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Executives

David Carey

Robert B. Jones - Chief Executive Officer, President and Director

Peter A. Clemens - Chief Financial Officer, Principal Accounting officer, Senior Vice President of Investor Relations and Secretary

Analysts

Michael Kallai Tong - Wells Fargo Securities, LLC, Research Division

Kevin Kedra - Gabelli & Company, Inc.

James Liberman

Robert Cummins Hazlett - Roth Capital Partners, LLC, Research Division

Tom Marks

Acura Pharmaceuticals (ACUR) Q2 2012 Earnings Call July 31, 2012 8:30 AM ET

Operator

Good day, everyone, and welcome, ladies and gentlemen, to the Acura Pharmaceutical's Conference Call. As a reminder, today's call is being recorded. [Operator Instructions] At this time, I'd like to turn the call over to David Carey of Lazar Partners. Please go ahead, sir.

David Carey

Thank you. Before we begin, I'd like to remind you that any discussion that takes place during this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements reflect management's current view of future events and operations including, but not limited to, statements pertaining to the company's expectations regarding OXECTA and other products licensed to Pfizer, the company's product development pipeline, commercial plans for the NEXAFED product, the commercial potential of the company's products and plans to maximize this potential, future product sales and financial results and the company's strategy for long-term growth. Forward-looking statements involve certain significant risks and uncertainties, and actual results may differ materially. Given these uncertainties, you should not place undue reliance on these forward-looking statements.

Certain factors that may cause actual results to differ materially from the forward-looking statements are discussed in the company's press release issued yesterday evening and the Risk Factors section and other sections of the company's Form 10-K for the year ended December 31, 2011, as filed with the Securities and Exchange Commission.

Acura does not undertake to publicly update or revise any of its forward-looking statements even if experience or future changes show that the indicated results or events will not be realized.

I'll now turn the call over to Bob Jones, President and CEO of Acura Pharmaceuticals.

Robert B. Jones

Thanks, David. Good morning, and thank you for joining us to discuss our second quarter 2012 financial results and corporate update.

Let's start with the AVERSION opioid products, which are designed to discourage some of the common methods of tampering associated with abuse and intentional misuse of the opioids. Last week, Pfizer notified us of their decision to return the 3 AVERSION opioid products in development while continuing to commercialize the product OXECTA. You will recall that our partnership with Pfizer was a result of our merger of our former partner, King Pharmaceuticals. Pfizer has had our 3 development products for 16 months following its acquisition of King. In that time, they have completed 1 bioequivalence study, held 1 FDA meeting and has not initiated any additional clinical studies.

In contrast, in the 8 months between King's announcement of the bioequivalence results on OXECTA and the submission of the NDA for that product, King completed 2 clinical studies, held an FDA meeting and completed all the other related development activities. It is against this background that we welcome our products back. We now control the timing and execution of these products, and we believe we have the resources and the expertise to execute the development plan for these products once they are formally returned by Pfizer. In the scheme of pharmaceutical development, these are not overly expensive products to develop if all goes well. We will also consider partnering these products with an alternative strategic partner for the development and commercialization of the returned products. Importantly, there is nothing we are aware of to indicate there are any clinical or regulatory barriers to developing these products.

The lead development product, hydrocodone with acetaminophen has demonstrated bioequivalence to its reference drug and the development plan discussed with the FDA at a pre-IND meeting is generally comparable to the development plan used for OXECTA. We will work with Pfizer to in effect an appropriate transition of the development products back to Acura within the next 12 months. Once we have the products back, we will be in a position to assess our strategic options for them, including the potential to relicense them to a motivated partner for development and commercialization. Pfizer has impressive marketing capabilities that have the potential to make OXECTA a long-term success.

However, we believe that their decision to price OXECTA at such a significant premium to the market has been a hindrance to the initial uptake of this product. Even so, we remain hopeful that their continued efforts position OXECTA as part of the solution to combat the abuse and misuse of opioids will soon be evidenced in not only the sales of OXECTA, but also may benefit our other AVERSION opioid products as well.

The problem of prescription opioid abuse persists. Two recent New York Times articles provided anecdotal information that abusers of extended-release opioids may be shifting to other drugs, including immediate release opioids when faced with tamper-resistant products. The Centers for Disease Control and Prevention estimates 1 person dies every 19 minutes from prescription drug abuse in the United States. We are encouraged by the fact that state and national lawmakers are devoting more attention to this epidemic and proposing legislation to combat the issue.

Importantly, last month, a bipartisan group of congressmen, led by Representative William Keating of Massachusetts, introduced the Stop Tampering of Prescription Pills Act of 2012, otherwise known as the STOPP Act. If approved, the STOPP Act would provide a framework for defining tamper-resistant technologies and encourage the development and adoption of tamper-resistant opioids. This legislation has the potential to initiate a dialogue between physicians, regulators, third-party payers and others concerned with the epidemic of prescription opioid abuse and misuse to promote the proper use of tamper-resistant technologies, along with other risk mitigation strategies.

The federal legislative efforts are not alone. Numerous states have introduced legislation regarding tamper-resistant opioid products as well. Two states have recently enacted regulations requiring for the first time physicians to register all opioid prescriptions with law enforcement. We're glad to see more stakeholders realizing the role tamper-resistant products can have in addressing the risk of opioid abuse remain encouraged that our AVERSION technology offers potential solution to a still growing problem.

Now let's turn our attention to the IMPEDE technology platform. NEXAFED is our nonprescription over-the-counter immediate release pseudoephedrine that uses IMPEDE. IMPEDE is an advanced polymer matrix that disrupts the extraction or conversion of the pseudoephedrine into illicit drug methamphetamine hydrochloride, commonly known as meth. In the second quarter, we completed the commercial scale of our manufacturing process for NEXAFED. During scale-up, we made several formulation changes to improve our manufacturing process. We have confirmed these changes have not adversely impacted our meth resistance. However, we have to obtain new stability data and intend to repeat our bioequivalence study due to these formulation changes.

We are scheduling our manufacturing validation, which if successful, we'll provide our initial commercial launch to pharmacies of the product. If all goes as planned, we can make NEXAFED commercially available to pharmacies later this year.

I'll now turn the call over to Pete Clemens, who will review our first quarter -- our second quarter 2012 financial results.

Peter A. Clemens

Thanks, Bob. Before I turn to the quarterly results, let me comment briefly on the change in our agreement with Pfizer and its impact on us. This change really has no significant near-term impact on our financial results and we are not due any termination fees for Pfizer as a result of their decision to return the 3 AVERSION products. We are still due to begin earning royalties on sales of OXECTA in the first quarter of 2013 and are eligible to receive such royalties through 2025.

As you can tell, if you looked at our financials, we are a lean organization with a burn rate of only $8 million to $9 million per year and we have approximately $31 million currently on hand. In the second quarter of 2012, we reported net loss of $2,200,000 or $0.05 per diluted share compared to a net income of $17 million or $0.35 per diluted share for the same period in 2011. As expected, we did not record revenue in the 3 months ended July -- or ended at June 30, 2012. In the same period last year, we recorded revenue of $20,400,000, mostly as a result of the $20 million milestone received from Pfizer upon the approval of OXECTA. Research and development expenses associated with product candidates utilizing the company's AVERSION and IMPEDE technologies were $900,000 in the second quarter of 2012 compared to $1.1 million for the same period last year.

Marketing, general and administrative expenses were $1.3 million in the second quarter of 2012 versus $1.7 million in the same period last year. And as I've said, as of June 30, 2012, we had cash and cash equivalents of $31.7 million and no long-term debt.

Now we'll open up the call for your questions. Operator, you may now begin the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] And we will go first to Michael Tong with Wells Fargo.

Michael Kallai Tong - Wells Fargo Securities, LLC, Research Division

Just a couple of questions on the termination of the Pfizer agreement in terms of the activities that you can do during the transition period. Can you do any clinicals or any other bioequivalent studies while the transition is occurring? And as a follow-up to that, if Pfizer hasn't done a whole lot during the period that they have these products, why does the transition period take so long?

Robert B. Jones

Thanks, Michael. We'll start with the second question first. The length of the transition period is as prescribed in our agreement with Pfizer. These are typically negotiated in some circumstances. The 12 months is generally set to be a long-enough period to affect a smooth transition. I think the 12 months was more directed at product and commercialization, for example, something like OXECTA, which will require some transition in manufacturing and marketing expertise. So our transition of the products with Pfizer will be subject to discussions with Pfizer and we hope to come to some agreement with them in short order. In terms of what we're allowed to do in the transition period, we can certainly work on certain activities with the products, but we cannot clinically develop them until we actually transition them back to Acura.

Operator

[Operator Instructions] And we will go next to Kevin Kedra with Gabelli.

Kevin Kedra - Gabelli & Company, Inc.

I was just wondering if you had any sort of discussions with Pfizer sort of what their motivation was for giving back these 3 compounds yet keeping OXECTA. And towards the end that OXECTA maybe underperforming, what you guys believe is the value of the product, is there any sense of whether Pfizer is possibly going to change their direction or strategy with the product? And if not, is there any recourse down the road for you to eventually get this product back in house as well?

Robert B. Jones

Sure. Could you clarify on the motivation, Kevin? Was that their motivation to keep OXECTA or their motivation to terminate the development products?

Kevin Kedra - Gabelli & Company, Inc.

I guess a combination of both. I mean what was it that made them want to keep OXECTA, but eliminate the 3 other compounds in the space and why did they never really push the development of these products?

Robert B. Jones

Well, from Pfizer's motivations of what they're keeping and what they have transitioned back, that was their decision. I don't think it's appropriate for us to discuss their internal deliberations and decision-making processes. That's something for them to speak to. I think what's important is that Pfizer made their determination on whatever basis to send the products back. They made that decision relatively quickly. They didn't just sit on these assets. They had a pre-IND meeting with the FDA as late as May of this year. So between that meeting and now, they made -- obviously, made a decision, which is good for us. They hadn't just sat on them and what's important to us is the fact that they're not coming back to us having failed the clinical study or had a development pathway that was not executable. These are still the products that we licensed out to King in 2007. So it's just a matter of now of us doing the work as opposed to Pfizer and certainly regaining control of the assets is important. As it comes and relates to OXECTA, the standard in our agreement is a pretty standard provision, which is Pfizer has to use commercially reasonable efforts to market the product. That's somewhat in the eye of the beholder. Obviously, to continue to utilize the same strategy and not garner any significant results or at least what we're tracking right now are weekly scripts that are less than 20 a week, and we believe that's predominantly because of the fact that the price is so high. Now at some point, our recourse is obviously we do still have partnership with Pfizer. We still have joint steering committees. We sit down with them and discuss the strategy on the products. But to press the issue, obviously, we would take a claim of breach and some legal action against Pfizer.

Operator

And we will go next to James Liberman with Wells Fargo Advisors.

James Liberman

So do I understand correctly that the hydrocodone product, according to this release, shows bioequivalency as of February study? Is that a very significant milestone for the company and the product?

Robert B. Jones

It is from our perspective. The FDA for OXECTA has determined that a bioequivalent study was sufficient to establish the safety and efficacy of the product. We had to run additional -- one additional pharmacokinetic study, and we ran our nasal abuse liability study along with our laboratory abuse liability studies. So it is an important milestone as part of the pre-IND meeting. The agency did confirm that the bioequivalence would be acceptable for the hydrocodone product. So yes, we think that -- what's coming back to us and we're pleased that the AVERSION Technology has demonstrated that we can translate the technology that's been used successfully in OXECTA. It is now at the bioequivalence level been translated into the hydrocodone with acetaminophen product. So it certainly establishes, we believe, a solid baseline for which to advance the development of the hydrocodone product.

James Liberman

And are you able to discuss any further what other further development would be required beyond that at this time?

Robert B. Jones

At this point, we cannot. Again, until the products are formerly transitioned to us, they are still Pfizer's licensed products. They are still covered by the terms of our agreement with Pfizer. But as soon as they're transitioned back to us, which we hope will be sooner rather than later, we'll be updating you on the development plans for the products.

Operator

[Operator Instructions] And we'll go next to Bert Hazlett with Roth.

Robert Cummins Hazlett - Roth Capital Partners, LLC, Research Division

Just a quick follow-up, Bob, on one of the discussion points regarding the transition of the Pfizer agreement. You're intimating in your language and I don't want to read too much into this, but I would like to try to maybe get a little bit more. You're intimating that it is possible to maybe get these back more rapidly than 12 months. I mean, I know it's stated in the agreement 12 months, but again that's -- that supposes really commercial assets. Do you think that it is possible to get them back more rapidly?

Robert B. Jones

That's certainly our objective, Bert.

Robert Cummins Hazlett - Roth Capital Partners, LLC, Research Division

Okay, and then secondly, knowing what you know now given these assets, as you consider the opportunities going forward, once they're in your hands, knowing what you know now, would you look for different characteristics in a partner other than Pfizer or what sort of type of partnership would you be contemplating once you get these back?

Robert B. Jones

Probably not substantially in terms of the nuts and bolts, not substantially different than what we had with King, which ultimately Pfizer took over and Pfizer put a lot of intellectual value into the products. If you'll recall, we had a sequenced effect that showed up in our nasal snorting study. Pfizer has done a lot on protocol development to try to work those out of the study. They've also looked in some of the laboratory studies. So there's more that's going on probably behind the scenes, but in terms of outward development of Pfizer, we got what we got. I think the -- what you're looking for in a partner is someone who shares your passion for the products, that someone who's motivated, someone who is going to hit the ground running. Certainly, they have to have the capabilities from our perspective. Commercialization will be critical. So I think it's those 2 things. It's the capabilities that they bring to the table and it's their passion and motivation and their shared vision that they have with you. Pfizer, I think, they picked up these assets from King. I'm not sure that they ever shared the same level of enthusiasm here that we had when we had with King.

Robert Cummins Hazlett - Roth Capital Partners, LLC, Research Division

That's helpful color. Just one other point on that same subject. Will you be seeking more control of the overall products or the overall development in your consideration if things move forward?

Robert B. Jones

Yes, if you'll recall back to the original King agreement, we developed the first product, which was the predecessor actually to OXECTA. We developed that product completely ourselves and then the development was turned over to King. The OXECTA product, we completed about half of the development of that product with King and King was actually, by the terms of the agreement, was in the lead in the development on OXECTA. So I think it's going depend on who we partner with, what their capabilities are. But I think given our past track record of our partial participation in the OXECTA development and our development of the former product, which was the Acurox with niacin product, I think we have a lot of experience in developing these type of assets. And if that's what it takes to bring the products to market more rapidly, we certainly would like to retain that control.

Robert Cummins Hazlett - Roth Capital Partners, LLC, Research Division

And is there any thought to just keeping these yourself and doing it yourself and building out the infrastructure?

Robert B. Jones

That's always a possibility. The challenge in the opioid space is, I think, most of us are aware is the breadth of prescribers out there for opioids and typically, we believe it's going to take a more sizable selling effort than a small start-up can really bring to bear. But if that's what it takes, that's what we'll do.

Operator

And we'll hear next from Tom Marks with Bankers & Investors.

Tom Marks

Yes, they've already answered some of my questions.

Operator

And so with no further questions in the queue at this time, I'd like to turn the call over to Bob Jones for any additional or closing remarks.

Robert B. Jones

Thank you for joining us on today's call. We look forward to updating you on our continued progress, and we look forward to seeing many members of the institutional investment community at the Stifel Nicolaus Health Care Conference in Boston on September 5. Thank you.

Operator

And again that does conclude this call. We thank everyone for participating today.

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