Tercica Inc. Q1 2008 Earnings Call Transcript

May.12.08 | About: Tercica Inc. (TRCA)

Tercica Inc. (TRCA) Q1 2008 Earnings Call May 12, 2008 4:30 PM ET

Executives

Fred Wiklund - Senior Director of IR

Chip Scarlett - CEO

Richard King - President and COO

Ajay Bansal - CFO

Analysts

Eric Schmidt - Cowen and Company

Matt Osborne - Lazard

Tom Shrader - Rodman and Renshaw

Jim Reddoch - Friedman, Billings, Ramsey

Chris Raymond - Robert W. Baird

Jason Oveya - Jalal Equity

Operator

Good afternoon and welcome to Tercica First Quarter 2008 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we'll hold a Q&A session. (Operator Instructions). As a reminder, this conference is being recorded, today May 12, 2008.

I would now like to turn the conference over to Mr. Fred Wiklund. Please go ahead sir.

Fred Wiklund

Good afternoon. This is Fred Wiklund, Senior Director of Investor Relations and Corporation Development at Tercica. Thank you for joining us today to discuss financial results for the 2008 first quarter. Joining me from Tercica today are Chip Scarlett, our Chief Executive Officer; Richard King, our President and Chief Operating Officer; and Ajay Bansal, our Chief Financial Officer.

Except for the historical information, our presentation today contains forward-looking statements concerning the company's prospects and results, including without limitation that the company reiterates it's 2008 total revenue and year-end cash guidance, and has expectations regarding the initiation dates for clinical trails for neuroendocrine tumors and AGHD, and enrollment and completion date for our growth hormone combination product short stature clinic trails. Our pipeline prospects, and other expectations, beliefs and plans all involve significant risks and uncertainties.

There are important factors that could cause actual results to differ materially from our forward-looking statements. For a detailed discussion of these factors, we refer you to Tercica's most recently filed Form 10-K for the year ending December 31, 2007 filed with the SEC on February 29, 2008. The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast today, May 12, 2008. Tercica undertakes no obligations to revise or update any statements to reflect events or circumstances after the date of this call.

With that said, I'd like to turn over the call to Chip Scarlett.

Chip Scarlett

Thanks, Fred. And welcome everyone to our first quarter conference call. I’d like to start by briefly commenting on our commercial performance to date and updating you on other highlights from the quarter. First the launch of Somatuline Depot is progressing well. Our sale reps have now been promoting Somatuline Depot for about five months and the feedback from physicians, nurses and patients continues to be positive and over 50% of the patients treated with Somatuline Depot were switched from Sandostatin early on. Richard will cover more detailed feedback from market research conducted in April 2008 among physicians treating acromegal patients.

Regarding Increlex, although sales in the first quarter reflected seasonal and short-term inventory effects, we see good underlying momentum in this part of the business as well. Richard will also cover this in detail. In addition, with year-to-date revenues as of today totaling approximately $7.3 million, we remain on track to achieve our 2008 total revenue guidance of $30 million to $38 million and year-end cash guidance of $40 million.

Also regarding Increlex, we are pleased to report the initial efficacy and safety data that were recently shared with investigators in our IGFD Registry study. These data are important because they are the first Increlex data pertaining to children who are representative of the patient population being treated by the physicians today.

We are pleased with both the growth rate seen and the positive safety data from the study. Updated data will be presented on June 17th of American Society's 90th Annual Meeting in San Francisco.

I will now turn the call over to Richard, who will provide more details on several of these points. Richard?

Richard King

Well, thanks Chip and let me first start with an update on the ongoing launch of Somatuline Depot. As you know Somatuline Depot became commercially available in mid-November 2007. Over the past few months, our field force has presented the product to many of our leading customers, and the (inaudible) growing feedback from physicians has been positive. Recently Tercica retained agency to conduct market research among 76 endocrinologists who treat patients with acromegaly to gauge reaction to introduction of Somatuline Depot. Five months after our launch, 60% of study participants claim to have used Somatuline Depot and estimate that 14% of the patients were being treated with Somatuline Depot at that time.

We also reported that 53% of the patients that were treated with Somatuline Depot had been switched from Sandostatin LAR and another 19% came from generic octreotide. Participants also reported that the top three reasons for switch were one, the convenience of the pre-filled syringe in 62% of switch cases; secondly, inadequate response to prior therapy based on the number of breakthrough symptoms on Sandostatin LAR in 56% of switch cases; and lastly saving us staff time and resources in 54% of switch cases.

As we discussed on the last earnings call, the available public data sources that categorize the market share up-tick of Somatuline Depot all have limitations. These limitations notwithstanding, we are pleased to note that in the weekly IMS exponent data averaged across the last four weeks, Somatuline Depot captured 8.2% of new prescription and 4.4% of total prescriptions written for the three main therapies used to treat acromegaly which are Sandostatin LAR, Somavert and Somatuline Depot. These data also suggest that in terms of penetration into the market, we have pulled level with some of them, which the product market by finds specifically for the treatment of acromegaly. This collective feedback provides us with confidence that our launch is on track and that our promotional messages are being successfully communicated to our physician audience.

While the launches in acromegaly are in high gear, we are also actively exploring strategies to development Somatuline Depot for the neuroendocrine tumor or NET market. We are preparing to discuss a [protocol] design for the treatment of certain neuroendocrine with the FDA in the coming months. If these discussions are successful, we expect to initiate a clinical trial in NET by yearend 2008.

Let me now turn to Increlex. Net product sales for Increlex in the first quarter were 3.4 million. As Chip mentioned in his opening remarks, the sales of Increlex in the first quarter reflected seasonality to discuss in the short stature market as well as what we believe to be one-time effect related to our distribution channel strategy.

First, we saw the effects of market seasonality on Increlex revenues. This first quarter effect has been consistently observed in the growth hormone market. When we look at quarterly sales trends over the past three years, for the leading growth hormone manufacturer in the United States, the first quarter product sales have declined approximately 9% in dollar terms over the previous fourth quarter sales, which is roughly in line with what we observe with Increlex this quarter.

We believe this decline can be primarily attributed to two factors; the first is the customer stocking by most distributors during the proceeding fourth quarter in anticipation of annual price increases in the new year and the second is the delay in commercial shipments as patients switch the insurers over the new year that must be enrolled and sometime re-qualified by their new insurers.

Aside from these seasonal effects on revenues traditionally seen in the short stature market, we also observed what we believe should be a one-time meaningful reduction in average inventory levels of Increlex held especially pharmacies in the first quarter. This was a consequence of our deliberate strategy specific to Increlex. At the start of the quarter, we implemented an initiative to channel our commercial Increlex shipments through a smaller number of key specialty pharmacies. This initiative was in response to the recognition that's certain of our RSPs have particularly strong track records in terms of gaining reimbursement, achieving high levels of patient compliance with therapy and minimizing dropout for therapy.

These SPs, which now handle approximately 80% of our prescriptions or SMNs average lower levels of inventory compared to the remainder of other specialty pharmacies. This planned action to shift emphasis to these more successful SPs further amplify the de-stocking affect of the first quarter; as the year has progressed, we are now seeing demand catch up with existing inventory levels.

Let me now turn to the Increlex’s registry data and to studies MS301 and 308. We are very pleased to report initial data from our Increlex IGFD registry, which we believe are encouraging from both an efficacy and safety standpoint. We will present two posters with these data on June 17th at the Annual Endocrine Society Meetings in San Francisco

I’d like to put these data in the context of the Increlex’s launch and our progress to-date in penetrating the short stature market. When we acquired Increlex from Genentech and filed the NDA, the clinical data available came from long-term treatment of very severely affected children with primary IGFD. These children were profoundly growth hormone resistant and were some of the shortest and most IGF-1 deficient patients in the world.

Even before Increlex received an approval for the treatment of severe primary IGFD, we recognized how important it would be to provide physicians with data from the treatment of less severely affected children; that is, the type of children with severe primary IGFD that they more routinely see.

To address this, we initiated three clinical studies. Firstly, we began MS301 which is the registration study evaluating Increlex versus observation only in children with primary IGFD. Second, we began MS308, which is an exploratory study of once daily dosing of Increlex in the same population. And third, we began the IGFD Registry study in order to collect additional efficacy and safety data in the real world use of Increlex to short stature.

We recently presented efficacy data from the IGFD Registry for the first time, now representing over 300 children treated commercially with Increlex over 70 participating sites. These data suggested that treatment with Increlex have dose greater than 100 micrograms per kilo twice daily for at least a year resulted in a very healthy 8.3 centimeters per year growth rate. These data also suggested that it was important to use an adequate dose of Increlex since patients, who have treated with less than 100 micrograms per kilo twice daily had a much lower growth effect.

That's most important roll, these suggested that Increlex had a reassuring safety profile, specifically the rate of hypoglycemia was substantially lower than that observed in the more severely affected patients that were in the original NDS cohort and the reported recent adverse events including hypoglycemia were not dose dependant in this Registry study.

There are two positive implications from these data for physician's managing patients with short stature. The first is the physicians that already prescribed Increlex regularly. These data suggest that they can move patients to the target approved dose of 120 microgram per kilogram bid without undue concern that they may cause dose related hypoglycemia and so doing that they can expect to achieve attractive growth rates for children in their care.

The second is that we believe that many pediatric endocrinologists, who have been waiting for data from a population of children more representative of those patients with severe Primary IGFD, who may see in their offices, will be encouraged by these data and will consider using Increlex in such patients.

Finally, to conclude the clinical strategy we started several years ago, we expect to present data from both MS301 and 308 at our medical conference in the fourth quarter of 2008. With regard to the timing for an sNDA for Primary IGFD, we are now planning to have a pre-NDA meeting with FDA. Once we have met with the agency and know their definitive viewpoint regarding all aspect regarding the submission of an sNDA, we will let you know our expected time line.

I would like to turn now to our next generation growth hormone product candidates. These are products that contain the combination of growth hormone and IGF-1. That is why previously, we believe there is a strong scientific rationale for the use of combination products in short stature and in adult growth hormone deficiency. For short stature the goal is to [fight] efficacy greater than that which can obtained by the use of either growth hormone or IGF-1 alone.

Having greater efficacy could mean that more children would obtain normal heights than is currently possible with existing therapy. In preclinical studies, any IGF-1 growth hormone resulted in incremental effects on stature or growth and body composition that were achieved by simply increasing the dose of growth hormone alone.

If this time the profile is met, we will believe we will have a superior product addressing the approximately $2 billion worldwide short stature market. In January 2008, the first patients entered into our Phase II clinical studies for the treatment of short stature, the primary objective of this trial referred to as MS316 is to access the efficacy and safety of three different combination measurements of Nutropin AQ and Increlex compared to Nutropin AQ alone in the treatment of short stature associated with low IGF-1 levels.

The primary efficacy end point is a high philosophy during the first 12 months of therapy. After evaluation of the primary endpoint the study will be continued to evaluate long-term effects. Approximately 25 patients will be enrolled in each of the four arms of the study. We are encouraged by the rate of patient enrollment so far, and we continue to target completion of enrollment no later than mid-2009.

In addition to our short stature study, we are also in discussions with the FDA regarding the design of the Phase II clinical study with our combination product candidates for the treatment of adult growth hormone deficiency. Patients with AGHD have abnormalities in body composition, including increased body fats and reduced muscle mass. Preclinical and clinical studies have shown that the addition of IGF-1 to growth hormone has synergistic effects in reducing body fat increasing muscle mass. We expect to start this trial in late 2008.

Finally, as we have commented before during several calls, a number of similarities exist between patients with metabolic syndrome and individuals with adult growth hormone deficiency. These include increased abdominal visceral fat, insulin resistance, and high risk for development of Type 2 diabetes. After review of the clinical data from a study of the combination product in adult growth hormone deficiency, Tercica expect to evaluate the attractiveness of this product in treating other metabolic disorders associated with abnormal body composition including metabolic syndrome, obesity and/or Type 2 diabetes.

With that, I'd like to turn the call over the Ajay to discuss our financial performance for the first quarter 2008.

Ajay Bansal

Thanks Richard. Total net product sales totaled 4.4 million compared to 1.1 million in the first quarter of 2007. Net product sales for Increlex and Somatuline Depot in the first quarter of 2008 were 3.4 million and 1 million respectively. Net loss for the quarter was $17.5 million or $0.34 per share, compared to a net loss of $12.4 million or $0.25 per share for the first quarter of 2007.

Research and development expenses for the first quarter of 2008 were $6.1 million, compared to $4.9 million for the first quarter of 2007 due to increases in developmental activities associated with Tercica’s growth hormone and IGF-1 combination product candidate.

Selling, general and administrative expenses for the first quarter of 2008 were $12.4 million, compared to $9.6 million for the first quarter of 2007, due to increases in sales and marketing activities associated with the launch of Somatuline Depot. Cash, cash equivalents, and short-term investments as of March 31, 2008 were $94.9 million, compared to a $113.5 million as of December 31, 2007. As already mentioned in the call, we reiterate our 2008 revenue and year-end cash guidance.

With that financial overview I will now turn the call over to Chip to conclude our comments and to host the Q&A session.

Chip Scarlett

Thank you, Ajay. So we remain very enthusiastic about our business. The underlying Increlex sales trends remain favorable, and the launch of Somatuline Depot also continues to progress well. Meanwhile, we are very happy with the reception that pediatric growth hormone IGF-1 combination study is getting with in the pediatric endocrine community, and look forward to future progress in all of our development programs.

So with that, I’d like to now turn the call over for Q&A.

Question-and-Answer-Session

Operator

(Operator Instructions)

Your first question is from Eric Schmidt with Cowen and Company.

Eric Schmidt - Cowen and Company

Good afternoon, gentlemen.

Chip Scarlett

Hi, Eric.

Eric Schmidt - Cowen and Company

Hello. I have question on the number of patients on Increlex. I assume you saw no diminishing in that number during Q1?

Richard King

No, we did not say any diminish in patient with Increlex, indeed we’ve seen have seen robust continued momentum in terms of the Increlex brand.

Eric Schmidt - Cowen and Company

When we look at the significant sales quarter to-date in Q2, I would venture $3.1 million to-date, is that mostly, Richard a makeup on Increlex as apposed to some new growth on Somatuline?

Richard King

Yes, it is.

Ajay Bansal

So, Eric actually the delta between -- the Q1 our total sales were $4.6 million and we just talked about our sales being $7.4 million year-to-date. So far in this quarter we have $2.8 million versus $3.1 million that you mentioned and of course they come from Increlex and Somatuline Depot as well as the licensing revenue.

Eric Schmidt - Cowen and Company

Oh, that is inclusive of licensing revenue then in that sale?

Ajay Bansal

Yes.

Eric Schmidt - Cowen and Company

Okay. I am with you. Thanks for the clarification on that. Are you seeing any sales on Somatuline outside the labeled indication?

Richard King

So, we have seen the request from physicians for to treat patients outside of acromegaly and those request are being assessed by payors in terms of merits of pursuing those.

Eric Schmidt - Cowen and Company

So far no clearances or --?

Richard King

No, we do have clearance payers have non-patients have been treated for conditions outside of acromegaly.

Eric Schmidt - Cowen and Company

Okay. The last question is on the manufacturing start-up cost, are we still on for roughly $2 million and such cost for the duration of 2008 or is that no longer applicable?

Richard King

Yes, that is in ballpark, the estimated cost that we have for the remainder of the year?

Eric Schmidt - Cowen and Company

So, that on a quarterly basis will be trending down in immediately.

Richard King

That said, we would expect the majority of these cost taken place by the end of the third quarter?

Eric Schmidt - Cowen and Company

Okay. Thanks a lot.

Operator

Your next question is from Matt Osborne with Lazard.

Matt Osborne - Lazard

Hello. Thanks for taking the question. Chip, can you comment on from the Registry database which you have, what percent of patient now are at that 100 microgram dose?

Chip Scarlett

I am not sure I have the exact numbers for patients, who are at that, what we do know that in the data was quite clear that if you do not get up to that magic hundred, if you are below that you really get significantly less growth. So, we are hoping that this is really going to give us the ammunition to give comfort to physicians that they can move up as a consequence of the adverse events not being dose related and clearly they are being a strong dose relationship with efficacy.

Matt Osborne - Lazard

On the hypoglycemia, are you seeing a dose increase relative to a rate increase of hypoglycemia relative to dose increase from the rest of your data base?

Chip Scarlett

No, we are not. There is no real association between the occurrence of hypoglycemia and dosing. I think we are not as surprised by that, if I think because although every patient is individual. We do know as we have gotten our hands around both the product and probably more importantly this patient population in that. There is also lot of children in particularly with severe primary IGFD, who have certain range of spontaneous hypoglycemia and that is going to be not related to the product. I am sure there is some relationship to the use of the product as well, but it seems to not to be specifically dose related. So, I think that was quite assuring to us.

Matt Osborne - Lazard

Great and last two questions actually, was there any price increase for Increlex this quarter and then can you comment on the sales cycle, I know it seems longer in this particular indication with (inaudible). Do you see that improving over time?

Chip Scarlett

So, we did take a price increase in January, to the 15% price increase in January and then in terms of the second part of your question the sales cycle. Yes, I think that we do have a solid cadre of physicians, who has been supportive by what we are trying to do from the work get go and I think if supported as well. We have a number of physicians who frankly so in the sidelines waiting for data in population, in which is perhaps more like the population that they see that are severe primary patients.

I think the Registry data will allow a lot of that information to come to light that will allow a broader number of physicians to approach Increlex and to embrace for us to able to expand the use of base as a result of that. So, I do think that, I do see dynamics in the marketplace, which are going to evolve for Increlex both in terms of the number of physicians that adopt the brand and also in terms of the appropriate dosing of patients to realized good growth and also to always there are not dose limiting side effects for the drug.

Matt Osborne - Lazard

Great, thank you.

Operator

(Operator Instruction). Your next question is from Tom Shrader and Rodman and Renshaw.

Tom Shrader - Rodman and Renshaw

Hey, good afternoon. I think a question pretty related to what other questions I have asked. If there are no adverse effects, do you have a sense of why physicians are staying at the lower dose, is that data from earlier in use? Are not they used to titrating up till they get the growth they want? Why are they staying at the lower dose?

Chip Scarlett

It is a good question. I will take it first and then Richard may have some additional comments. I think they have not had this data before, Tom. If you looked at the data that they had available from the very time we launched the product, it suggested quite a bit higher rate of hypoglycemia for example. As I commented on that, both the consequence of the population that we studied in the initial NDA-related studies, but it is also just an experiential issue.

So they have not had the data. This is the first time we have really had the data in a broader range of patients more representative of the kids that they actually see. So, the people who’ve seen this, the investigators if you will who’ve seen this have responded very positively. Richard any other comment?

Richard King

I would only comment that. I think it took pediatric endocrinologists a good number of years to get used to the idea of pushing dose to growth hormone. It took them a reasonable period of time, and I think that is the nature of the pediatric endocrinologist in many respects. They are cautious folks, and we continue to see again, that is why this is a long cycle, sales cycle for us. We continue to see as time evolves here, better comfort with the product, leading to better utilization of the product, leading to improved and expanded experience that ultimately self enforces. So that is just the nature of the sales cycle with this population I think.

Tom Shrader - Rodman and Renshaw

How would you get this data out? Do you need to publish a paper or is it a tight enough community that you think you do most of the distribution just by strong presence of PAS or one of the important meetings?

Richard King

So we think it’s all of the above. I think this population is a well read population, and I think inactively we will get good familiarity with the data at the ENDO meeting in June when the data is presented to a broader audience for the first time. I think after that there will also be publications that follow that will further amplify it. So I think it is only above.

Tom Shrader - Rodman and Renshaw

Okay, okay, thank you.

Ajay Bansal

This is Ajay Bansal. I just wanted to add a clarification to a question that Eric asked earlier regarding the manufacturing transfer cost. Eric I think you mentioned that the rest of the year cost to the tune of about $2 million, it will actually be a little bit higher than that, are estimated to maybe closer to $3 million followed by additional cost of maybe about $1 million next year.

Tom Shrader - Rodman and Renshaw

Okay.

Fred Wiklund

Next question.

Operator

Your next question is from the line of Jim Reddoch with Friedman, Billings, Ramsey.

Jim Reddoch - Friedman, Billings, Ramsey

Good morning. Couple of quick questions, the first is what would you say your penetration in to the moderate short stature patient population is right now, so that would be two standard deviations or less? Secondly in terms of Increlex inventory, what is the equilibrium level that you are shooting for in terms of weeks? Thanks.

Chip Scarlett

I will take the first one and Richard can take the second. Jim I think that certainly the majority of physicians in prescribing for the patient right on the pay sheets is their primary IGFD and we take some of their word of that. That is certainly the majority of patients. So I think that that is probably the best answer for us to be able to give at this point in time. As far as the inventory--

Richard King

Yes. So obviously we have seen this reduction in our inventory levels. We are working LSP to ensure that they have the proper and appropriate level of inventory on hand to manage the patient population, and so therefore we would see somewhere in the three to four week range. Thus being the idea of target inventory level that we would like to run at.

Jim Reddoch - Friedman, Billings, Ramsey

Where are you now compared to three or four weeks?

Richard King

We are right around three levels; given our inventory adjustments at the ESP level.

Jim Reddoch - Friedman, Billings, Ramsey

Would you expect net inflow in the channel?

Chip Scarlett

I would call neutral. I would say we have gone through that transition, I would say, that one-time transition in the first quarter. I would say that this point going on we should expect to see neutral effects on inventory.

Jim Reddoch - Friedman, Billings, Ramsey

If you are at three now, I am assuming right now you have been into the first quarter. Where were you entering the first quarter?

Chip Scarlett

We were somewhere between four and five weeks. So, that is the scope of the change in inventory.

Jim Reddoch - Friedman, Billings, Ramsey

Okay, great. Thank you.

Operator

Your next question is from Chris Raymond with Robert W. Baird.

Chris Raymond - Robert W. Baird

Thanks much. Would you quantify the impact of Q4 as the revenue Increlex in Q4 or to the best degree that you can that was helped along by the inventory built that you think took place from the distributors.

Richard King

Have not done it. We know there was a little bit of a built towards the back end of the year. I would not say that is a dramatic effect towards backend of the year, but there was a little bit of a build in the fourth quarter.

Chris Raymond - Robert W. Baird

Okay. So you do not have anything specific?

Richard King

I cannot, I do not have any numbers available, no. Sorry.

Chris Raymond - Robert W. Baird

Thank you.

Operator

Your next question is from [Jason Oveya with Jalal Equity].

Jason Oveya - Jalal Equity

Hey, Chip. I wanted to just ask couple of general questions. One on financing, it looks like at some point in 2009 you we need to raise money and clearly this is not a wonderful environment to your stock price doing at. I am wondering if you would look to do a non dilutive financing either go back to extend what I would think would especially with weak dollar, we have a lot of incentive to continue to fund, towards it, but if you can at some point, whether its now or in the future give some indication to your shareholders that you will not do a dilutive financing.

Richard King

Ajay will probably take that.

Ajay Bansal

Yes, we will of course examine all options available to us, in case we need to raise cash and as we have mentioned to you, before the amount of cash we may need to raise its going to depend on the ramp of the products. As the product ramp faster than what we had expecting there maybe a scenario, where we have to raise very modest amount of capital or no capital. However, all of this, we would look at all the options available in terms of equity or non-equity in non-dilutive financings.

Jason Oveya - Jalal Equity

So, that kind of (inaudible) into my next question which is, it seems that data continues to improve. I think the data that announced today is exciting both from a safety standpoint and from a dosing standpoint, but we continue practically quarter-after-quarter to disappoint on the top and bottom line. I am wondering at what point you say, hey look we have got a wonderful collection of assets that we have assembled here maybe it time to put these assets in somebody else’s hand with some more marketing muscle that go through the sale cycle faster.

Chip Scarlett

I am trying to figure out how to answer that question. I think that we have a pretty clear view of the business and Jason I think that it is certainly true that we continue to try to improve our performance. We have invested fairly recently in the sales force and we continue to believe that that will improve.

I think that this is a certain level of activity that is just a timeframe that it takes to get us there. So, we are always open to thoughts about how to maximize shareholder value, but beyond that I do not think I can really say very much.

Jason Oveya - Jalal Equity

Thank you.

Operator

There are no further questions at this time. Please proceed with your presentation or any closing remarks?

Chip Scarlett

Well, I thank everybody for being on the call today, and we look forward to speaking with you at the end of the next quarter. Thanks a lot.

Operator

Ladies and gentlemen, that concludes your conference call for today. We thank you for your participation and ask that you please disconnect your line.

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