift in revenue mix towards more Subsys sales, which accounted for 98% of total revenue in Q2 of 2014.

Sales and marketing expense was $14.1 million during the second quarter of 2014 compared to $6.3 million in the second quarter of 2013. The $7.8 million increase was due to the higher sales of Subsys, coupled with incremental product marketing expense.

As of June 30, 2014, we had 200 full-time sales and marketing personnel compared to 85 a year-ago. R&D expense was $9.2 million for the second quarter of 2014 as compared to $1.9 million for the second quarter of 2013. The $7.3 million increase was due primarily to pipeline development investment during 2014 and a non-cash equity compensation expense of $3.1 million in connection with the departure of our former Chief Medical Officer.

General and administrative expense was $10.7 million for the second quarter of 2014 compared to $2.8 million for the second quarter of 2013. The $7.9 million increase was primarily the result of costs incurred in connection with increased administrative infrastructure to support the growth of Subsys sales, expenses related to various legal matters and corporate costs associated with being a public Company.

Operating margin for the second quarter of 2014 was 27.3% compared with 27.6% in the second quarter of 2013, reflecting continued R&D and G&A investments. We recognize a $5.7 million tax expense for the three months ended June 30, 2014, reflecting an effective corporate tax rate of 37.8%. We recognized a small tax expense of $375,000 for the three months ended June 30, 2013.

Net income for the second quarter of 2014 was $9.5 million and diluted earnings per share was $0.26. This compares to net income of $4.5 million and diluted EPS of $0.17 for the second quarter of 2013. Non-GAAP adjusted net income $20.9 million or $0.58 per diluted share for the second quarter of 2014 compared to adjusted net income of $6.2 million or $0.24 per diluted share for the second quarter of 2013.

We continue to strengthen our balance sheet. On June 30, 2014, Insys had $75.3 million in cash, cash equivalents and short and long-term investments. Our working capital excluding cash and cash equivalents and short-term investments was $19.1 million. We have no debt and $121.5 million in stockholders equity as of the close of Q2, 2014.

And with that I will turn the call over to Mike.

Michael L. Babich

Thanks Darryl. I'm pleased with the milestone Insys has achieved during and since the second quarter of 2014. The most important of these was the submission earlier today of the New Drug Application for our proprietary Dronabinol Oral Solution for the second line treatment of chemotherapy induced nausea and vomiting or CINV and anorexia associated with weight loss in patients AIDS.

The Dronabinol Oral Solution candidate is orally administered liquid formulation of dronabinol a synthetic cannabinoid. We believe it’s more consistent bioavailability, faster onset of action and more flexible dose offer significant advantages over the current formulation of generic Marinol, which is only available in soft gels and capsules of 2.5 mg, 5 mg and 10 mg strings.

Our Dronabinol Oral Solution would also allow physicians to titrate more effectively to better address their individual patient needs. It is worth mentioning that although the Dronabinol capsule product is off patent and has had no promotion behind it for the past four years, third-party data provided by Symphony Health Solutions, indicates that ongoing growth in prescriptions at a rate of 4% annually.

We believe this growth is a result of heightened awareness of medical marijuana, which may not be tolerable by certain patients and for which the Dronabinol Oral Solution offers an alternative. With the advantage of our product over the capsules, we see a significant opportunity to penetrate this market assuming FDA approval.

Our initial focus of the Dronabinol Oral Solution will be to convert the existing Marinol market by targeting the current prescribers of the product. With 70% of generic Dronabinol prescriptions written by 8000 health care providers and prescriptions growing organically at a rate of 4%, the approval of this novel formulation creates an opportunity to satisfy growing unmet medical need.

We intend to scale our sales force to adequately cover the 45% of Dronabinol prescribers treating the AIDS population, as well as the remaining 55% who treat the CINV population. We have also achieved several milestones with our other pipeline candidates as well.

We received orphan drug designation from the FDA for our pharmaceutical Cannabidiol candidate for the treatment of two rare and severe forms of pediatric onset epilepsy. Lennox-Gestaut Syndrome and Dravet Syndrome these orphan drug designations are significant milestones, because they will provide us with a seven year period of U.S. marketing exclusivity if approved first.

Our pharmaceutical cannabinoid is over 99.5% pure cannabidiol; it is synthesized to be identical to the cannabidiol extract from cannabis and has produced in a controlled environment in Austin Texas. Cannabidiol is one of at least 60 active cannabinoids identified in cannibis, it is considered to have a wider scope of medical applications than THC and appears to have anti-convulsive action in animal models.

Importantly we have more than seven years of research in development experience in the pharmaceutical cannabinoid space, we manufacture pharmaceutical Dronabinol and pharmaceutical cannabidiol at our FDA inspected and DEA approved facility in Round Rock, Texas right outside of Austin.

We are near completion of our second facility to accommodate anticipated production demand for our Dronabinol Oral Solution and pharmaceutical cannabidiol products. We believe we are the only U.S. based company with the capacity to produce pharmaceutical cannabinoids in scalable quantities.

We see tremendous opportunities for our pharmaceutical cannabidiol and the treatment of epilepsy in both children and adults. Further more we are concurrently evaluating to use another indications such the treatment of peripheral neuropathy in taxol-treated patients; addiction in cocaine, heroin and opioids; and glioblastoma.

We are planning to file an IND for pharmaceutical cannabidiol in at least one epilepsy indication by the end of this year. Until Dronabinol Oral Solutions launches which we would expect to occur mid 2015 assuming approval, Subsys will continue to be our main revenue driver.

We believe the success to-date of Subsys is the result of a clinically superior product coupled with a focus market penetration strategy. Subsys offers patients several significant advantages over other available products, including the patient consult and administer Subsys in less than one minute; it has a rapid five minute onset of action and is available in the widest range of doses 100 micrograms to 1600 micrograms.

We continue to proactively work with managed care providers to ensure coverage for our patient population; we maintain Tier-3 coverage under nearly all major insurance plans. The majority of patients have access to Subsys to through their insurance plans. As you are probably aware Pharmacy Benefit Managers or PBMs continue to push companies that manufacture branded drugs where there is a likely generic alternative to try to lower their costs.

Where the branded manufacturers not willing to offer a rebate to reduce the PBMs costs amass that of the generic drug. The branded product may be excluded from the formulary. The TIRF class of products has been impacted by this trend. Express Scripts recently decided to exclude nearly all branded TIRF products including Subsys for its national preferred formulary effective January 1 of 2014. We believe this action was strictly an economic decision on the part of the PBM.

With that said, Subsys patients on the Express Scripts national formulary represent only about 5% of our scripts. And I would like to point out that our business model is not dependent upon formulary inclusion to be successful. In spite of Express Scripts’ decision, we believe that physicians will continue to prescribe Subsys and overall patient access to Subsys will not be compromised.

We will continue to reinforce our commitment to ensuring that patients have access to Subsys with physician and patient outreach. Therefore, we anticipate the Express Scripts’ decision will not reduce our overall level of prescriptions that Subsys revenue will continue to grow. We are also confident that our strong IP position will allow Subsys to remain a market leading product.

We have patent protection with two Orange Book listed patents and two notice of allowances that extend to 2028. We seek to further leverage our fentanyl spray technology to drive future revenue growth through Subsys label expansion and the development of additional products.

We are proud to announce that we successfully filed an IND for buprenorphine for pain and we intend to conduct an end of Phase II meeting at the end of fourth quarter 2014. We also remain on track to file INDs in buprenorphine with naloxone for opioid dependence, ondansetron for nausea and vomiting. In addition, we announced this morning that Insys intends to file an IND for Sildenafil for erectile dysfunction in 2014 as well.

As I’ve outlined Insys is extremely well positioned to continue building and delivering shareholder value. We are building on our expertise in pharmaceutical cannabinoids and the proven capability of our FDA and DEA regulated U.S. facility to manufacture pharmaceutical grade cannabinoids. We submitted the NDA for our Dronabinol Oral Solution which will leverage our sales force, diversifying our revenue stream and we are developing pharmaceutical cannabinoid for multiple indications.

We are simultaneously working to maximize the revenue generating power of our sublingual spray platform, including Subsys for current and potential new indications as well as the development of our new sublingual spray candidates that address very large markets where our delivery method can have a meaningful impact. We look forward to updating you on the progress that we make in these and other initiatives and thank you for your support.

With that we would like to open the call for questions. Operator, please go ahead with the instructions.

Question-and-Answer Session

(Operator Instructions) We’ll take our first question from Michael Faerm with Wells Fargo.

Michael E. Faerm – Wells Fargo Securities, LLC.

Good morning. Thanks for taking the question. Can you provide any sense of expected revenues or any other type of sense of performance of what you expect from Subsys in the remainder of the year?

Michael L. Babich

Sure. Good morning, Michael. As mentioned in the press release, we expect to see revenue growth in Subsys in both the third and the fourth quarter. I would also like to mention that our belief in the product long-term, we are confident that we can grow Subsys revenue and a double-digit growth in the out years starting in 2015 as well. Regarding guidance, we have made a commitment we did give guidance last quarter based on the inventory level explanation and also the change in accounting revenue. Going forward at this time, we just intend to state that we expect revenue growth for Subsys in Q3 and beyond.

Michael E. Faerm – Wells Fargo Securities, LLC.

Can you clarify when you say you expect revenue growth, does that mean sequential growth in 3Q and 4Q versus 2Q revenues?

Michael L. Babich

That is correct.

Michael E. Faerm – Wells Fargo Securities, LLC.

Okay. So above the $54 million in both 3Q and 4Q?

Michael L. Babich

Yes. That’s correct.

Michael E. Faerm – Wells Fargo Securities, LLC.

Okay, okay. Thank you. And one follow-up. On the Subsys gross to net, I noticed in your 10-Q that it was about 75% in 2Q, that's down from about 79% in 1Q. Could you talk a little bit about what you expect to see for gross to net trends going forward? Should that continue to migrate downward, and if so, what sort of a steady state do you eventually see that getting to?

Michael L. Babich

Sure. We believe that the low-to-mid 70% range reflected in the second quarter is what you should expect for the balance of the year. Obviously, several factors that play in our space including government and commercial rebates and we continue to work with third party payers to ensure that we can get product through the growing number of patients and doctors who write Subsys. So, we expect those levels in Q2 to be the most accurate going forward.

Michael E. Faerm – Wells Fargo Securities, LLC.

Great. And one last question. Your R&D spend, if I back out the stock compensation expense, looks like it went up from about $3.7 million to $5.7 million in this last quarter. Could you give a sense of what that trajectory might look like going forward?

Michael L. Babich

Sure. We think that trajectory will continue to rise; obviously with the plethora of IND filings, the NDA filing which took place this morning as well, so we think a gradual increase for the remainder of the year is appropriate.

Michael E. Faerm – Wells Fargo Securities, LLC.

Great. Thank you.

Michael L. Babich

Thank you, Michael.

Operator

We’ll take our next question from Jason Butler with JMP Securities.

Jason N. Butler – JMP Securities LLC

Hi, thanks for taking the questions. Just want to ask follow-up on the Subsys growth expectations. If we look at IMS data, the trend that we've seen so far in the end of 2Q and the beginning of 3Q would not support seeing quarter-over-quarter revenue growth. So you commented and you prepared remarks that your REMS data was more accurate than other data sources. So are you saying that the IMS trend is not what you're seeing in your data right now?

Michael L. Babich

Good morning Jason yes that is correct. We know many of you have access to the other data services, these services are useful on providing directional guidance on trend, but obviously as of late have not been most accurate. As a reminder, we do get real-time data from the REMS portal that is operated for the TIRFs class by McKesson. We are not seeing the same type of trends that IMS or WK is showing at this time.

Jason N. Butler – JMP Securities LLC

Okay that’s helpful. Also on Dronabinol, could you talk about what overlap there is what the current sales force and how many reps you might need to add when you launch the oral solution product?

Michael L. Babich

Absolutely, when you look at the writers of Marinol, divided with the two indications both in the CINV and the appetite stimulation, and it's about 45% of the scripts appear to be written by the pain doctors and oncologist for the nausea and vomiting. We obviously have a tremendous coverage there with our current sales force with Subsys and the additional prescriptions written in the AIDS community, you see that it's very focused, a lot of the high decile, decile eight through 10s are the folks who are treating the AIDS patients.

So we anticipate that there would be a gradual ramp-up in the sales force for that product. It's too early to tell what that number looks like, but I would say anywhere between 50 to 100 additional people in the commercial organization to launch that product, but we feel that our sales force that’s in the field right now has plenty of extra space in the bag to carry the Dronabinol Oral Solution for the pain doctors and the oncologists. So just supplementing to make sure that we're covering the AIDS physicians is our priority at this time.

Jason N. Butler – JMP Securities LLC

Okay, thanks. And then just on the pipeline as well for the Subsys, can you give us an update on your expected timeline for label expansion opportunities for Subsys?

Michael L. Babich

Sure. The one that's most paramount that we received the IND approval for in the first half of 2014 is utilizing Subsys in the preprocedural setting. Our conversations with the FDA indicate that the FDA is opened to looking at indications that are in a controlled environment such as a pain office or an oncology office or in the hospital space and we're currently working with the FDA to power that study effectively, so if we were able to show that we had separation from placebo, that we would get approval as a supplement to the NDA. So I would look for time lines at the next earnings call for a majority of those indications.

Jason N. Butler – JMP Securities LLC

Great. Thanks. And then just a last question for Darryl. Could you give us an indication of what the impact of wholesaler inventory stocking was during the quarter? You had said last quarter there were some destocking, so just wondering of the net revenue reported for the quarter, what benefit you got from stocking?

Darryl S. Baker

Yes Jason. The destocking that had happened at the end of Q1 did reverse in Q2; however inventory levels in the channel at the end of Q2 were consistent with inventory levels at the end of Q1.

Jason N. Butler – JMP Securities LLC

Okay. Thanks a lot for taking my questions.

Michael L. Babich

Thank you.

Operator

(Operator Instructions) well’ take our next question from Rohit Vanjani from Oppenheimer.

Rohit Vanjani – Oppenheimer & Co

Hi guys, thanks for taking the questions. I had a couple questions on the Express Scripts Formulary commentary that you made. So s there any sense of how many commercial lives are being reimbursed by Express Scripts? Is it more or less than kind of their market share out there?

Michael L. Babich

Sure. For the Express Scripts national preferred formulary there is 23 million patients in the national preferred formulary. So we are able to calculate the exact number of scripts that go through that national preferred formulary and that we were able to detect approximately 5% of scripts do go through that formulary itself.

Rohit Vanjani – Oppenheimer & Co

Okay. And then have you heard anything in terms of other PBMs and their plans to focus on Subsys?

Michael L. Babich

We have not at this time, obviously Caremark had a large exclusion list and we were not – and we remain in contact with all the insurance plans and PBMs going forward as well. Its important to note though that given the that Subsys and all the TIRFs require a prior authorization process, there is a point where companies are not incentivized to rebates because if a physician or a patient fights for use of the product itself that there is a barrier that prevents companies from getting into a rebate negotiation, but we continue to properly communicate with all the major plans and the PBMs to ensure proper access for Subsys.

Rohit Vanjani – Oppenheimer & Co

Okay. So there will be some – it sounds like there will be some impact of prescription going forward a small amount 5%, but when would wholesalers make those decisions on their buying patterns? Would that happen in 4Q 2014. Ahead of the 1/1/2015 exclusion date?

Michael L. Babich

I think the when we say 5%, I think that's what's deemed at risk, but we don't feel that 5% is an accurate reflection of what we may loose in 2015, because we know that patients and physicians will do a number of outreach to their plans, if they feel that they're having success on the product itself. In terms of the wholesalers, I would anticipate that that would probably get spread over Q4 and Q1. So we don't anticipate any impact from that at this time.

Rohit Vanjani – Oppenheimer & Co.

Okay. Is there any kind of cost that we can think of as you kind of ramp up the campaign to get Subsys back on Formulary? How much incremental that would be in 2014 or 2015?

Michael L. Babich

No, I don't think it would be anything worth nothing.

Rohit Vanjani – Oppenheimer & Co.

Okay. All right. Thanks for the questions. I appreciate it.

Michael L. Babich

Thank you.

Operator

And at this time, I would like to turn the call back to Mr. Mike Babich for closing comments.

Michael L. Babich

Thank you all for joining our second quarter earnings call and look forward to speaking with you next quarter. Thank you.

Operator

This does conclude today's conference. We thank you for your participation.

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Insys Therapeutics (NASDAQ:INSY): Q2 EPS of $0.58 beats by $0.28. Revenue of $55.7M (+196.0% Y/Y) beats by $2.93M.