Aralez Pharmaceuticals' (ARLZ) CEO Adrian Adams on Q2 2016 Results - Earnings Call Transcript

| About: Aralez Pharmaceuticals (ARLZ)

Aralez Pharmaceuticals Inc. (NASDAQ:ARLZ)

Q2 2016 Earnings Conference Call

August 9, 2016 11:00 AM ET


Adrian Adams – Chief xecutive Officer

Nichol Ochsner – Executive Director of Investor Relations and Corporate Communications

Scott Charles – Chief Financial Officer


David Bautz – Zacks Equity Research

David Martin – Bloom Burton

Keay Nakae – Chardan Capital Markets

Brandon Folkes – Guggenheim Partners


Greetings, and welcome to Aralez Pharmaceuticals' Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is my pleasure to turn the conference over to your host, Mr. Adrian Adams, Chief Executive Officer at Aralez Pharmaceuticals. Thank you. You may begin.

Adrian Adams

Thank you, operator. Good morning, everyone, and thank you for joining the Aralez Pharmaceuticals webcast to discuss our second quarter 2016 financial results, together with more details on our portfolio commercialization plans, near-term business opportunities, and our corporate strategy moving forward. With me this morning is our Chief Financial Officer, Scott Charles; and Executive Director of Investor Relations and Corporate Communications, Nichol Ochsner.

Before I proceed, I would like to ask Nichol to say a few opening remarks. Nichol?

Nichol Ochsner

Thank you, Adrian. Earlier today, we issued a press release summarizing our financial results and key achievements for the second quarter of 2016, which can be found on the EDGAR and SEDAR databases, and on our website at

Additionally, I would like to remind everyone that we have a slide presentation to accompany our conference call this morning, which can also be viewed at our website. If you are listening to this call on your telephone, you may access a synchronized slide deck on our website by choosing the link on our webcast page that says Click Here to Listen.

Before we begin, I would like to provide the following cautionary statement regarding forward-looking statements. Statements made during today's call may contain forward-looking statements under applicable securities laws, including statements regarding our commercialization strategy; our product development and launch efforts including, with respect to Fibricor and YOSPRALA, upon FDA approval; and our future financial results and business development efforts.

These forward-looking statements are based on management's current assumptions and expectations, and are made in light of management's experience and perception of historical trends, current conditions, and expected future developments. Actual operating results and other forward-looking statements, including in respect of our product development and launch efforts and business development opportunities, may vary significantly from these forward-looking statements based on a variety of factors.

These important factors are described in our filings with applicable securities regulators, including the Company's annual report on Form 10-K for the fiscal year ended December 31, 2015; and the 10-Q for this fiscal quarter, ended June 30, 2016, which will be filed later today. You may obtain free copies of these documents and other related documents filed with applicable securities regulators at our website, under the heading Investors; or the SEC's website, at; or on sedar, at We undertake no obligation to update these forward-looking statements. I would also note that all dollar amounts referenced on this call are references in U.S. dollars, unless otherwise noted.

With that, I will turn the call back over to Adrian.

Adrian Adams

Thank you, Nichol. On Slide number 3, you will find the agenda for today's call. I will begin with an overview of our portfolio commercialization objectives and plans for YOSPRALA, as well as some early performance indicators for Fibricor. Scott will then provide the highlights of our second-quarter financial results. Following that, I will summarize our platform for growth and ongoing business development focus areas. I will conclude by summarizing our near-term business priorities before opening up the call for your valued questions.

Turning to slide number 4, I would like to review the market opportunity we see for YOSPRALA in the United States. We believe that YOSPRALA has the potential to achieve a mid-single-digit market share in the secondary prevention patient population, and that this will represent an attractive market opportunity with peak sales revenue potential in excess of $200 million per year.

To put this in perspective, there are around 26 million secondary prevention of cardiovascular events patients in the United States; with approximately 18 million patients, or 70% of whom take aspirin. According to market research, around 6 million patients in any one year take aspirin, plus a proton pump inhibitor. We remain confident that YOSPRALA, a product that is specifically designed to reduce aspirin intolerance and improve compliance to therapy has the potential to resonate well with healthcare practitioners and patients.

The graph on the right-hand side of this slide shows the potential market share opportunity, following exposure to a de-identified full core visual aid similar to the design we intend to use to educate physicians about the benefits of YOSPRALA, once approved by the FDA.

We conducted physician market research in which the overall product profile, known to participants as Product X, was presented with the goal of determining what their prescribing intentions would be following this profile sharing. The graph shows that current anti-platelet prescribing habits of these particular physicians – interestingly the current prescribing habits of these particular physicians are to prescribe aspirin monotherapy in the secondary prevention market is quite high, around 56% compared to about 44% where Plavix is prescribed.

The bar chart on the right-hand side represent physicians' preferences after viewing the core messaging details for Product X. As you can see, these same physicians would know utilize YOSPRALA in up to 39% of their patients.

There are two important points from this that I would like to highlight. One is that we believe the data demonstrates a clear apparent need in the anti-platelet market for a product like YOSPRALA; and the opportunity for it to play a significant role within the doctor's armamentarium for managing the secondary prevention of cardiovascular disease in patients who require aspirin anti-platelet therapy, and are at risk of GI events.

Secondly, we found it very interesting that in addition to the potential for YOSPRALA gaining a significant part of this market, this research suggests YOSPRALA may actually expand the proportion of this market using aspirin therapy from 56% to 70%. This research further reinforces our belief in the potential for YOSPRALA.

I'd now like to spend a few minutes reviewing the importance of aspirin therapy adherence, and strategies to improve patient compliance by referring to slide number 5. As you may know, aspirin is a gold standard in the secondary prevention of cardiovascular events. However, adherence to aspirin therapy is non-optimal, commonly due to GI side effects. Non-adherence and discontinuation of aspirin therapy increases when patients experience an increasing number of GI symptoms, and when severe GI complications occur.

Data has shown that patients diagnosed with a peptic ulcer were more than 5 times more likely to discontinue aspirin treatment than those without an ulcer; and, importantly, non-adherence has potentially serious consequences. Non-adherence or withdrawal of aspirin therapy in patients at risk for coronary artery disease is associated with an approximately threefold higher risk of major cardiac events. Furthermore, aspirin discontinuation following a GI bleed in patients with cardiovascular disease increases the risk of a cardiovascular event or death by almost sevenfold.

It is important to note that enteric-coated aspirin or buffered aspirin alone may not be protective against GI complications. Medical literature demonstrates that patients continue to experience GI toxicity despite using an enteric-coated aspirin or buffered aspirin formulations. The use of low-dose aspirin is associated with a two- to fourfold increased risk of GI events, which is not reduced by either buffered or enteric-coated aspirin preparations.

Concomitant use of a proton pump inhibitor in patients at risk of GI events on aspirin therapy is recommended by an expert consensus group of cardiologists and gastroenterologists.

In addition, as we consider strategies to improve compliance to medications, fixed dose combination regimens have been shown to reduce the risk of non-compliance by 24% to 26% compared to when individual drug components are taken separately.

As you see on the right-hand side, our disease awareness initiative and educational campaign is entitled Hole in Aspirin Therapy. This initiative has the objective of raising awareness for the potential GI side effects of aspirin and their impact on the patient outcomes. We believe that it is important to continue to reinforce the cardio protective benefits of aspirin and the need to improve patient adherence to aspirin therapy and reduce potential GI side effects.

Turning now to slide number 6, let's review the positioning and regulatory status of YOSPRALA. As previously mentioned, a challenge with aspirin therapy for the secondary prevention of cardiovascular events is long-term compliance; often because of the side effects associated with a GI upset, ulcer formation, and really GI bleeding. YOSPRALA has been specifically designed with a coordinated delivery mechanism composed of an 81 milligram or 325 milligram enteric-coated aspirin core, which is surrounded by 40 milligrams of immediate-release omeprazole

When YOSPRALA enters the stomach, the omeprazole is immediately released. This is designed to increase the pH of the stomach to a less acidic gastro-protective level. At a pH level of around 5.5 or greater, the enteric coat of aspirin in the inner core dissolves to allow release of the aspirin into circulation to enable cardio protection. The gastro-protective pH helps to prevent damage to the stomach lining when the aspirin dissolves and circulates through the body.

YOSPRALA, therefore, is designed to improve patient compliance to potential life-saving aspirin therapy, reducing the risk of recurrent cardiovascular events, and ensuring that omeprazole is delivered with every dose of aspirin therapy. YOSPRALA combines the cardio protection of enteric-coated aspirin with the gastro protection of omeprazole in a fixed-dose combination.

Now, as you may recall, the previous hurdles for the YOSPRALA NDA were primarily related to the original aspirin manufacturer. In 2015, we identified an alternative aspirin supplier. And in the first quarter of this year, we believe that we have – that they have met the qualifications to become our new primary aspirin supplier. As such, in March of this year, we resubmitted the NDA with this new primary aspirin supplier. The FDA provided a PDUFA goal date of September 14, 2016.

While our management team has significant experience launching products, we are extremely excited by the opportunity to launch YOSPRALA, since this is the first time that we will be launching a product for which there is 100% current awareness of the core ingredients. Most physicians, whether they be cardiologists or primary care physicians, understand the cardio protective benefits of aspirin. And we believe that a fixed dose combination product designed to reduce aspirin GI intolerance and improve patient compliance to therapy has the potential to perform extremely well in this market.

Moving now to Slide Number 7, I would like to remind you of the Phase III clinical data. These data show that when you compare YOSPRALA to enteric-coated aspirin alone, at the same 325 milligram aspirin dose, there is a statistically significant reduction in the endoscopic gastric ulcers, gastro-duodenal ulcers, and discontinuations due to prespecified GI events than seen with enteric-coated aspirin therapy alone. This is meaningful, given the challenges potentially associated with long-term usage and patient adherence to aspirin therapy.

Please now refer to Slide Number 8 for an overview of our pricing and access strategy for YOSPRALA. We are confident in our responsible pricing strategy that is designed to remove access barriers to YOSPRALA, and targets an affordable patient co-pay of less than $1 per day, which is competitive to the aggregate cost of the individual over-the-counter component drugs.

Extensive research has been conducted to establish appropriate wholesale acquisition costs and patient pricing. The research consisted of 1,400 patients, 440 healthcare professionals, and a payer group that covers approximately 200 million lives.

We are implementing a three-pronged approach designed to remove access barriers and secure coverage. First, we intend to utilize a contracting and rebate strategy to secure appropriate formulary access; secondly, to leverage active and passive co-pay mitigation programs to further reduce patient out-of-pocket expense; and, thirdly, to use a customized mail-order pharmacy to further provide benefits, with easier access to YOSPRALA at a reasonable cost as compared to other prescription and over-the-counter products. If successful, we believe our strategy will help ensure YOSPRALA is widely accessible, at a competitive cost to the patient, and in a timely manner.

Slide Number 9 shows some recent third-party market research conducted to assess the importance of YOSPRALA's features on payer formulary coverage decisions. As you can see on the chart, when presented with the YOSPRALA product profile, the research indicates formulary decision influencers overwhelmingly agree on the importance of the attributes that YOSPRALA possesses; namely, efficacy data that shows appropriate reduction in GI effects of aspirin therapy; protection to patients at risk of another cardiac event; protection to patients at risk of GI side effects, while protecting the heart; a combination product that may increase patient compliance; and a time-released formulation that benefits patients at risk of GI issues. This research is largely consistent with both the qualitative and quantitative research we previously conducted, further reinforcing our belief in the potential for YOSPRALA.

Turning to Slide Number 10, I would like to outline our evolving salesforce strategy. Our financially disciplined salesforce buildout is driven by a tried and trusted invest-into-the-opportunity targeting approach. Our current salesforce is comprised of 25 high-quality sales representatives that are promoting Fibricor to high-potential fibrate writers, and also potential top-tier writers for YOSPRALA, pending FDA approval. To date, over 3,000 high-decile anti-platelet therapy physicians have been called on by our current salesforce for Fibricor. The benefit of this strategy is that we have the opportunity to grow Fibricor while also positioning ourselves nicely ahead of the potential launch of YOSPRALA.

As we approach the YOSPRALA PDUFA date, we plan to extend an additional 85 contingent offers to salesforce candidates who have worked with our management team in the past. We are targeting high-performing sales professionals who are currently employed with similar work experience to the initial 25-person sales team. When we have clarity on the specific timing of the YOSPRALA launch, we will switch the contingent offers to formal offers, to complete the salesforce buildout to a total of 110 sales professionals. This financially and commercially disciplined approach allows for thoughtful management of risk and expenses.

Moving to Slide Number 11, we are seeing an encouraging response to promotion of Fibricor, a product that has not been promoted since 2009, and operates in a very large and heavily genericized market. As previously mentioned, in April we deployed the 25-person salesforce that began promotion of Fibricor in the United States.

As you can see from this slide, since launch, the impact of our 25 representatives has resulted in an 88% increase in new prescriptions, and a 45% increase in the retail prescription equivalent, which takes into consideration the 90-day mail order. These data point to an encouraging response to promotion among our covered geographies.

Even when you look at national growth, new prescriptions increased 31%, and the retail prescription equivalents are up 18%. While it is still early days, we believe we are well-positioned to capture market share with the combination of the Fibricor brand and authorized generic product offerings.

We are pleased with the prescription evolution, which also reinforces the marketing strategy that we plan to use with YOSPRALA. Rather than put in place a very large salesforce and hope that market share evolves, we are adopting and invest-into-the-opportunity approach with a measured plan to put highly effective salespeople in place, targeting cardiologists and high-prescribing physicians with a high level of frequency to build market share. As we deliver success, we will plan to add further target positions and representatives to build into this opportunity.

With that, I will turn the call over to Scott to discuss our financial results. Scott?

Scott Charles

Thank you, Adrian, and good morning, everyone. I will first review our GAAP financial results, and I will then review our non-GAAP SG&A and R&D expenses. As a reminder, later today Aralez will file its quarterly report on Form 10-Q, and I encourage you all to review that report.

Recall that since our merger with Tribute closed in February of this year, our consolidated results of operations for 2016 include the results of Tribute from February 5 through June 30. For accounting and reporting purposes, Aralez is the successor issuer to POZEN; and, as a result, the 2015 figures include the result of POZEN only.

Now please turn to Slide 13. Total revenues for the second quarter of 2016 were $12.6 million, and included net product revenues of $7.4 million related to products acquired with the Tribute merger. We did not show Tribute net product revenues in 2015, as the acquisition was not completed until February of this year. The net product revenues increased from $3.6 million in the first quarter to $7.4 million in the second quarter, primarily due to the first quarter only including two months given the acquisition closed February 5, together with the growth in revenues from the Canadian product portfolio.

Other revenues of $5.2 million, which represent royalties earned on sales of VIMOVO by our commercial partners, were consistent with the second quarter of 2015. Royalty revenues in the second quarter included an increase in the royalty percentage due to us from AstraZeneca from 6% to 10%, starting January 1, 2016, offset by a decrease in net sales in the U.S. due to lower net pricing recorded by our licensee, Horizon Pharma. VIMOVO royalty revenues were up 16% from $4.5 million in the first quarter of 2016 as a result of improvement in net pricing by Horizon in the second quarter, as well as modest prescription growth.

Now, please turn to Slide 14. Aralez's operating expenses for the second quarter included $2.1 million of amortization of the intangible assets we acquired from Tribute; and $3.4 million in cost of product revenues, which include $800,000 for the fair value step-up in inventory as a result of the purchase accounting. The fair value step-up has now been fully expensed to cost of product revenues as of the end of the second quarter. I'll discuss SG&A expenses in detail when we get to the next slide.

For R&D, expenses were $1.5 million in the second quarter of 2016 compared to $2.3 million in the second quarter of 2015. 2015 included additional development expenses for YOSPRALA for which we resubmitted the NDA in March of this year. Our resulting net loss was $17.5 million for the quarter compared to a net loss of $16.3 million in the second quarter of 2015.

Now moving to Slide 15, the SG&A expenses were $22.7 million for the second quarter of 2016 compared to $18.2 million in the same quarter of the prior year. I will break down the change in SG&A into four categories. First, commercial costs incurred were $6.2 million, and include $4.1 million of promotional spend, primarily in preparation for the planned launch of YOSPRALA; $1.3 million related to the buildout of the U.S. salesforce; and $0.8 million related to the buildout of the commercial infrastructure. Second, we incurred $3 million of additional ongoing cost to support our global corporate structure.

Third, we incurred $4.7 million of continued operational expenses in Canada. And lastly, transaction fees and severance and retention expenses were each $4.9 million less compared to the prior year.

Now moving on to Slide 16. For SG&A and R&D expenses, we provide our non-GAAP to GAAP reconciliations which illustrate when discrete items impact in the quarter. On a non-GAAP basis, SG&A expenses were $19.5 million for the second quarter 2016 compared to $4.6 million in 2015. The reconciling items between non-GAAP to GAAP include share-based compensation expense and transaction-related expenses.

Now, please turn to Slide 17. Non-GAAP R&D expenses were $1.1 million for the second quarter of 2016 compared to $2.2 million in 2015. From a balance sheet perspective, we ended the quarter with approximately 65 million shares issued and outstanding, and $93 million in cash and cash equivalents. We remain focused on prudently managing our cash and expenses while preparing to launch YOSPRALA.

In addition, we have access to $200 million of committed capital from Deerfield to make accretive acquisitions. We continue to believe we have the capital and the resources in place to fuel the growth of the business.

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

Adrian Adams

Thank you, Scott. Now turning to Slide number 18, which captures the current profile of the Company and what we believe is a compelling platform for growth. As you may know, Aralez Pharmaceuticals is a Canadian-domiciled global specialty pharmaceutical company, with a competitive growth platform supported by an efficient structure.

Looking at the 2015 pro forma revenues, the overall revenue will be around $49 million, comprised of product revenues from Tribute and POZEN's VIMOVO royalty revenue, which together forms the base business. In this particular environment, we continue to believe we are in a strong position to build the Company moving forward.

If we did nothing else from a business development point of view, which is clearly not our strategy, but simply leverage and maximize the base business that we currently have, we anticipate that by the end of 2018 we will become profitable on an adjusted EBITDA basis.

However, we fully intend to leverage our current platform and pursue business development and licensing opportunities, utilizing the resources that we have to further diversify and propel the business forward with the additional goal of potentially bringing forward profitability. We believe that this represents a compelling growth platform from which we have the opportunity to drive significant short-, medium-, and long-term value creation.

Turning to slide number 19, I want to review our business development strategy and current areas of focus. As you know, business development is a very important part of the Aralez growth strategy. Our business development focus and priorities include actively assessing opportunities and approved products in our cardiovascular and pain anchor therapeutic areas that are near-term EBITDA accretive and revenue-generating.

In the event that we can identify stepping stone-type transactions that we can put into the sales representatives' bag, and further leverage our infrastructure, we are keen to do that. Also, if we see something of a larger size, we believe that we'll have access to capital to complete such transactions.

We are also taking an opportunistic approach to other specialty therapeutic areas that meet the specified criteria that I just outlined, with a focus on the United States and Canada with selective global expansion, provided that this does not add significantly to our overall near-term cost base.

In addition, we are very interested in aligned, value-creating, and transformative M&A. Overall, we believe that the changing landscape of opportunities in today's environment gives Aralez a competitive advantage due to the fact that we are well-positioned with both a competitive platform and committed capital to transact.

In conclusion of our presentation today, let's look at Slide 20 for our near-term business priorities. We plan to continue to execute with excellence on the launch of Fibricor, as well as prepare for the anticipated launch of YOSPRALA in the fourth quarter of this year, subject to FDA approval.

In addition, we are planning to submit YOSPRALA in Europe in the fourth quarter of this year; and MT 400, or Treximet, and YOSPRALA in Canada in the first half of 2017. And we are actively assessing business development and M&A opportunities that are near-term, revenue-generating and EBITDA accretive in our cardiovascular and pain anchor therapeutic areas.

As we look into the second half of this year, the business combination that is the formation of Aralez provides increased financial flexibility with an efficient platform for growth, while we execute our business development strategy. We remain confident in our ability to further transform Aralez into a leading global specialty pharmaceutical company with the clear goal of creating shareholder value in the short-, medium-, and long-term.

We thank you for your continued interest and support. I would now like to open up the call for your valued questions. Operator, can you please give the instructions?

Question-and-Answer Session


[Operator Instructions] Our first question comes from David Bautz with Zacks Equity Research. Please proceed with your question.

David Bautz

Hi, good morning, everybody. So for the market research, we were looking at the 39% of physicians saying they would consider prescribing YOSPRALA in the future. I'm wondering if that was the data that you took into account to make the projected $200 million in peak sales for YOSPRALA? Or does that market research maybe represent upside to that $200 million figure?

Adrian Adams

We would consider that being upside to our overall forecast. And as I’ve mentioned before – it’s a very good question, but as I mentioned before, I think, I’ve had the pleasure of working in market research in my time. And I recognize that market research tends to be a little bit overly optimistic. But my view is that even if you halve both numbers that we currently see, this represent a very significant opportunity. But our best forecasting for YOSPRALA, with a view to delivering peak sales revenue in excess of $200 million, clearly did not build in a 39% share. So that would be upside if we delivered that.

David Bautz

Okay, thanks, and one more question. Will you guys be breaking out the Fibricor sales in future quarters? Or providing guidance maybe on potential Fibricor sales, especially given the encouraging growth in prescriptions?

Adrian Adams

Well, I think we will continue to obviously update on the prescription evolution and market share characteristics. And clearly we will do the same when we launch YOSPRALA, on an ongoing basis. That said, I think as we move into 2017, we are giving thought to our overall communications that relates to guidance for the Company. We’ve not made a specific decision. But at this point in time, we do not break out individual revenues.

David Bautz

Okay. Thanks for taking my questions.

Adrian Adams

Thank you so much.


Our next question comes from David Martin with Bloom Burton. Please proceed with question.

David Martin

Hi, thanks for taking my question. The first one is regarding the new API supplier and the NDA resubmission. Has there been acknowledgment by the FDA that the API supplier has fulfilled everything that is needed by the Agency?

Adrian Adams

Well, obviously the NDA – we received notification that the NDA was accepted by the FDA. And the way I would – without getting too specific, I think we believe with all the characteristics of the new primary aspirin supplier, that we’ve removed all obstacles that were in place before. And clearly as we – after we resubmitted the NDA, the interactions we’ve had with the FDA have been frequent, productive; and, to date, there have been no red flags. So we remain confident in our ability to move forward with planning for a fourth quarter approval.

David Martin

Okay. Second question: the pricing strategy of getting the cost per patients down to $1 per day, which is, as you said, close to where they would be paying if they were combining the two generic components of the drug. But what about for the payers, the insurance companies, Medicare? How much more will they pay for the product at your planned pricing? And what is the feedback from them as to how they will deal with that?

Adrian Adams

Yes. I think, again, a very good point. And the reason you asked the question obviously is that this is a critical component of our overall strategy with YOSPRALA. And I think we have been quite consistent in our communications around this. Now clearly, I think until we launch the product, for competitive reasons we won’t be going public in relation to where our specific pricing levels are. But we’ve been consistent in saying that we wanted to make sure that from a patient perspective, out-of-pocket perspective, that the patients could take the product at no additional cost. And so that is why we positioned our overall strategy as out-of-pocket for the patient of less than $1 a day.

We also referenced in our presentation a lot of very detailed work that we’ve been doing with others, particularly as it relates to how we position the WAC price. And that gets to the point that you are raising. So I think we have always felt that where we position that WAC price, with a consideration of volume uptake and a consideration of making sure that it was attractive for the payers, that that was a critical component. So we’ve more or less completed that work. We feel good about where we are, at this particular point in time.

And clearly I think at the right time, as we get close to clarity around the precise date of approval by the FDA, we’ll be able to communicate that much more openly. But it’s a very good question. I think we believe that we’ve got a strategy that will deal with those aspects, so that all shareholders – and we’ll be happy with a strategy that we adopt.

David Martin

Okay. Switching to Tribute, their revenues were a little ahead of what we were expecting. Was BLEXTEN launched in Canada? Is that partly what contributed to it? If it hasn’t been launched yet, are there plans to launch it? And what accounted for the increase in sales at Tribute?

Scott Charles

Sure. Good question. So with regard to Tribute, we have not, at this point, launched BLEXTEN. We are in the process right now of assessing the precise process and approach with regard to BLEXTEN, and will communicate that potentially in future quarters. But we have not yet launched it. What accounted for the increase in the quarter for Tribute revenues was just continued growth of the base product portfolio that you are familiar with. And to highlight a few, Fiorinal and Soriatane are a couple of the drivers.

David Martin

Okay. And then one last question, and I’ll get back in queue. Any updates on the patent litigation with Dr. Reddy’s, as it pertains to VIMOVO?

Scott Charles

Yes, there are no updates with regard to Dr. Reddy’s. Good question. Obviously, as you know, these patents have been in litigation for some period of time. And we, along with Horizon, continue to vigorously defend the IP portfolio that’s in place. And we are confident in its ability to support the product for a long time.

David Martin

Okay, thanks.

Adrian Adams

Thank you.


Our next question comes from Keay Nakae with Chardan Capital Markets. Please proceed with your question.

Keay Nakae

Hi, thanks. Adrian, with respect to the NDA review of YOSPRALA, any communication with the FDA regarding labeling that is surprising in any way?

Adrian Adams

Well, I think, clearly, I think – as I’ve mentioned, I think I don’t want to get into specifics in relation to discussions we are having with the FDA. I would remind everyone on the call that clearly I think if one looks at the history of the evolution of the regulatory pathway with YOSPRALA, I think the label aspects have not been a particular issue with the FDA. And we feel very good that obviously if one looks at all of the kind of level components of aspirin that fuel the counter-protection claims together with the gastro protection, that that level will be a strong level. Clearly I think when we have those discussions with the FDA, which we anticipate as being normal course of business, I think then we’ll get into that level of detail. But it’s not been an issue in the past. The barrier, as we’ve said, in the past on the YOSPRALA NDA has always been related to the same issue: manufacturing. And we feel that we’ve dealt with that; and, hence, all confidence in the launch of this product in the fourth quarter of this year. So we feel good about where we are, at this point in time.

Keay Nakae

Okay. With respect to the SG&A expense, as we think about both Q3 and Q4, and maybe specifically the promotional spend item, is this a number – the $4.1 million you just did – is that a similar number we should expect in Q3, perhaps, and then maybe even larger in Q4? Any thoughts on that, Scott?

Scott Charles

Yes, good question. I mean, at this point in time, we have not updated our guidance. I think what – with regard to the spend for Q3 and Q4, the one thing I would just keep in mind is, as Adrian highlighted earlier, is that we do plan to hire an incremental 85 sales representatives in preparation for the launch of YOSPRALA. So obviously that would be additional expense to think about, as you look at Q3 and Q4 for the rest of the year. But again, from a full-year perspective and otherwise, we have not yet at our guidance at this time.

Adrian Adams

Just to be clear, I think the guidance that we articulated at the beginning of this year, the expense profile of the Company will be within that guidance – well within that guidance.

Keay Nakae

Okay. And then just one last line item. I think I heard this correctly, Scott, but the amortization of the Tribute assets – that’s done as of the end of this quarter?

Scott Charles

Yes, if you are talking about the amortization of the fair value step-up on the inventory from the purchase accounting, that was fully expensed across the product revenues, as of the end of the second quarter. There will be amortization expense going forward, as it relates to the intangible assets that were created upon the purchase accounting. That will continue as we move forward, over the life of the remaining – over the remaining life of the applicable asset.

Keay Nakae

Okay. So the $2.1 million reported in Q2 – we’ll see that continue on?

Scott Charles


Keay Nakae

Okay, very good. Thanks.

Scott Charles

Thank you.


[Operator Instructions] Our next question comes from Louise Chen with Guggenheim Partners. Please proceed with your question.

Brandon Folkes

Hi, it’s Brandon Folkes on for Louise. Can you just update us on your ex-US commercialization strategy for YOSPRALA? And then just changing gears, has the recent market volatility changed your approach to M&A? Do you still – do you have a preference between late-stage development versus commercial-stage assets? Thank you.

Adrian Adams

Thank you for the questions. I think on the former point, as we mentioned I think we remain on track to obviously submit the YOSPRALA in Europe in the fourth quarter of this year. Now clearly, as we’ve – our absolute focus within the organization has been on ensuring that the overall base platform that is the essence of the growth strategy of the Company is in place; and, therefore, clearly, with a strong focus on getting the product approved in the United States, and all commercial execution thereof.

So obviously, as we put together and submit the package in Europe, we will obviously be turning our attention to looking to a commercialization strategy through a partnership. Clearly, I think with this – with the platform that we have, as I mentioned, I think we do not want to obviously build in any unnecessary cost as it relates to outside the United States or outside North America. So we will be looking to secure a partnership. But our focus at this particular point in time is on delivering the value associated with approval and launch of the asset in the United States.

On the aspect of business development, I think our overall strategy as it relates to business development, so it’s not – has not changed. And clearly I think we’ve been very focused on making sure we deliver the promise of YOSPRALA. We’ve been actively, and are actively assessing, a lot of different opportunities. We do believe that the overall landscape of opportunities remains very buoyant. But, clearly, we want to make sure that whatever we do has a very strong financial discipline.

Are we keen to obviously leverage our salesforce? Clearly, if we look to the launch of YOSPRALA, we’ll have a salesforce that has two products in the bag. If we are able to bring in products that add revenue and are EBITDA accretive, that we believe will be very strong financial setting in the – over the course of time. But we remain very optimistic.

If we see the right deal, whether it be small or large products or, indeed, the right kind of M&A, then clearly if it fulfills all the financial criteria that we have outlined, we would be interested in doing that. So clearly, things remain very buoyant.

As you well know, I think the sector itself is now operating in a more buoyant fashion, we believe, with a number of companies obviously performing pretty well. And we feel pretty good about our situation. So I guess over the course of time, we’ll – watch this space; and meanwhile remain very focused on launching YOSPRALA in the fourth quarter of this year.

Brandon Folkes

Great, thanks so much.


Our next question comes from David Martin with Bloom Burton. Please proceed with your question.

David Martin

Thanks. One question about the SG&A. You compared this year’s quarter with last year’s. But on a sequential basis, it reduced quite substantially. And with the preparations for YOSPRALA, I’m wondering where the cost savings came from, Q1 to Q2.

Scott Charles

So I just want to make sure we are looking at the same thing, David. So are you looking at Q1 to Q2, and you are looking at non-GAAP SG&A expenses?

David Martin


Scott Charles

Okay. So the non-GAAP SG&A expenses are actually up slightly from Q1 to Q2. And that just simply reflects the hiring of the 25 sales representatives that we hired late in Q1. And you have the full-quarter effect of that in Q2. So on a non-GAAP basis, the SG&A expenses are just slightly higher from Q1 to Q2, David.

David Martin

Okay, okay. Sorry. I’m looking at 37.5 going to 22.7. I guess that’s GAAP?

Scott Charles

Yes, you are looking at it on a GAAP basis. Obviously the GAAP basis, to be clear, included transaction-related expenses in Q1, as well as severance and retention expenses, as well as excise tax equalization payments. So as a result, on a GAAP basis, Q1 was higher.

But when you normalize for all that on a non-GAAP basis, which is the way we look at it on a cash ongoing basis, the SG&A expenses were slightly higher from Q1 to Q2. And as Adrian highlighted before, we are managing well within the guidance for the full year. And I can tell you right now, we are prudently managing expenses and carefully looking at both cash and expenses as we move forward here as a Company.

David Martin

And then one last question, kind of linked into the previous question you had. The M&A environment, Adrian, you mentioned is buoyant. I’m wondering, with all the gyrations in specialty pharma recently, has it changed at all in the last quarter, or few quarters? Our prices coming down? Are portfolios more available – portfolios of drugs more available, whereas it was a one-off drugs? Are there any changes in what you’re seeing out there?

Adrian Adams

Well, obviously, without getting into any specifics on values, et cetera, because after every particular transaction that any company might consider is different, and the way one might structure things is different. I think the one thing that hasn’t changed I think is that clearly, I think if one looks at the kind of bigger pharma universe I think we are seeing them start to obviously reengineer themselves a little bit. So we think, whereas in the past probably it’s very difficult to dislodge from the portfolios, I think there appears to be more willingness to consider that.

Clearly, if one looks at the broader portfolio of assets that tend to become available, and clearly companies that are looking at themselves, I think again, without getting into specifics of pricing, et cetera, we do believe that the last couple of quarters have remained very buoyant.

As to whether or not it’s changed specifically versus where it was three or four quarters ago, I wouldn’t say it changed dramatically. But clearly I think in this environment, everybody is looking to shareholder value creation, and certainly we are doing that as well. But we are doing that from a very strong basis.

We know we have committed capital, but also we know we don’t have to do anything. I think if we did nothing else, as I mentioned, I think, but just leverage and execute what we currently have, we think it’s a very viable, strong company profile. And we think that’s a very good position to be in. So we can adopt very good financial discipline, and make sure that we get good value in any acquisition, whether it be product or whether it be companies moving forward. So, we feel very good about the platform that we have, and the ability for ourselves to differentiate from others.

David Martin

Great, thank you.


Ladies and gentlemen, we have reached the end of the question-and-answer session. At this time, I would like to turn the call back to Adrian Adams for concluding remarks.

Adrian Adams

Thank you so much. I think, as I mentioned in my latter comment, we remain very confident about the Aralez platform and our ability to deliver enhanced shareholder value over the course of time. I would like to thank you for joining us this morning. And as always, we look forward to updating you on our continued progress and the corporate milestones in our next quarter and thereafter. So thank you again. And thank you, operator, for so excellently and efficiently managing this call. Thank you, everybody, and good morning.


Thank you. This concludes today’s teleconference. We thank you for your participation. You may disconnect your lines at this time.

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