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Somaxon Pharmaceuticals, Inc. (NASDAQ:SOMX)

Q4 2007 Earnings Call

March 11, 2008 4:30 pm ET

Executives

David F. Hale - Executive Chairman of the Board, Interim Chief Executive Officer

Meg M. McGilley - Chief Financial Officer, Vice President, Treasurer Officer

Jeffrey W. Raser - Senior Vice President - Sales and Marketing Officer

Susan E. Dube - Senior Vice President - Corporate and Business Development Officer

Philip Jochelson M.D. - Senior Vice President, Chief Medical Officer

James J. L'Italien Ph.D. - Senior Vice President - Regulatory Affairs and Quality Assurance Officer

Matthew W. Onaitis - Vice President, General Counsel, Secretary Officer

Robert L. Jones - Vice President - Human Resources Officer

Brian T. Dorsey - Vice President - Product Development Officer

Kenneth M. Cohen > Director

Analysts

David Amsellem - Friedman, Billings, Ramsey & Co.

E. Russell McAllister - Merriman Curhan Ford

Coverage in Transition - Morgan Stanley

Brian Laegeler - Morningstar

Corey Davis - Natixis Bleischroeder

Coverage in Transition - Piper Jaffray

Ken Trbovich - RBC Capital Markets

Donald B. Ellis, Pharm.D. - Thomas Weisel Partners

Operator

Welcome to the Somaxon Pharmaceuticals 2007 fourth quarter and full year conference call. (Operator Instructions) I’ll now turn the conference over to Mr. Robert Whetstone, Investor Relations for Somaxon Pharmaceuticals. Please go ahead sir.

Robert Whetstone

Great. Thank you, Michael. Good afternoon everyone and thank you for joining us today to discuss Somaxon Pharmaceuticals 2007 fourth quarter and full year financial results. On the call today are David Hale, Somaxon’s Executive Chairman and Interim Chief Executive Officer; Meg McGilley, the Company’s Vice President and Chief Financial Officer; and Jeff Raser, the Company’s Senior Vice President, Sales and Marketing.

First some housekeeping issues before we start. Earlier this afternoon, Somaxon released financial results for the 2007 fourth quarter and full year. If you have not received this news release, if you would like to be added to Somaxon’s fax and email list to receive company information or if you would like to change your contact information, please contact [Janet Simmons] at PondelWilkinson at 310-279-5974. We encourage everyone to read today’s new release as well as Somaxon’s annual report on Form 10-K that will be filed tomorrow.

In addition, please be advised that this conference call is being broadcast live on the internet at Somaxon’s website at the investor relation section; the URL is as follows http://investors.somaxon.com/events.cfm. A playback of this call will be available or may be accessed at that site. Please note that certain of the information discussed in the call today is covered under the Safe Harbor provisions of the Private Securities Litigation Reform act. I caution listeners’ that during this call Somaxon management will be making forward-looking statements. Actual results could differ materially from those stated or implied by our forward-looking statements due to risks and uncertainties associated with the company’s business. These forward-looking statements are qualified by the cautionary statements contained in Somaxon’s press releases and SEC filings, including the annual report on Form 10-K and quarterly reports on Form 10-Q.

The content of this conference call contains time-sensitive information that is accurate only as of the date of this live broadcast, March 11, 2008. Somaxon undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call.

I would also like to point out that the company maybe discussing certain measures on a historical and forward-looking basis during this conference call, some of which maybe non-GAAP in nature. Any discussion of non-GAAP measures is not intended to detract from the importance of comparable GAAP measures.

With that said, it’s my pleasure to turn the call over to David Hale. David?

David F. Hale

Thank you, Rob and good afternoon everyone. We appreciate all of you joining us to discuss our full year 2007 financial results and some of our plans and outlook for 2008. We wish you could all be with us here in sunny Southern California today.

We’ve issued a number of important milestones during 2007. Most importantly, we finished all of the clinical and non-clinical development work required to complete our new drug application for SILENOR™ and to submit it to the FDA on January 31, 2008. During 2008, we have two major initiatives underway. One obviously is to focus on the regulatory approval process for our new drug application for SILENOR. The other is to plan for the commercialization of SILENOR if it is approved by the FDA. I’ll talk more about our SILENOR program and plans after Meg reviews our financial results. Meg?

Meg M. McGilley

Thanks David and good afternoon everyone. Our net loss for 2007 was $26.4 million or $1.45 per share compared with 46.4 million or $2.58 per share for 2006. For the fourth quarter of 2007, our net loss was 7.8 million or $0.43 per share. For the same period in ’06, our net loss was 8.3 million or $0.46 per share. As a development stage company, Somaxon had no revenues in 2007.

Research and development expenses were 12.7 million for 2007 compared to R&D expenses in 2006 of 37.5 million. The decrease is primarily due to the completion of our Phase III clinical development program for SILENOR and the completion of our clinical trial of Nalmefene for smoking cessation and the treatment of pathological gambling during 2006. This was partially offset by an increase in salary and overhead costs as well as an increase in facility costs and consulting fees. In addition, share-based compensation expense allocable to research and development personnel in accordance with FAS 123R was higher in 2007 than 2006 primarily due to equity-based awards granted in 2007.

Marketing, general and administrative expenses for 2007 were 15.6 million versus 11.7 million in 2006, the increase was primarily caused by an increased in headcount and related salary expenses for our marketing, general and administrative functions and higher professional fees and facility cost. In addition share-based compensation expense allocable to marketing, general and administrative personnel in accordance with FAS 123R was higher in 2007 than in 2006, primarily due to equity-based awards granted and the acceleration of vesting of certain stock options in 2007.

Included in total operating expenses for the year is non-cash share-based compensation expense recognized in accordance with FAS 123R of 8.4 million compared to 5 million for 2006. As of December 31, 2007 we had 18.4 million shares outstanding and 21.6 fully diluted shares which include outstanding stock option. At the end of ’07, we had 37.1 million in cash, cash equivalents and marketable securities and no long-term debt. We have enough cash to meet our operating requirements at least through 2008.

With that pre-financial review, I’d like to turn the call back over to David to take us through our SILENOR program and related matters. David?

David F. Hale

Thank you, Meg. As I mentioned earlier, we are very excited about our submission of the new drug application for SILENOR. Pursuant to PDUFA guidelines, we expect the FDA to notify us by mid-April whether it will accept the NDA for SILENOR for filing. If the NDA is accepted for filing under the PDUFA guidelines it’s expected that the FDA will complete its review and provide an action letter in December 2008. We believe that the efficacy and safety profile demonstrated in our clinical development program is sufficient to support a termination by the FDA that SILENOR can be approved for the treatment of insomnia.

We also believe that our clinical results show that SILENOR is differentiated from currently available treatments for insomnia and if approved, may achieve success in the large and growing insomnia market. Based on the results from the entire clinical development program for SILENOR, we believe that SILENOR has a number of attributes that could lead to commercial success if SILENOR is approved by the FDA.

First of all, a clinical efficacy profile showing improvement in three important parameters: firstly, sleep onset, sleep maintenance, and the prevention of early morning awakenings. A clinical safety profile that demonstrated a low drop out rate and adverse event profile that was comparable to placebo and no evidence of dependency, withdrawal, tolerance, amnesia or complex sleep behaviors. Also, we believe that SILENOR will not be scheduled as a control of substance. We anticipate that SILENOR will provide benefits to a broad segment of insomnia patients including for the treatment of chronic and transient insomnia in both the adult and elderly populations.

And finally, we believe that SILENOR because of its profile and its safety profile can be suitable for long-term use. In addition to the results from our Phase III clinical development program, our NDA for SILENOR also includes the results from our completed genotoxicity, reproductive toxicology and 26-week transgenic mouse carcinogenicity, non-clinical studies of SILENOR.

Based on correspondence with the FDA, we intend to submit the results of our ongoing two year rat carcinogenicity study as opposed to approval commitment. Our determinations regarding the non-clinical study data to include in the initial NDA submission resulted from our previous interactions with the FDA which were summarized in our news releases and our 10-K.

Our objective as you know is to establish a strategic collaboration to optimize the commercial success of SILENOR if it’s approved by the FDA. We’re also conducting market preparation activities to prepare for the commercial launch of SILENOR, and we also intend to prepare to copromote our market SILENOR to specialists and high prescribing physicians.

Another focus at Somaxon has been to strengthen the IP position for SILENOR. As we’ve recently described we have exclusive rights to 2 issued patents; one claiming the treatment of chronic insomnia that expires in 2013, and another claiming the treatment of transient insomnia that expires in 2020. In each case there are low doses ranges of 1, 3 and 6 milligrams.

In late 2007, we concluded our reissued proceeding relating to our chronic insomnia patent after the US Patent and Trademark Office confirmed that all of the current claims in this patent withstand scrutiny in light of all of the prior art identified by us. Because we intend to seek labelling for SILENOR for indications that are consistent with the subject matter of our patent claims, we believe that this patent and the remainder of our patented stake may restrict the ability of competitors to market doxepin for such indications.

Also, over the last year or so we filed a number of new patent applications based on foreseeing findings that we’ve observed in our clinical trials and non-clinical studies relating to the use of low-dose doxepin for the treatment of insomnia. Our objective here is to obtain multiple patents covering claims or statements we hope to make in the product label for SILENOR. If issued, these new patents will be listed in the Orange Book. This strategy gives us a chance to strengthen and prolong the patent protection around SILENOR through the year 2027, our confidence in the potential of SILENOR in the insomnia market to rise from our clinical and non-clinical data as well as the significant amount of market research that we’ve done.

I’d now like to ask Jeff Raser our Senior Vice-President of Sales & Marketing to review some of our recent market research results with you.

Jeff Raser

Thank you, David, and good afternoon to everyone. We continue to be very excited about the overall insomnia market and the potential for SILENOR to compete in this market. Despite some recent slowing in prescription volume, the underlying market opportunity remains significant. According to [Walters Cooler], the US prescription market for insomnia treatments grew approximately 11% in 2007 over 2006.

The market dynamics remain favorable. And we expect that the prescription insomnia market will continue to grow largely due to its untapped potential. According to the American Psychiatric Association approximately 1/3rd of American adults or 70 million people are affected with insomnia. Today, we believe that only about 20% of those who suffer from insomnia are currently being treated with prescription medications suggesting a large unmatched clinical need. We believe there are number of factors that contribute to this under treatment.

One of these factors is the lack of widespread understanding of the health consequences caused by lack of sleep. Chronic insomnia, which is defined as insomnia lasting more than four weeks, has been associated with a wide range of adverse conditions, including mood disturbances, difficulties with concentration and memory, and certain cardiovascular pulmonaries and gastrointestinal disorders.

Chronic sleep deprivation has also been associated with an increased risk of depression, diabetes and obesity among other disorders. As people who suffer from insomnia and the clinicians who treat them continue to learn about the important connection between sleep and heath. We believe this will be a catalyst for future market growth. We believe another important factor that contributes to the number of patients not taking prescription medication to treat their insomnia is their dissatisfaction with currently available treatment options.

Specifically, our market research indicates that less than 1/3rd of patients being treated for insomnia with prescription medications claim they are very satisfied with their current treatment. And only 12% of patients claim that their insomnia was well controlled. The high level of dissatisfaction is frequently attributed to characteristics associated with many of the currently marketed products. For example, in our market and research, almost 1/3rd of patients claim they were feeling groggy, and 33% claim to have suffered from memory impairment at sometime after taking their medication with almost 80% of those reporting that they felt memory lapse somewhat or very scary phenomenon. We believe that consumer concern over dependency is a major issue for currently available treatments for insomnia. In our market research, 24% of surveyed patients on prescription insomnia medications claimed that they could not sleep without it, and 28% of people suffering from insomnia, but not all medications cited fear of addiction as the reason they did not seek prescription treatment.

Safety concerns associated with insomnia medications remain a major factor in consumer’s decision making about treatment alternatives. Almost 10% that responded to our market research suggest that they did not use prescription treatment because they are worried about safety issues. As a result, we believe many of these people take over to counter products as an alternative. However, in our market research almost 1/3rd of patients claim their OTC medication did not work for them and 25% claim that they were feeling groggy. All of this suggests there is room for significant growth in the prescription marketplace with the introduction of products that fundamentally address many, if not most of these patient concerns.

In addition to research with consumers and patients, we have also conducted a significant amount of market research with physicians. The physicians we surveyed indicated that they would prefer to prescribe sleep medications for their patients that provided a full 7 to 8 hours of sleep that were not associated with the risk of dependency and that minimized the known side effects of many of the currently prescribed products such as memory impairment, hallucination, and complex sleep behaviors.

We presented physicians with a clinical profile that described the results of our completed phase III clinical trial program for SILENOR. This included data showing that patients slept 7 to 8 hours with no evidence of dependence, tolerance, withdrawal, memory impairment, hallucination, or clinically meaningful next day effects and with no reports of complex sleep behaviors. When presented with this product profile, more than 85% of physicians indicated a willingness to prescribe SILENOR for their patients. The physicians also suggested that such a product with the profile of SILENOR could become the most frequently prescribed insomnia treatment in their practice.

We believe that the introduction of new prescription treatments having a different clinical profile from currently marketed products coupled with the increased awareness of both the patient and physician level the chronic sleep deprivation can lead to dilatory of health consequences can translate into an increase in the treatment of insomnia and the result in prescription market growth.

Coupled with our ongoing marketing research efforts, we are engaged in a variety of market preparation activities. Importantly, we look forward to present a SILENOR related data at upcoming scientific conferences at both the American Psychiatric Association, or APA conference in May, and the Association of Professional Sleep Society, or APSS conference in June, we will be presenting four posters on data from our clinical development program. In addition, at APSS, some of our data will be subject to an oral presentation, and also at APSS we have a supported a continuing medical education symposium on the scientific bases of the unique effect of Selective H1 antagonist.

We believe also on – sorry, we also are continuing to develop the branding positioning at overall marketing platform for SILENOR in anticipation of potential commercial launch.

With that, let me turn the call back over to David for some closing remarks.

David F. Hale

Thank you, Jeff. The results of this market research together with the differentiated clinical profile on SILENOR underlie our belief in the potential for success of SILENOR in the insomnia market if the product is approved by the FDA. We also believe that the insomnia market itself continues to represent a significant long-term growth opportunity despite some moderation of goods in 2007 total prescriptions are more than 40% higher than they were just three years ago. The introduction of generic substitutes for Ambien has only had minor effects on the market shares of other branded products and the majority of the 70 products (indiscernible) in Americans who have ongoing symptoms of insomnia continue to go untreated while a substantial portion of those who use prescription medications continuing to express dissatisfaction, especially with respect to sleep maintenance early wakenings side effects and fear of dependence.

We believe that this market is sensitive to promotion and that growth can be sustained and potentially accelerated if new differentiated products like SILENOR can achieve a significant share of voice in the market place. With that and with the time available, we would be happy to address questions that you may have. Thank you.

Question-and-Answer Session

Operator

Thank you sir. Ladies and gentlemen at this time we will begin the question and answer session. (Operator Instructions). Our first question is coming from Ken Trbovich with RBC Capital Markets. Please go ahead.

David F. Hale

Hello

Ken Trbovich - RBC Capital Markets

Yeah, can you hear me?

David F. Hale

Yeah, please go ahead.

Ken Trbovich - RBC Capital Markets

Yeah just really quickly for Meg, I guess the question really related back to the comments in the press release and on the call regarding the issuance of options and the acceleration of vesting, could you give us a better understanding as to the impact that that had and whether was specifically limited to the fourth quarter or perhaps that there was a variance in the fourth quarter and then what the outlook would be for ‘08?

Meg McGilley

Yeah, the -- generally the issuance of options, they were options granted at the beginning of the year in the normal course of our process, the compensation committee considers options grants to the officers towards generally in the first quarter of each year. They evaluate and assess option grants for officers and then all employees are also considered for option grants that usually happens at the beginning of the year in terms of a normal course of business and that happened in ’07 and that we had higher employee base at the beginning of ’07 than we would have had in ’06, that drives the bigger 123(NYSE:R) expense number. Then at the end of ’07 Ken as you know with Ken Cohen leaving the company, there was a calculation and acceleration of options for him as a result of his termination and that resulted in a big charge, a big 123(R) expense charge in the fourth quarter that was unique and one-time only that’s why the G&A 123(R) expense that I alluded to was particularly high in ’07 relative to ’06, but that was a unique one-time only that’s out of the course of the normal grant process.

Ken Trbovich - RBC Capital Markets

Okay. When you say large, can you quantify it?

Meg McGilley

Yeah, it was just over $1 million charge for acceleration.

Ken Trbovich - RBC Capital Markets

Okay. And then for Jeff and for, I guess for David in terms of the discussions in the ongoing sort of market dynamics, can you give us a sense as to what you are seeing out there, I mean obviously we all had some of the insight into the fact that Neurocrine had potentially setup a partnership and obviously there partner was not willing to take the risk of FDA approval. What sort of sense can you give us or understanding as to what your partners are looking for, potential partners are looking for and then alternatively are there strategic ways to fund this without perhaps giving up the 100% of the right?

David F. Hale

There is a lot in that question, Ken and I’ll try to answer it. We continue to believe that the commercial success of SILENOR will largely depend on gaining access to the highest prescribing physicians. Physicians, neurologists and sleep specialists represent a significant percentage of the top decile of physicians and also as you know primary care physicians are also very important. We believe that we are as we’ve indicated continuing to have discussions with potential strategic collaborations related to the commercialization of SILENOR. We believe that a strategic collaboration may be the best way to achieve the most significant success for our shareholders in the commercialization of SILENOR. But with that said, I want to go back to the fact that SILENOR like most sleep medications will be primarily prescribed by the highest prescribing physicians and we believe that the clinical profile of SILENOR will differentiate that product for both physicians and patients. So we are continuing to have those discussions. We believe that our objective is to establish a strategic collaboration that will allow us to maintain a significant percentage of the long-term value of this asset in the marketplace and we believe that any strategic collaboration that we establish would reflect the importance of that long-term value to our shareholders.

Ken Trbovich - RBC Capital Markets

Thank you.

Meg McGilley

Hey Ken, just to add one more thing to my comment about options just to be clear the acceleration of vesting for Ken’s options was according to his employment agreement. He called for that acceleration already determined to enhance an employment agreement and so we did that according to that agreement. It wasn’t a decision we made internally we just applied the terms of the agreement.

David F. Hale

Ken let me also mention that we are continuing to move forward with activities in preparation for the launch of SILENOR and as we’ve indicated in the past part of that preparation may be that we would copromote or market SILENOR to high prescribing physicians including the specialist, psychiatrist, neurologist and others. We are looking at potentially non-dilutive ways of financing our launch of SILENOR to that, those specially goods, that why significant number of prescriptions for sleep medications.

Operator

(Operator Instruction). Our next question is coming from the line of Donald Ellis with Thomas Weisel Partners. Please go ahead.

Unidentified Participant

Hi. This is actually (indiscernible) for Donald. My question is also regarding your discussions with potential partners and I was wondering are these companies in discussions with the staying companies as six months ago and also are there more companies now that you filed the NDA?

David F. Hale

Let me just say that we continue to have discussions with a number of potential strategic collaborations, some of which we’ve had discussions with in the past. As we’ve indicated we believe that there continues to be interest in the insomnia market and we believe that there are companies that in the past may have decided that was too costly to enter insomnia market that have or we are looking at the significant long-term opportunity in the insomnia new market.

Unidentified Participant

Okay. Thank you.

Operator

All right, thank you management. There are no further questions. At this time, please continue with any closing comments.

David F. Hale

I want to thank you all for joining us this afternoon. As always, we appreciate your continued support and interest in our company. Obviously, there is a significant amount of activity in the company continuing to prepare for the FDA response to our NDA. As well as preparing for the eventual launch of SILENOR, if it’s approved by the FDA. So, thank you and we look forward to continuing to update you as we move the company forward. That concludes our call today and we thank you for your attention.

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Source: Somaxon Pharmaceuticals Q4 2007 Earnings Call Transcript

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