Keryx Biopharmaceuticals' (KERX) CEO Greg Madison on Q2 2016 Results - Earnings Call Transcript

Keryx Biopharmaceuticals, Inc. (NASDAQ:KERX)

Q2 2016 Earnings Conference Call

August 1, 2016, 08:30 ET

Executives

Amy Sullivan - VP, Corporate Development & Public Affairs

Greg Madison - CEO

Scott Holmes - CFO

Analysts

Reni Benjamin - Raymond James

Whitney Ijem - JPMorgan

Andrew Berens - Morgan Stanley

Mike King - JMP Securities

Stephen Willey - Stifel Nicolaus

Yigal Nochomovitz - Citigroup

Jason Kolbert - Maxim Group

Chris James - FBR

Matt Kaplan - Ladenburg Thalmann

Operator

Good morning. My name is Hope and I will be your conference operator today. At this time, I would like to welcome everyone to the Keryx brand conference call. [Operator Instructions]. Ms. Amy Sullivan, Vice President of Corporate Development and Public Affairs, you may begin your conference.

Amy Sullivan

Thank you, Hope. This is Amy Sullivan. Good morning and thank you for joining us on today's call. We issued a press release this morning announcing our second quarter financial results and the unexpected supply interruption concerning Auryxia. On the call with me today are Greg Madison, our Chief Executive Officer and Scott Holmes, our Chief Financial Officer. After the prepared remarks, we will open the call for Q&A.

Before beginning the call, please be advised that various remarks that we make about our future prospects, expectations and plans constitute forward-looking statements for purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995. Keryx cautions that these forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from those indicated. We encourage you to review of all the risk factors associated with our business as filed in our 2015 10-K and subsequent 10-Q and SEC filings as well as the forward-looking statements section of our press release issued this morning.

In addition, during this call, we will discuss certain non-GAAP financial measures. For more information regarding these non-GAAP financial measures and their comparable GAAP financial measures, please see our press release issued this morning and available under the investors section of our website at www.Keryx.com. This conference call is being recorded for audio rebroadcast on our website, where it will be available for the next 15 days. All participants on this call will be in a listen-only mode.

I now turn the call over to Greg.

Greg Madison

Thank you, Amy and hello everyone. As you can see by our press release, we're coming off a very strong second quarter. Unfortunately, we're now in the position that the great work of our field sales team will be disrupted due to an imminent supply interruption. First and foremost, today, we're thinking about the dialysis community and those patients currently taking Auryxia who will be impacted by this unexpected supply interruption. We understand the benefits that Auryxia can bring to patients and their healthcare providers and we're going to work diligently to make Auryxia available again as soon as possible. We anticipate having adequate supply during the fourth quarter.

It is important to note that the supply interruption of Auryxia is due to a production related issue. It does not affect the safety profile of currently available product. As we work through this interruption, our field sales and medical organizations will stay highly engaged with the kidney dialysis community which we believe will allow us to emerge from this interruption in the best possible position.

Now, let me go into a bit more detail on some of the key areas of the supply interruption and steps we're taking to rebuild supply. We currently have a single source drug product contract manufacturer or CMO. This manufacturer turns active ingredients or API, of Auryxia into tablets and they have been successfully producing commercial batches for approximately two years.

In past few months, we began experiencing difficulties converting active pharmaceutical ingredients or API, to finish drug product which resulted in variable yields, as compared to our historical rate. We had been management supply levels efficiently even with increased demand generated by our field team in the second quarter. Last week our CMO notified us that a production issue reoccurred in their latest run and we agreed to stop production to identify the cause. As a result of halting production combined with the previous low yields and increased demand, we've exhausted our reserves of finished drug tablets. At this time, current inventories held by wholesalers and direct customers will not be sufficient for patients to continue filling prescriptions.

In order to remedy the current situation, there are two main priorities. First, we're going to continue to work with our CMO to resolve the issue and get back online as quickly as possible. And second, we plan to bring online an additional CMO which is under review with the FDA. To give you a little bit of background, in 2014, we began the process to bring a second CMO online. The CMO has already produced Auryxia and has several production runs scheduled. The finished tablets already on hand coupled with the additional production runs scheduled with this manufacturer we believe would allow us to come back to the market during the fourth quarter pending FDA approval of the site. The FDA has assigned us a PDUFA date of November 13.

We take our responsibility to patients and the treatment community very seriously and recognize the impact that this unexpected interruption of supply will cost for patients and their healthcare providers. We utilize our field-based teams during the interruption to continue to support these healthcare providers and their patients with hyperphosphatemia.

I will now turn the call over to Scott.

Scott Holmes

Thanks Greg. Given the strong second quarter we reported today, I was looking forward to being in a position to raise Auryxia guidance for the year. Instead, with the anticipated loss of revenue due to the supply interruption, unfortunately we're pulling our 2016 financial guidance. Let me start by reviewing high-level financial results for the quarter. You can review the detail in our press release and our 10-Q, once filed.

For the second quarter, we reported $8.3 million in Auryxia sales driven by 44% growth in Auryxia prescriptions. Our IMS capture rate for the quarter was approximately 55%, so 45% of our total scripts came from non-IMS reporting sources. Finally, our gross to net adjustment for the quarter was approximately 34%. Total operating expenses, excluding cost of goods and license expense, for the quarter were $27.2 million of which $4.8 million were not cast in nature, thereby resulting in total cash operating expenses of $22.4 million. While we have withdrawn our financial guidance today, we expect that cash operating expenses for the remainder of 2016 will be relatively consistent with the past two quarters.

Cost of goods sold for the quarter was $5.1 million and included $1.9 million in write-offs associated with the aforementioned manufacturing difficulties. We ended the quarter with approximately $156 million in cash, having burned $15 million in the quarter. We believe we're well-positioned financially to manage through the supply interruption. Our strong balance sheet and appropriately aligned cost structure will ensure that we continue to make the necessary investments to emerge from this unexpected event in the best possible position.

I'll now hand the call back to Greg.

Greg Madison

Thanks Scott. The results in the second quarter show us the impact the expanded sales force who had not yet hit full stride can have in raising awareness of Auryxia and driving uptake in demand. For this reason, despite the unexpected interruption in supply, I have strong confidence in the future of Auryxia and the future of Keryx. We have a dedicated and talented team, both in the field and in our home office, who will do every possible to ensure that we emerge from the supply interruption in a strong position to move forward. As we work to rebuild supply, we will maintain a high level of engagement with our customers and continue to press ahead with our work to submit the sNDA to expand the label for Auryxia.

Operator, we will now open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question comes from the line of Reni Benjamin with Raymond James.

Reni Benjamin

Maybe just a couple of questions. One, can you help us understand exactly how imminent let's say the interruption is going to occur? And can you give us any sort of color as to how scripts might behave. So for example, does it go straight to zero? Is there enough inventory with wholesalers that you see some sort of a 50% or 80% decline? Any sort of color as to how we should map out third and fourth quarter?

Greg Madison

I will take the first part and then turn it over to Scott for the second part there. When we say imminent, right now, we don't have any inventory remaining at our 3PL. So there is inventory available still at the wholesalers. It's always difficult to estimate exactly how much is out there, but based on our estimates and depending on the wholesaler, it's generally around one to two weeks. So you could see patients get interrupted in supply as early as late this week, early next week and the coming weeks after that depending on when they want to refill their prescription. Scott, do you want to answer the second part of that?

Scott Holmes

Sure. So, with regards to what we can expect for revenue in the third quarter here, obviously we had a full month of July. As Greg pointed out, we have probably a week to two weeks still in the channel of sales that we would recognize in the month of August. If you recall, our revenue recognition is on a script basis, so there was inventory in the channel as well that will come through, so therefore a portion, if not all, but like a significant portion of the deferred I would expect to come through in the quarter as well.

Reni Benjamin

Okay. And then maybe related to that, you mentioned a production issue. Can you give us a little bit more color as to what is the production issue, how do you plan on resolving it? And I guess, in the fourth quarter when you're returning to market, is that primarily based on the second CMO coming online or is it you have to have the production issue resolved so that the first CMO will pretty much be taking care of the demand?

Greg Madison

We have two pathways that we're looking at right now. As we said in our prepared remarks, first is still to work with the current CMO, identify what the issue is and the root cause, fix that issue and get them back online as quickly as possible. Additionally, we have the second CMO that we planned for as far back as early as a couple years ago that will be coming online. They've already produced Auryxia tablets. They're going to continue their production runs. And as we mentioned, we do have a PDUFA date there of November 13.

So as we look at two different pathways to get us back online here as we project going forward, we expect we will come back during that fourth quarter. As far as any additional color on the production related issue, we don't. We have tried to be open and give a lot of color here. I think what we've done now is, since we've halted production, the key step is to step back, really identify what the issue is and what the root cause is, if that we can get that fixed and again get them back online as quickly as possible.

Operator

Your next question is from the line of Whitney Ijem with JPMorgan.

Whitney Ijem

I guess the first question is will this supply interruption or manufacturing issue have any impact on the non-dialysis filing timelines?

Greg Madison

No, it will not.

Whitney Ijem

Okay. And then when supply is reinstated, I think, so, by my math, COGS in the second quarter was about 39% when you back out the $1.9 million write-down. I'm guessing that kind of had to do with the lower yield, but how should we be thinking about COGS going forward when it is reinstated?

Scott Holmes

This is Scott. You're correct in your percentages throughout and as well as the reasoning. Certainly the lower yields have an impact on that. I think, if you recall when we talked about 2016, we talked about COGS in the mid-20%. We knew we were going to have some fluctuations from quarter to quarter, so certainly the lower yields were not expected, but slightly higher COGS in the second quarter was expected based on the timing of material that's actually flowing through just given when it was produced and when it ultimately flowed through. So we did expect slightly higher COGS in the second quarter. I would anticipate, as we move forward, to still be, for the foreseeable future, to still be in that 20% to 25% range on cost of goods overall.

Whitney Ijem

And then I guess last question, you mentioned the sales force will still be out there supporting patients. Is there any kind of promotion going on during this interruption or is it just kind of servicing the existing patients and clients?

Greg Madison

The sales team, they've done a tremendous job and obviously are a critical part of our strategy that we ensure that we come through that's a strong position. Their main focus right now and our main focus is to ensure that the message gets out there to our healthcare professionals that currently have patients on Auryxia, make sure they are aware of the situation and start to manage those patients appropriately during this unexpected interruption.

We want to make sure we stay very visible and work with them as closely as possible to provide whatever resources we can to help manage through this supply interruption here and make sure that we're out there front and center with them. It showcases what we do. I'm not going to hide this issue but we want to support them all the way and also start thinking about how we reenter the marketplace during that fourth quarter.

Additionally, we will make sure that we properly incentivize our sales organization to be engaged with customers, both to manage through this issue and also to prepare ourselves for reentry during that fourth quarter.

Operator

Your next question comes from the line of Andrew Berens with Morgan Stanley.

Andrew Berens

The second manufacturer, the one that has the action date coming up in November, what's the capacity of that manufacturer?

Greg Madison

As we've talked about, I think as we think about our pathways to get back online during that fourth quarter, again fixing the issue that has appeared at the first contract manufacturer as well as getting the product, the new CMO, online during that fourth quarter PDUFA date timeline, that's the pathway to get things back overall. One of the things we want to make sure that we do is that you never really want to have an interruption in supply like that and we certainly regret that this occurred.

We kind of passed that on to our healthcare professionals. But we want to ensure that, when we come back, make sure we have an adequate supply to make sure that does not happen again. So I think, as we look forward and talk about coming back in the fourth quarter, it's really important for us to have that adequate amount of supply. And when we have that, we will come right back on the marketplace and make sure we stay engaged with our customers.

Scott Holmes

This is Scott. I think what I would add to that I think what I would add to that is the following. So typically with single product companies of our nature, when you start approaching commercialization with your commercialization CMO and you look to add that second supply chain, one of the key factors you are considering is the uptake in the product and the ability to ramp supply levels with your second manufacturer that you bring online, so not only in the aggregate but singularly as well.

Andrew Berens

Okay. So is the second manufacturer enough to meet the complete demand if the first manufacturer doesn't come back on board?

Scott Holmes

I think certainly yes. They have a larger capacity overall. It is still a two-pronged approach from our perspective to have if you want to do source of supply, but yes. It's safe to say overall they do have a larger capacity.

Andrew Berens

Okay. And then I guess just a question on the commercial dynamics. Congrats on an increasing demand. What's the reason you think you are seeing more of the scripts going through Fresenius and DaVita pharmacies?

Greg Madison

Yes, as we commented before, it's a good question and really there's no particular strategy we have focused to either one of those particular chains. So the reps are in the field doing a great job. They really target their doctors that are writing most prescriptions and seeing phosphate binders.

I think obviously a lot of those physicians, since most of the clinics, roughly about two-thirds of the clinics, are associated with DaVita or Fresenius, as well as the fact that they both have kind of a mail-order pharmacy, are actively trying to enroll patients in those mail-order pharmacies. So that could be part of the dynamics of why you're seeing the shift starting to go there.

But again we're very, very pleased, despite this news, with the demand that that field force has generated during that second quarter and I think they really haven't even hit stride yet. So that team has shown an ability to be out there and create demand and I'm very confident that we will get through this and get them reengaged here in the fourth quarter.

Andrew Berens

Are you guys getting the sense that Fresenius and DaVita are starting to recognize some of the anemia savings by shifting the costs outside the bundle?

Greg Madison

No. What we're hearing back from our physicians, both directly during advisory boards as well as market research, is that physicians are really starting to see patients that go onto the drug really experience the benefits that they expect to see. First and foremost, it's controlling that phosphorus. We just heard numerous stories of patients that were out of range, that 30% to 40% of patients that were out of range that go on to Auryxia and are showing very strong results. I think the more that gets out there, that starts to build up momentum, I think clearly we're seeing that start to build in the marketplace which is encouraging.

Operator

Your next question comes from the line of Mike King with JMP Securities.

Mike King

Thanks for taking the question and let me add my congratulations on the commercial execution and my empathy on the supply disruption. Just a couple of questions about -- so Greg there was no product that reached the market that was out of spec. I assume that all the product was in spec before the supply disruption hit?

Greg Madison

That is correct, Mike. It's really important that we all understand that the supply interruption is a production related issue does not affect at all the safety profile currently available of Auryxia.

Mike King

Okay. So no charges for recalls or anything like that expected?

Greg Madison

None.

Mike King

Okay. And I don't know if you can speak more specifically about what you mentioned as the incentives for the sales force to remain in place. I guess I would be concerned that, without a product to sell for a few months, sales reps might defect to other pharmaceutical companies. Can you talk about the things you are doing to ensure that doesn't happen or minimize that impact?

Greg Madison

Yes. What I would comment on is that the sales team we have in place now, the newly expanded sales force, having had a chance to get in front of them and see them firsthand on numerous occasions over the last six to nine months, it's a really, really impressive team. And what I would say is they show tremendous resolve. So when they came to this organization, they believe in Auryxia, they believe in the value it can bring to patients overall. They really enjoy selling this drug and they really enjoy developing the relationships within the dialysis community. And they have shown firsthand that, boy, if they put their heads down, they can just execute.

They really, they are just starting to hit full stride and they really drove some nice numbers here in the second quarter. So I think this resolve and this belief in the product, what it can bring to physicians and their patients as well as the belief in the Company and the long term value that we're going here and the excitement around IDA potential in the future, I think all those things are reasons why they would believe in the product.

Certainly they're going to be disappointed to hear this news, as we all are but I do believe that, with this unexpected interruption and getting back here in the fourth quarter, they're going to make sure that they engage, be out there visible to customers, provide the level of support and put us in the position that we can get right back as soon as supply gets back in the fourth quarter.

Mike King

And then finally, I think it's an issue that everybody is trying to wrap their heads around again which is addressing the non-dialysis CKD population. You sound to me like you feel confident in the alternative CMO, its ability to supply. I guess at sort of full commercial scale, will you need more than one supply or wouldn't need two? Do you think you may have to qualify a third? Are you possibly in the process now of qualifying a third supplier? Maybe give us a little bit of color on that. Thanks.

Scott Holmes

Sure. This is Scott. I think what I would say, as we've said a number of times, this is a multi-pronged approach. We think both of the suppliers are important to, one, solving this immediate issue that we're facing, but also long term. There's not activity underway for a third supply chain at this point in time. The capacity these two, when back up and running, the first and then certainly the second one online, they will be able to help us meet the immediate needs of the product and into the future.

Operator

Your next question comes from the line of Stephen Willey with Stifel.

Stephen Willey

Has there been any real noticeable shift in terms of business mix just with respect to the percentage of business that's coming from patient switches versus those that are coming in from new patient starts? I think it was kind of in the 70%-to-30% range previously.

Greg Madison

It's Greg. No, that has remained remarkably consistent. We're still seeing about 70% of patients coming from switch patients and about 30% of our patients coming from new starts.

Stephen Willey

And then I guess it's taken some time to build a level of confidence on the prescribing front, I think probably more so from a reimbursement perspective. But just wondering if you can maybe characterize how you think this interruption may impact that prescribing confidence, if at all.

Greg Madison

Look, I think we would be naive to sit here and say that wouldn't be any effect on that overall. But to kind of quantify that is almost impossible. It's really up to us and our field-based teams, our medical teams and us as an organization really to just stay engaged, be out in front of this, be open with our customers and really ensure that we do the best thing for patients right now during this interruption and make sure that we do the right things for our customers.

I think that is the best thing we can do -- that I see as the physicians and the dietitians and the nurses that have seen patients go on this drug understand the benefits of what it can do and how it's different from other phosphate binders. So we need to manage through this transition as best as possible, make sure we don't run and hide, we're out in front of this out there in the community doing everything we can so that when we reenter in the marketplace, we can kind of hit the ground running.

Stephen Willey

Okay. And then just to confirm then, the second contract manufacturer will be manufacturing product at risk ahead of the November 13 PDUFA, correct?

Greg Madison

That is correct. They have several production runs scheduled right now and will be producing at risk.

Operator

Your next question comes from the line of Yigal Nochomovitz with Citi.

Yigal Nochomovitz

Can you say if there's anything that's changing in the formulation or the process of producing the finished API to resolve the current disruption relative to before the interruption?

Greg Madison

All the API currently meets the same standard specifications and as I said, the news on the CMO here, understanding the recurrence of the issue that just showed up last week, we've halted production. We need to investigate the issue which we have opened up to really identify what the cause is and then we can kind of put the fixes in place. And I don't have any additional color on that other than to say that the API probably meets all standard specifications.

Yigal Nochomovitz

Okay. And what are you advising? How are you communicating the message to your sales force in terms of patients that were on Auryxia? Is there a specific alternative binder that you're recommending or does it just go back to what they were doing before Auryxia? How is that going to work in this interim period?

Greg Madison

It will really be up to the healthcare professionals to determine what's the most appropriate course of therapy for that patient during this interruption. And so the field force primarily will be out there making sure that the clinicians are aware of the pending issue, making sure that they understand that this is coming and kind of keep an eye on the patients that are on Auryxia to ensure that they don't go without any phosphate binder which would cause their phosphate levels to spike and then the clinicians will choose the most appropriate course of therapy to ensure that patient is managed in the short term and then also want to make sure we're ready to go and to ideally get that patient back on Auryxia once supply comes back during the fourth quarter.

Yigal Nochomovitz

And do you have any estimate of the percentage of patients that may be sitting at home with 90-day scripts which could offer them a little bit more than maybe the rest of the Auryxia patients from the supply interruption?

Greg Madison

Yes, we don't. We have good data all the way down the wholesalers, but once it gets there, it's impossible to really understand at the patient level how many of them and what level of supply they may have. That will be part of the discussion that reps will have with the clinicians, so the clinicians and then turn around and identify for the patients personally what is their current situation and how could they best manage it going forward.

Yigal Nochomovitz

Okay. And one last question. Do you have any insight into the recent trend since the Phase III IDA data came out with regard to uptick or an off-label use in the IDA setting?

Greg Madison

No, we don't have any insight into what product may be used off-label at this point in time. Our suspicion is it's relatively low at this point because the fall what's been put out there is a press release and that's not something that we promote on, don't talk about, so our suspicion is probably relatively low.

Operator

Your next question comes from the line of Jason Kolbert with Maxim.

Jason Kolbert

I'd like to ask two questions. One, the COGS in the quarter strike me as very high, even taking out the one-time charge. Going forward, I know you talked a little bit about COGS in the 25% range, but even that seems very, very high. So help us understand, now that you're going through a manufacturing review, what your ultimate target COGS might be for this product. And secondly, can you point to other historical examples where there's been a disruption in the middle of the launch so that we can maybe understand historically how this might impact the next couple of quarters and our overall launch trajectory going forward? Thanks.

Scott Holmes

Sure. This is Scott. I'll take the question on COGS first. So as we come into 2016 here really in the second year post-launch, if you think about the process to get a product to a commercial stage, you go through a lot of manufacturing and not at the scale which you ultimately want to get to and you improve that over time, so that's why we expect in these early periods to have COGS slightly, higher than one might otherwise like.

At the end of the day, recall this is a very high load tablet, so there's a lot of iron packed into this tablet and that has an impact on the cost of goods. I think long term, we haven't given long term guidance but we would expect to be able to get below that 20% range. And when I talk about that 20% to 25% I'm really talking about that 2016, 2017 time period as we work through some of this initially produced API and lower scale production runs.

Jason Kolbert

One quick question though. Is there any ex-U.S. supply among your partners that you can use to bridge this gap? I'm sure you've thought of that already.

Scott Holmes

You can imagine we've thought of everything possible in this situation and there's nothing available from ex-U.S. suppliers for use in the U.S. market.

Jason Kolbert

Okay, and the historical precedent. Thank you.

Greg Madison

Yes, no problem. This is Greg. Really there is not a good precedent that's out there that you can point to look at this overall. So, as I said before, I think we're acutely aware that we have a lot of work to do here to ensure that we stay engaged with the customers and try to make sure that we manage through this, get patients transitioned appropriately and put ourselves in the best position as possible when we reenter the marketplace, but there's really not a good area to kind of point to that we can look at as an analog.

Operator

Your next question comes from the line of Chris James with FBR.

Chris James

Just one, I joined the call a little late and I apologize if this was already addressed, but I guess how, in your view, does the supply interruption affect the upcoming FDA's decision for the PDUFA in IDA non-dialysis? And specifically, do you expect the PDUFA date to be pushed out?

Greg Madison

It's Greg. No, we don't anticipate any change in our timelines around the sNDA filing, nor the potential timeline of PDUFA date as a result of this.

Operator

Your next question comes from the line of Matt Kaplan with Ladenburg Thalmann.

Matt Kaplan

First, congrats on the results in the quarter. Can you describe what impact this will have in terms of supply interruption on your SG&A spending during the third and fourth quarters? This is the first question.

Scott Holmes

Yes, sure. This is Scott. As I stated in my prepared remarks, we don't expect any impact on the SG&A costs in the third and fourth quarter. Greg has alluded to and I concur with the importance of the sales force through this process, but we do not expect any changes in our cost structure. And we continue to need to make the appropriate investments in the business and get through this bump in the road, per se and get back in the fourth quarter with product in the market.

Matt Kaplan

And then in terms of when you reenter the market, what do think the ramp profile will look like when you get back on the market in the fourth quarter?

Scott Holmes

It's really a too little too early to say on that. I think we've got to get into the market first and foremost, have our reps in the market and our MSL teams in the market assisting patients and communicating the message appropriately. But until we have some more clarity around the situation, it would be premature to comment on what we expect the ramp to be after having product available.

Matt Kaplan

And then the reimbursement status for Auryxia, can you give us an update on where that stands and lives covered?

Greg Madison

Yes. We're right where we have been, so we got access to the majority of patients out there in the marketplace across Part D in commercial. And as you can see by the Q2 results, the sales team has done a heck of a job making sure that our customers become more aware of the reimbursement status and have done a really nice job of pulling that through.

Matt Kaplan

And then an update on the partnering in Europe as well?

Greg Madison

There are no material updates to comment on.

Operator

Thank you. This does conclude the question-and-answer session. I will now turn the floor back over to Greg for any further or closing remarks.

Greg Madison

Thank you for joining us this morning. Right now, our number one focus is on the patients and rebuilding supply of Auryxia as soon as possible and remaining active members of the community working to help patients dealing with chronic kidney disease. Thank you all for joining us this morning.

Operator

Thank you. This does conclude today's conference call. You may now disconnect.

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