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Somaxon Pharmaceuticals, Inc. (NASDAQ:SOMX)

Q2 2012 Earnings Call

August 7, 2012 4:30 pm ET

Executives

Matt Sheldon - IR

Richard Pascoe - President and CEO

Tran Nguyen - SVP and CFO

Analysts

Graig Suvannavejh - Jefferies

Operator

Welcome to the Somaxon Pharmaceuticals' second quarter 2012 conference call. (Operator Instructions) I would now like to turn the conference over to our host, Mr. Matt Sheldon, Investor Relations for Somaxon's.

Matt Sheldon

Good afternoon, everyone, and thank you for joining us today to discuss Somaxon Pharmaceuticals' second quarter 2012 financial results. On the call today are Richard Pascoe, the company's President and Chief Executive Officer; and Tran Nguyen, the company's Senior Vice President and Chief Financial Officer.

First some housekeeping issues before we start, earlier today Somaxon issued a news release announcing the company's financial results for the second quarter of 2012. If you have not received this news release, if you'd like to be added to Somaxon's fax and e-mail list to receive company information, or if you would like to change your contact information, please contact Somaxon Investor Relations at 858-876-6500. We encourage everyone to read today's news release as well as Somaxon's quarterly report on Form 10-Q that will be filed later today.

In addition, be advised that this conference call is being broadcast live on the Internet at investors.somaxon.com/eventdetail.cfm. A playback of this call will be available and may be accessed at that site.

Please note that certain of the information discussed on 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 the 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 its annual report on Form 10-K and quarterly reports on Form 10-Q.

This conference call contains time-sensitive information that is accurate only as of the date of this live broadcast, August 7, 2012. Somaxon undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call.

With that said, let me turn the call over to Richard Pascoe. Rich?

Richard Pascoe

Thank you, Matt, and good afternoon everyone. We appreciate you joining us to discuss our financial results for the second quarter of 2012 and our future plans and outlook. Since the beginning of the second quarter of 2012, we have continued to make progress towards our corporate objective of increasing stockholder value.

Importantly, we recently settled our Silenor paragraph IV litigation with Mylan, Par and Zydus, representing three of the four generic filers. We also increased Silenor net revenues for the second quarter as compared to the first quarter of this year, and we continue to manage our operating expenses in an effort to drive towards profitability.

In addition, we bolstered our balance sheet through a registered direct offering of common stock and warrants, which we believe positions us to achieve positive cash generation in 2013. We are also continuing to see to maximize the value of Silenor for our stockholders through our previously announced strategic alternatives process, led by advisor, Stifel Nicolaus Weisel.

I will provide more detail regarding our activities and progress in a few minutes. But first, I would like to have Tran, briefly review our financial results for the second quarter of 2012. Tran?

Tran Nguyen

Thanks Rich, and good afternoon, everyone. For the second quarter of 2012, we reported total revenue of $3.4 million consisting of net product sales of Silenor of $2.9 million and license fee revenue from our South Korean license deal of $0.4 million. Net product sales of Silenor for the comparable second quarter of 2011, was $6.2 million.

As a reminder, in the second quarter of 2011, we began recognizing revenue for sales of Silenor at the time of delivery of the product to our wholesale pharmaceutical distributors and other customers, resulting in a one-time increase in net product sales of $3.2 million in that quarter from the recognition of previously deferred product sales revenue. As a result, a better competitor of net product sales for the second quarter of 2012 maybe the first quarter of 2012, for which net product sales of Silenor was $2.7 million.

Our total operating costs and expenses for the second quarter of 2012 were $5.6 million, including $0.7 million of non-cash, share-based compensation expense compared with $21.2 million, including $1.4 million of non-cash share-based compensation expense for the second quarter of 2011. The decrease compared to the comparable prior-year period was primarily due to the reduction of our marketing efforts and the our reduction in force in the fourth quarter of 2011.

Cost of product sales was $0.3 million for the second quarter of 2012 compared to cost of product sales for the second quarter of 2011 of $0.7 million. Gross profit was $2.7 million for the second quarter of 2012 and $5.6 million for the second quarter of 2011. Expressed as a percentage of net product sales, gross margin was 91% for the second quarter of 2012 and 89% for the second quarter of 2011.

SG&A expense was $5.3 million for the second quarter of 2012 compared to $20.1 million for the second quarter of 2011. The decrease in SG&A expense was primarily due to the reduction of our marketing efforts and our reduction in force in the fourth quarter of 2011, as we discussed earlier.

We had no research and development expense for the second quarter of 2012. Research and development expense for the second quarter of 2011 was $0.5 million. Our net loss for the second quarter of 2012 was $2.2 million or a loss of $0.05 per share compared with a net loss of $14.9 million or a loss of $0.33 per share for the second quarter of 2011.

As of June 30, 2012, we had 48.1 million shares outstanding and 57.5 million shares on a fully diluted basis, which includes outstanding stock options, restricted stock units and warrants. On a pro forma basis, taking into account our recent registered direct offering as of June 30, 2012, we had 57.5 million shares outstanding and 71.6 million on a fully diluted basis.

At June 30, 2012, we had cash and cash equivalents totaling $7.1 million and no debt. On a pro forma basis, taking into account our recent registered direct offering as of June 30, 2012, we had cash and cash equivalents totaling $9.8 million and no debt. At December 31, 2011, we had cash and cash equivalents totaling $10.7 million and no debt.

With that, I'd like to turn the call back over to Rich.

Richard Pascoe

Thanks Tran. As we have previously disclosed, during the first half of this year, we streamlined our commercial operations and reallocated our commercial resources with a goal of maximizing prescriptions, and net sales of Silenor are continuing to manage our operating expenses.

We are continuing to focus on our commercial resources towards the objective of achieving positive cash flow and profitability. Our sales force focuses on current Silenor prescribers and high-branded prescribers, where we have favorable managed care coverage in order to increase current prescribing of Silenor.

The balance of our commercial efforts in 2012 will focus on increasing the utilization of Silenor through the managed markets contracting as well as enhancing our patient loyalty programs to encourage retails and more effectively penetrating the elderly patient population.

Specifically, with respect to this last area, we intent to leverage Silenor's unique safety profile to gain more favorable Medicare coverage as part of CMS's Five-Star Quality Rating System. That system provides bonus payments to Medicare Advantage Plans based upon the plans quality rating, of which drug safety in the elderly population is a key component.

As an example, our efforts to drive Silenor utilization through this initiative, we've recently agreed to terms with a national Medicare party, Pharmacy Benefits Manager, placing Silenor on it's formulary in a Tier 2 unrestricted access status starting October of this year.

Importantly, because of Silenor's unique safety profile, starting in January of 2013, this plan will place a step added on generic Ambien, Ambien CR and Sonata, thus requiring Silenor to be used first over a generic GABA agonist in an effort to provide access to non-high-risk medications, such as Silenor. This reorganization of Silenor as a non-high-risk medication for use in the elderly population is consistent as well of the recent update of the Beers Criteria for potentially inappropriate medication use in elderly adults.

In the recent update of the 2012 Beer's List published by the American Geriatric Society, doses of doxepin or Silenor of 6 mg and below are excluded under the stated rationale that low-dose doxepin has a safety profile comparable to placebo. Doxepin 3 and 6 mg is the active pharmaceutical ingredient in Silenor.

Just in contrast to the inclusion on the Beer's List of the active pharmaceutical ingredients and Ambien, Ambien CR, Lunesta and Sonata, together with the recommendation that such medications, just mentioned, are not to be used chronically, defined as greater than 90 days.

While we can provide no assurance that we will be successful in replicating this particular Part D event, we intend to vigorously pursue all available avenues by which we can make Silenor available to elderly insomniac included in this Part D opportunity. We believe that a focused deployment and management of our more streamline commercial resources is in fact producing results.

Looking at some performance metrics to bear this out, wholesale orders in the second quarter of 2012 grew 7.9% compared to the first quarter of 2011. Weekly total prescription data during the second quarter appears to be stabilizing relative to the larger expected declines from the first quarter.

The refill rate for Silenor has grown from 18% at the end of 2010 to approximately 42%, representing a base of overall patients. And the average prescription size is 34 tablets, indicating continued movement through the mail-ordered channels.

Throughout the second quarter of 2012, the total number of unique physicians who have prescribed Silenor, continue to increase. As of the end of May 2012, the total number of unique physicians that have prescribed Silenor was approximately 19,000.

In addition to our commercial efforts, we continue to make progress in our defense of Silenor's intellectual property against the generic challengers, with the goal of protecting its market exclusivity, while allowing us to remove uncertainty and to reduce the cost of litigation.

In July, we entered into separate settlement arrangements with Mylan, Par and Zydus to resolve pending patent litigation with each of them involving Silenor 3 and 6 mg tablets. The settlement agreement with Mylan, grants Mylan the exclusive right to begin selling an authorized generic version of Silenor on January 1, 2020, or earlier under certain circumstances.

Mylan's right to sell the authorized generic product could extend for a period of as long as 360 days, after which Mylan will have the non-exclusive right to sell a generic version of Silenor under its ANDA. In connection with this settlement agreement, the parties also entered into a supply agreement, under which Mylan has agreed to supply us with commercial quantities of Silenor 3 mg and 6 mg tablets.

The settlement agreements with Par and Zydus grant each of them the right to begin selling a generic version of Silenor, 180 days after the earlier of the date a third party generic version of Silenor is first sold in United States under a license from us or a final court decision that the litigated patents are not infringed, invalid, unenforceable or earlier under certain circumstances.

We will continue to defend Silenor's intellectual property against the remaining generic challenger Actavis with a goal of protecting its market exclusivity, while allowing us to minimize further uncertainty and the cost of litigation. We will also continue to work with our advisor, Stifel Nicolaus Weisel, to evaluate strategic alternatives with the goal of fully leveraging Silenor for the benefit of our shareholders.

In addition, to seeking to leverage Silenor's promotional sensitivity in the U.S. prescription market, this will entail working to generate value from both ex-U.S. and OTC rights for Silenor. I'd like to say a few words about each of these.

In April, we entered into a collaboration with CJ Corporation, pursuant to it CJ will commercialize Silenor in South Korea, if approved. We received an upfront payment of $600,000 U.S., and if Silenor is approved in South Korea, we will be eligible to receive sales-based milestone payments as well as a royalty, based on net sales of Silenor in South Korea. We will also supply CJ's requirement for commercial quantities of Silenor in South Korea at a separate transfer price.

We also previously announced that our licensee Paladin Labs filed a new drug submission for Silenor in Canada that is under review by Health Canada. If approved, Silenor is expected to be the first and only prescription product approved for the sleep of insomnia in Canada that is not a controlled substance. To date, the Canadian prescription sleep aid market has consisted mainly of Zopiclone and older medication, that despite it's limitations it has driven the market to exceed $87 million in 2011, an increase of 10% versus the prior year.

If Silenor is approved and commercialized in one or more of the licensed territories, most notably Canada, Somaxon will be eligible to receive sales-based milestone payments of up to $120 million U.S. as well as a tiered double-digit percentage of net sales. According to Paladin's most recent earnings call, Paladin is expecting approval of Silenor by Health Canada in late 2012, and a launch of the product in Canada in early 2013.

Our deals with both CJ and Paladin represent our commitment to partnering to drive Silenor revenue from all markets where it can be cost effective. We expect to continue to see partnerships in other ex-U.S. regions, where there is an unmet need or a highly differentiated insomnia treatment, particularly in Japan.

We are also seeking to leverage Rite and an over-the-counter version of Silenor. The FDA has provided clinical and regulatory guidance related to a Silenor OTC program that we believe provides a clear path-forward for this important Silenor life cycle management opportunity.

As we have stated before, we believe that Silenor's characteristics, including its lack of addiction potential and its clinical efficacy and safety profile make it an ideal candidate to be the first prescription insomnia therapy to be converted to an OTC product. The leading OTC products currently available for the treatment of insomnia utilize diphenhydramine or Doxylamine as their active ingredients. Both of these are listed in the 2012 Beer's List as medications to be avoided for use in older patients.

And with over 70 million insomniacs in the USA alone, where 80% or approximately 56 million of those do not use prescription therapy, coupled with the lack of a differentiated product with and/or safety concerns with existing OTC sleep aids, we believe that an approved OTC version of Silenor has a significant commercial potential in the U.S. over-the-counter sleep aid market.

In conclusion, we are pleased with the progress we are making in our business and we are exited about the potential to execute our Silenor operating plan during the remainder of this year. Moreover, we will continue to seek to maximize the value of Silenor in everyway possible for the benefit of our shareholders, while diligently managing operating expenses to drive towards being cash flow positive and profitable.

With that, and for the remaining time available, Tran and I would be happy to address any questions that you may have. Operator?

Questions-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Graig Suvannavejh with Jefferies.

Graig Suvannavejh - Jefferies

I just got a couple of question to ask you. First of all, could you just tell us a little bit more about this five-star program and it seems like you have one party win so far, I'm just trying to get a sense of what the opportunity is, generally speaking, how many more contracts do you think that you can go after? And then my second question just has to do with your current patent litigation with Actavis. Just wanted to get a sense of where do you think that is and what your sense of Actavis is positioned, and whether you think it will be some time that is will be difficult or relatively easy to settle?

Tran Nguyen

As it relates to the first question, we believe that we have had done a good job in getting Silenor coverage in the commercial payer markets since launch. With over 130 million lives currently covered predominantly in a Tier 2 or Tier 3 position.

The one opportunity that we have yet to fully penetrate, however, is the elderly population and given that that population is a 65 and older population, which is consistent with some of the clinical trials we ran, but we saw a striking level of efficacy and safety in the elderly population.

We believe that that's untapped opportunity for the product that we need to address through primarily a contracting effort. And so as a result of that, we've been working towards establishing and identifying those plans around the country where we can position Silenor as a safe and effective alternative for the elderly population, to make it available to them in a way that's cost effective for the patient.

As it relates to this program that you questioned, the Medicare managed plans that are out there are now enticed or incentivise by CMX to do everything possible to improve the quality of the experience that elderly patients have under these Medicare Advantage plans.

One of the components of that is to improve patient safety and as it relates specifically to our product and as the patient population is being treated, there are really two things that I can point you towards.

One is there is an effort to reduce any safety concern or adverse event concerned that there might be with the certain drugs including the Sleep Aid category, and by making these safer alternatives available on formulary and making the use of those products including a drug Silenor available to those patients, it enhances and improves the rating system or the rating for that particular plan.

Another component that falls into this sort of safety arena is the reduction of falls and other related injuries that can happen to elderly patients, clearly given the profile of Silenor, to be the non-side effect profile, that's lack of next day residual effects. We believe and of course, we'll continue to push into some other plan that we've identified that it should be and can be a safe alternative to some of the GABA agonist that are on the market.

In relation or in addressing your question on the current litigation, as we've noted in our remarks, we have settled on very favorable terms in our view with Mylan, Par and Zydus. Actavis is obviously still remaining, well. It's a practice of the company not to comment specifically on ongoing litigation.

I can't share with you that, we are in dialogue with the representatives from Actavis and it's our goal to resolve this remaining paragraph IV challenge in the most shareholder friendly fashion, meaning to do it as quickly as possible on the best terms possible, consistent with what you've seen here recently in the announcements we've made on the other three.

And I think importantly to ensure that we have clarity on this situation in such a way that we can also reduce ongoing expenses, given that the litigation cost will continue until we can resolve this. So can't make any firm predictions on the outcome, but suffice to say that we're committed to resolving this in the most Somaxon friendly way possible.

Graig Suvannavejh - Jefferies

If I could just follow-up actually, just two quick questions. One is a follow-up on the five-star parameter. How should one think about the profitability of all that type of arrangements versus what you have with the other $130 million commercialized being proprietary, in a way we should we think about that.

And then just the second, we were encouraged by some of the Silenor trends and I do think just looking at some of the latest weekly that it does look like perhaps the total prescriptions are down and that might be just a sampling of just one week.

But I guess, at the end of the day the question I guess, I want to ask is how confident are you guys right now that you can really grow Silenor revenue given the resources that you have behind you right now?

Richard Pascoe

To the fact to your question on the managed Medicare opportunity, I mean clearly we think that making this product available to the elderly population is an important opportunity for us to pursue. Having said that, we are committed as a company, to achieving profitability and cash flow generation, as quickly as possible, so we will certainly look to target our efforts in this regard towards those plans where we can negotiate terms that are a favorable to us.

I think generally speaking, the discounts and rebates associated with particularize tends to be a little higher than that on the commercial side. And so we'll be very selective and very surgical equivalent in how we address this, so that we can continue to achieve our stated goal of becoming profitable and reaching cash flow generation.

On the second part of your question, we just received the June data, the monthly data. I think a couple of things to note, since the beginning of the year we have seen a stabilization of the business. We obviously, reported out an increase in net revenue for the second quarter. And we saw a stabilization of the both totaled and new prescriptions when you compare the second quarter to first quarter.

I think there is a little lumpiness, if you will in the week-to-week data versus the monthly data. And also I will add that historically speaking, the summer months tend to see the market itself for the insomnia products, a drop somewhat with the vacations and schedules, and the how are the acquired. So I guess the best way to characterize it is, without making forward-looking projections is that we're confident and that we've stabilized our business.

We believed now that with the commercial efforts that we're making and the resources we're putting towards those efforts in the field will continue to focus on our existing prescribers to grow that base of business, where we already have traction. And to look to some of these other opportunities like the elderly population to add additional prescription and revenue to our business moving forward.

Graig Suvannavejh - Jefferies

Just a question may be around 2012 guidance, I'm assuming there are no changes in the current guidance. I just want to reaffirm that?

Tran Nguyen

As you know Graig, on our fourth quarter earlier this year, we stated that non-GAAP OpEx would be between $15 million and $16 million, which is of course excluding basically share-based compensation expense.

So at this point, we're still keeping that $15 million to $16 million. And then as Rich mentioned earlier, we want to continue to see where we end up here with the remaining generic filer. And once we can get that behind that, I think we can give the street a new estimate based on better outlook of seeing those litigation cost in our rear view mirror.

Graig Suvannavejh - Jefferies

Second question, maybe have to do with comments around the OTC opportunity. Just wanted to know what's your current thoughts' were in, and where do you think the future direction might go with an OTC application of Silenor?

Richard Pascoe

Graig, I think the way we've continued to look at Silenor and the opportunity is that there is value in RX business, which we will continue to build and grow, given the resources we have to put behind it, now and in the future. And with the evolving clarity on our patent situation, clearly that gives us the certainty that we will need going forward to invest properly in it as an RX product.

The other two components that we believe have great value and that we'll continue to look to extract value from. One is the ex-U.S. business that I spoke of earlier. I think with the near-term opportunity being approval in Canada, as early as end of this year with revenue being generated and milestones in realities that we would expect to receive based upon that.

The third piece that answer to your question, which was the over-the-counter opportunity. We continue to look upon as the most attractive lifecycle management opportunity for the product.

And given the market dynamics in the RX base as well as the vast opportunity that we see overall on the over-the-counter side, coupled with the fact that we have a safety tolerability profile and very clear guidance from the agency, in terms of being able to take the viability counter, all hedged up to what we believe, value for the product and for the company that we will look to extract in the best way possible.

As you know, we are working with Stifel on a process, which we've disclosed numerous times and spoke of today, as part of that process not only is the RX side of the business available for interested parties, but also the OTC business and what that represents to us. In terms of value clearly we think has great potential.

Graig Suvannavejh - Jefferies

I don't know if you want to specifically comment on this question that I have, but since you have been able to settle three of the four patent litigations, have you seen any change in the activity or discussions around the Silenor?

Richard Pascoe

We are clearly working closely with Stifel in the process, and I think it's fair to say that with the settlement that we announced last month that that has opened up several doors that we are currently exploring. We've had ongoing dialogue with companies along the way, but clearly with this type of outcome on three of the four settlements. It has helped to further the dialogue. And so we'll continue to let Stifel do their work. And when we have something to report, we will certainly up share that with the street at the appropriate time, once we've completed that process.

Graig Suvannavejh - Jefferies

And maybe just a last housekeeping question from me, the partnership in Korea. Could you remind us; a, what's your expectation around timelines are; b, and believe the original agreement was for $600,000 upfront, and I guess in this quarter you recorded $420 million, so I'm just trying to figure out what to do with the balance of that?

Tran Nguyen

So from our South Korean perspective, we expect a launch in around 2014. We've been clearly working with our partners and helping them get the regulatory documents filed with their regulatory body. So as if right now that's what we're been told by there side is that we should be expecting something in the 2014 time period.

Graig Suvannavejh - Jefferies

That's for approval one side, for filing or for commercial launch?

Tran Nguyen

For commercial launch. And the $600,000 was an upfront payment that they have already made to us. We haven't actually disclosed the remaining deal terms of the partnership. That being said, we see really more value being driven from the Paladin partnership than the South Korean partnership.

Graig Suvannavejh - Jefferies

I believe you recorded $420,000 in the quarter. Is there something to be done with the extra left over $180,000?

Tran Nguyen

Yes. We are amortizing the rest of it over the life of the partnership.

Graig Suvannavejh - Jefferies

Which is how long?

Tran Nguyen

Which is about 15 years.

Operator

Gentlemen, there are no further questions in the queue. Please go ahead.

Richard Pascoe

Thank you. Thank you all for joining us this afternoon. As always, we appreciate your continued support and interest in our company. If anyone has any further questions, please do not hesitate to contact the corporate or Investor Relations team at Somaxon. That concludes our call today. And we thank you for your interest in Somaxon.

Operator

Ladies and gentlemen, this concludes the Somaxon Pharmaceutical's second quarter 2012 conference call. If you like to listen to a replay of today's conference, please dial 303-590-3030, and enter access code of 4555893. AT&T would like to thank you for your participation. You may now disconnect.

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