Nicole Greenbaum – IR
Ronald Martell – President and CEO
Stephen Ghiglieri – EVP, COO and CFO
NeurogesX, Inc. (NGSX) Q2 2012 Earnings Call August 3, 2012 8:30 AM ET
Greetings and welcome to the NeurogesX, Inc., Second Quarter 2012 Earnings Conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator instructions) As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Nicole Greenbaum of the Ruth Group. Thank you, Ms. Greenbaum. You may now begin.
Thank you operator. Joining us on the call today are Ronald Martell, President and Chief Executive Officer; Stephen Ghiglieri, Executive Vice President, Chief Operating Officer and Chief Financial Officer; Michael Markels, Senior Vice President, Commercial and Business Development; and Dr. Stephen J. Peroutka, Executive Vice President and Chief Medical Officer.
Statements in this conference call regarding NeurogesX’s business which are not historical facts may be forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995 or the Act. NeurogesX disclaims any intent or obligation to update these forward-looking statements and claims protection of the Safe Harbor for forward-looking statements contained in the Act.
Forward-looking statements may include, but are not limited to, statements regarding expected quarterly cash usage rates for 2012, expectations and timing with respect to our entering NGX-1998 into Phase 3 clinical trial; the potential timeline of development of NGX-1998; and End-of-Phase 2 meeting with the FDA for NGX-1998 and expected areas of focus and benefits from such meetings and interactions with the FDA, securing and development partner for NGX-1998, the sufficiency of cash to fund operations well into 2013, expected reduced revenues from Qutenza commercialization efforts and expectations respect to such commercialization efforts, the benefits of NGX-1998 including as compared to Qutenza and its potential market advantage, and potential participation of our commercial partner in development of NGX-1998.
Actual results may differ from these discussed here today. Factors that may affect the outcome of forward-looking statements are explained in the risk factors section of our filings with the SEC, including our Form 10-Q, which this company filed with the SEC on May 10, 2012 and as updated by our Form 10-Q for the fiscal quarter ended June 30, 2012 that we expect to file with the SEC on or about mid August 2012.
Now I would like to turn the call over to Ronald Martell, President and Chief Executive Officer of NeurogesX.
Thanks you, Nicole. Good morning and thank you for joining us on our call. I’d like to provide you with an update on our activity this quarter and progress towards our corporate goals.
As we discussed on our last earnings call, we have fully aligned our resources behind our next generation product candidate, NGX-1998, a topically applied liquid formulation of prescription strength capsaicin designed to treat pain associated with neuropathic conditions.
As you know, 1998 has the same active pharmaceutical ingredient or API as Qutenza, our approved therapy. However, NGX-1998 has product attributes that have potential to create a significant market advantage over Qutenza. For example, Phase 2 data suggests that treatment with NGX-1998 requires only a five minute topical application for up to three months of pain relief. In addition, 1998 will be delivered by an easy to use applicator that could potentially facilitate home administration of the therapy.
The liquid formulation and applicator will also allow for treatments of such areas that were more difficult to treat with the patch such as hands and feet. The advantages of 1998 product profile are very exciting and its potential has driven our adoption of strategic goal that focus on enabling a Phase 3 study of NGX-1998 by the end of this year. In addition, we are continuing to manage costs and expenses following the March 2012 reorganization, while maintaining access to Qutenza for patients whom it provides relief.
As we discussed in the second quarter, the FDA accepted our request for an End-of-Phase 2 meeting for NGX-1998. Also during the quarter, we’ve submitted a briefing package to the Agency in support of that meeting. As we expect this will be a 505(b)(2) application, one of our objectives is to gain guidance as to how much the FDA will allow reliance on the significant data we and our partner Astellas have generated that address the safety and efficacy of prescription strength capsaicin, the API shared by 1998 and Qutenza.
With guidance as to the level of a clinical data, the Agency will need for approval of NGX-1998, we will be better able to finalize our development plan including the Phase 3 clinical trial designs and move the program forward. Additionally, this guidance we believe will aid in our partnering effort. If we or our partner are able to initiate the Phase 3 clinical trial by the end of this year, that could allow for clinical trial completion in 2014, NDA submission in 2015 and a possible approval in late 2015 or early 2016.
With respect to our partnering efforts, we have been working closely with JSB-Partners identifying and engaging with potential development and commercial partners in the U.S. and other un-partnered major global markets. The process is well defined and we are making progress. I am pleased to report that there are multiple parties currently in due diligence phase. As a reminder, NeurogesX retained exclusive rights in U.S., Canada, Asia and Latin America for NGX-1998 and Qutenza.
Our partnership with Astellas covers Europe, the Middle East and Africa. Currently, Qutenza is being sold in over 31 countries in the Astellas territories. Astellas is a best-in-class commercial and development organization and their expertise is evident in the value they are creating with Qutenza brand. They continue to invest in their commercial operations as they expand the Qutenza presence throughout their territories. Their efforts have resulted in continued growth in the top line results for Qutenza sales.
Astellas has committed to a significant and broad-based clinical development program for Qutenza. In addition to the long-term safety studies of Qutenza in peripheral neuropathic pain such PHN and HIVPN, Astellas is conducting a Phase 3 clinical trial of Qutenza in painful diabetic neuropathy or DPN. They also continue to conduct long-term safety study in the DPN population.
Further, Astellas is conducting several Phase 4 studies one of which examines the use of alternative pretreatment of lidocaine and we’ve recently announced another trial as ELEVATE that compares Qutenza in a head-to-head study against pregabalin. This trial enrolled its first patients in July. In addition to Qutenza, Astellas has the right to opt-in to license NGX-1998 for their territory. Should they do so, Astellas and NeurogesX will contribute equally to the applicable and relevant cost of a Phase 3 program for NGX-1998 which would generate clinical data suitable for submission to satisfy both the FDA and EMA requirements. We are working closely with them on this progress.
Lastly, I’d like to provide an update on our patent portfolio. This quarter, we announced that we have been issued a patent and patent allowance for NGX-1998 in Japan and three new patent allowances in the U.S. The most recently announced patent allowance which we announced yesterday, we believe provides substantial additional intellectual property protection for our NGX-1998 product candidates as it covers the use of liquid formulation for capsaicin responsive conditions including neuropathic pain.
NGX-1998 is squarely [ph] in the middle of this claim set. We are pleased to be consistently strengthening this portfolio and we will continue to provide updates as we gain more protection.
I’d now like to turn the call over to Stephen Ghiglieri, to discuss the financial results of the quarter. Stephen?
Thanks Ron, and good morning. You can find the summary of our financials from the second quarter in the press release we issued this morning before this call. The release is available on our website. Without further ado, I’ll dive into the numbers.
For the second quarter of 2012, we reported total revenue of $3.1 million, an increase of $600,000 from the second quarter of 2011 and essentially flat with the first quarter of 2012. Revenues include both U.S. product sales for Qutenza and collaboration revenues that are generated through the Astellas partnership. U.S. GAAP revenue for Qutenza was $844,000 in the second quarter, compared to $486,000 in the year ago quarter and $831,000 in the first quarter of 2012.
Although our U.S. Qutenza revenue remained flat on a sequential quarter basis, this is a result of our revenue recognition policy which causes us generally to recognize revenues about 120 days after a sale to our distributor customer has occurred. Given our termination of our direct promotional efforts late in the first quarter of this year to focus our resources on NGX-1998 development, the effects of that decision on recognized revenue will begin to appear in our third quarter.
We have seen as expected, a decrease in U.S. Qutenza end-user sales in the month since we stopped direct promotion. This decline in market demand is evidenced in our deferred product revenue which declined to $648,000 at June 30, 2012 versus $1.1 million at the end of the first quarter. We have begun a campaign of indirect promotion mainly with mail and email activity that we hope will minimize the decline in U.S. Qutenza sales going forward.
Regarding collaboration revenues, amortization of our upfront license fees under our agreement with Astellas totaled $1.8 million for both the quarter ended June 30, 2012 and the prior year quarter. Also included in collaboration revenue is the royalty we received from Astellas for their sale in their territory. We’ve reported those royalties on a quarter-lag basis so this quarter we are reporting royalties on Astellas’ first quarter 2012 sales. Those royalties totaled $407,000 compared with $337,000 last quarter and a $152,000 for the year ago quarter.
We’ve recently received Astellas’ report for their second quarter of 2012, and that amount totaled for $174,000 which we expect to report in our third quarter results. During the second quarter of 2012, Qutenza was available in 21 countries within Astellas territory and additionally 10 countries had pricing approval though commercial launch had not yet occurred.
The average ex factory price had declined somewhat to approximately EUR250 per patch down from EUR290 per patch. The decline in average price was mainly due to the increasing impact of lower priced countries and ex factored price erosion. Cost of goods sold for the second quarter was $94,000 which represents a 11% of recognized Qutenza revenue for the quarter.
Margins include some fixed costs in the distribution channel and as a result, margins may continue to erode as revenues from Qutenza sales decline over the future periods. We’re taking steps to minimize the fixed cost of the distribution channel and recently took actions to reduce the number of distributors in our channel to aid in that effort. Our operating expenses excluding cost of goods sold for the second quarter were $5 million which included non-cash stock compensation charges of $0.6 million.
Net of non-cash charge, our operating expenses totaled $4.4 million for the second quarter, down 68% from the year-ago period. The decrease was mainly due to our restructuring efforts both in October of 2011 and again in March of 2012. As part of those efforts we’ve suspended direct promotion of Qutenza. To remind you, our goal is for Qutenza commercialization effort is to breakeven with U.S. product sales.
Additionally during the quarter, our development expenses were lower due to our having completed our most recent trial in NGX-1998 of Phase 2 study, the result of which we announced in Q4 of last year, but which continued to have some cost extent into the first quarter of 2012.
Going forward, we expect that our quarterly operating expenses excluding non-cash stock related compensation expense will remain consistent while actually lower than we reported in the second quarter, until such time as we being the process to prepare for enrolling patients in our next clinical study which could begin as early as later this year. As Ron mentioned, we’re continuing to manage down our cost and expenses. As part of those initiatives we’ve recently relocated to a new facility reflecting our decreased requirements. We’re committed to realizing the full benefit of our restructuring efforts, the effects of which we’ve already begun to see in our second quarter results.
Interest expense was $3.5 million in the quarter and was comprised of two components. First, interest under our $15 million term debt facility with Hercules Technology totaled $752,000 during the quarter and second, accrued interest under our royalty monetization agreement with Healthcare Royalty Partners formerly known as Cowen Healthcare Royalty Partners totaled $2.7 million during the quarter.
Now if you’ll bear with me for two minutes, I want to reiterate something from prior discussions, that is, an explanation of our debt structure and its implications for our financial condition. Our balance sheet reflects two components of debt, a $15 million term debt facility with Hercules and an amount reflected as debt to Healthcare Royalty Partners. The Hercules obligation I characterize as traditional venture debt. We have been in interest-only period since we borrowed the fund back in August of last year and beginning of September, we began to repay the debt over 30 months, a very straight forward facility.
The Healthcare Royalty debt is a little more complicated and we continue to work on improving understanding of this component of our debt. The Healthcare Royalty debt was a vehicle to monetize our income flows from Astellas. We completed the transaction in April 2010 and received $40 million from that transaction. Under the accounting rules, this is required to be recorded as debt on our balance sheet. We accrue interest at the implied IRR of the transaction which is near 20%.
Our obligation is to pay Healthcare Royalty, royalties and milestones payments we’ve received from Astellas. Those amounts pay down the debt. However the interest amounts being accrued are currently larger than the royalty payments being received and so the differences being included on our balance sheet has a component of debt. Currently our debt to Healthcare Royalty as reflected on our balance sheet sits at approximately $58 million. What’s important to note here that this debt is limited recourse.
Over the life of the Healthcare Royalty agreement which has a minimum term of 10 years, NeurogesX’s obligation of limit to difference between what has been paid to Healthcare Royalty in royalties and milestones and the original $40 million. Essentially Healthcare Royalty is guaranteed only the original $40 million investment back. Any return on that investment is not guaranteed and is non-recourse.
Our current expectation even as Astellas revenue growth remained at levels consistent with historical patterns is that Healthcare Royalty will have received in its minimum obligation within the 10-year term. If that is the case, NeurogesX would have no obligation to make any payments at the end of term. Importantly, this vehicle does not represent a claim on our current resources despite presentation as debt on our balance sheet and the interest charges we report on our statement of operation.
To finish up with the quarter’s financials, our loss per share for the second quarter totaled $0.17 on 33.1 million weighted average shares outstanding. There were 33.2 million shares outstanding on June 30. We ended the quarter with cash and investments totaling $21.7 million and our cash burn from operations during the first quarter totaled $5.5 million, that’s compared to $9.8 million cash burn in the first quarter of 2012. The lower burn in the quarter was mainly due to our restructuring efforts in March which has significantly lowered our operating run rate.
We expect our quarterly cash burn to continue to be in the range of $5 million to $6 million per quarter which includes debt service on our term loan to Hercules. We expect our current cash balances to take us well into 2013.
And now I’ll turn the call back to Ron.
Thank you, Stephen. In summary, we’re progressing towards our stated corporate goals of; enable a Phase 3 clinical trial with 1998 by the end of this year, maintain access to Qutenza while significantly reducing our expenses and seeking partnerships for 1998 and Qutenza. We believe these goals and other related activities for the company will drive value for our shareholders.
I’d now like to open the call for questions. Operator?
Thank you. We will now be conducting the question-and-answer session. (Operator Instructions) One moment please while we poll for questions. Thank you. At this time we have no questions. I’d like to turn the floor back over to management for closing comments.
Thank you operator, and thank you everyone for joining us on the call here this morning. We look forward to our progress with the company and keeping you updated throughout the course of the quarter and balance of this year as we move the company forward. Thank you for your continued support.
This concludes today’s teleconference. You may now disconnect your lines at this time. Thank you for your participation.