Santarus' CEO Discusses Q2 2012 Results - Earnings Call Transcript

| About: Santarus, Inc. (SNTS)

Santarus, Inc. (NASDAQ:SNTS)

Q2 2012 Earnings Call

August 7, 2012 4:30 pm ET

Executives

Martha L. Hough – Vice President, Finance and Investor Relations

Gerald T. Proehl – President, Chief Executive Officer, Director

Debra P. Crawford – Chief Financial Officer, Senior Vice President, Treasurer, Secretary

William C. Denby III – Senior Vice President-Commercial Operations

Wendell Wierenga – Executive Vice President-Research and Development

Analysts

Frank Henry Pinkerton – SunTrust Robinson Humphrey

Annabel Samimy – Stifel, Nicolaus & Co., Inc.

Scott R. Henry – ROTH Capital Partners LLC

Operator

Good afternoon, ladies and gentlemen. My name is Martina and I will be your conference operator for today. At this time, I’d like to welcome everyone to the Santarus Second Quarter 2012 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) As a reminder, this conference call is being recorded today August 7, 2012.

I’d now like to turn the call over to our host Martha Hough.

Martha L. Hough

Thank you, Martina. Good afternoon, and welcome to today’s call. This is Martha Hough, Vice President of Finance and Investor Relations. Joining me today on the call are Gerry Proehl, President and Chief Executive Officer; Debbie Crawford, Senior Vice President and Chief Financial Officer; and Bill Denby, Senior Vice President of Commercial Operations. Dr. Wendell Wierenga, Executive Vice President of Research and Development will also be available during the question-and-answer session.

Earlier today Santarus issued a press release announcing our second quarter 2012 financial results, which is available on our website at www.santarus.com. Also a replay of this call will be available for the next two weeks on the Investor Relations section of our website.

Please keep in mind that risks and uncertainties involved in the company’s business may affect the matters referred to in forward-looking statements made by management during today’s call. As a result, the company’s performance may differ from those expressed in or indicated by such forward-looking statements, which are qualified in their entirety by the cautionary statements contained in the press release and the company’s Securities and Exchange Commission filings.

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

I’ll now turn the call over to Gerry Proehl.

Gerald T. Proehl

Thank you, Martha, and welcome to this afternoon’s call. Today, we reported our fifth consecutive quarter of profitability with $3.4 million in net income in the second quarter. Total revenues for the quarter were $47.2 million reflecting an approximately 77% increase in revenue over the prior year period.

GLUMETZA continues to drive our top line results with net sales of approximately $32 million during the second quarter. This represents a 98% increase over net sales reported by Depomed in the second quarter of 2011 prior to restructuring our GLUMETZA commercialization agreement.

Our financial progress for the first half of this year keeps us on track to achieve our guidance for the year. Total revenues grew 88% in the six months ended June 30, 2012, compared with the same period in 2011. And net income was up 86% compared with the first half of 2011. In addition, script trends for our promoted commercial products showed sequential quarter-over-quarter growth in the first half of this year.

In recent months, we focus significant activity on our late-stage development products. Our NDA for UCERIS for the induction of remission of mild to moderate active ulcerative colitis is under active review at the FDA with a PDUFA target action date of October 16. With the FDA action date less than three months away our commercial team has initiated activities to prepare for launch of UCERIS in early 2013, subject to approval by the FDA. We’ll then, we will outline some of these activities later in the call.

Our Phase IIIb clinical study to evaluate UCERIS as an add on therapy to current 5-ASA treatments for the induction of remission of mild to moderate active ulcerative colitis has enrolled more than 60 patients out of an expected total enrollment of 500. We are adding clinical sites to accelerate our recruitment with the goal of completing patient enrolments in the first half of 2013. We have provided educational grants to CME programs including online medical education directed to gastroenterologists this summer and to conduct CME symposia for two GI medical meetings in the second half of this year.

Manuscripts from our pivotal studies are in progress and we expect that the first paper for those studies will be published in a peer-reviewed gastroenterology journal in the coming months.

Moving to our second late stage development product in the early July, our partner Pharming announced they had completed enrollment of all 75 patients planned in the Phase III clinical study with RUCONEST, which was formally known in U.S. as RHUCIN.

RUCONEST is a recombinant human C1 inhibitor being developed for the treatment of acute attacks of hereditary angioedema. Topline data from the trials should be available in the fourth quarter after a follow-up period of up to 90 days required as part of the special protocol assessment agreement with the FDA.

Under our licensing agreement the successful completion of this study will trigger a $10 million milestone payable to Pharming. We are planning to purpose the trade name RUCONEST to the FDA, which is also the trade name used for the product in Europe.

In our third late stage program, we’ve also completed enrolment with 264 patients in our Phase III clinical study with rifamycin SV MMX for the treatment of travelers' diarrhea

And we expect to have topline data available later in the third quarter.

In order to submit an NDA for rifamycin SV MMX we will need to wait for the completion of a second Phase III clinical study being conducted by Cosmo Pharmaceuticals European development partner Dr. Falk Pharma. This is a non-inferiority study were rifamycin SV MMX is being compared with ciprofloxacin. We and Dr. Falk have an agreement to share data and we will need to have the data from Dr. Falk study as part of our NDA submission.

Based on a pre-specified Interim analysis, an independent data monitoring committee has recommended that approximately 250 patients be added to the Dr. Falk study which originally was targeted enrolling 780 patients. Assuming a protocol amendment is approved by the Indian government by the end of this year, Dr. Falk expects to complete the study in mid 2013.

We were pleased to recently learn from Cosmo that they have received a notice of allowance from the U.S. PTO for a patent covering rifamycin SV MMX with patent expiry in 2025, extending the IP approximately 5 years beyond the current patent covering the drug.

Enrolment in our Phase I clinical study and healthy volunteers with intravenous SAN-300 our anti-VLA-1 antibody is completed. We are currently testing a cohort of patients with rheumatoid arthritis, and expect to complete enrolment in the study with the intravenous formulation in 2012.

Finally, it is now been more than 15 months since our oral arguments took place before three-judge panel at the Federal Circuit on our ZEGERID patent appeal. The appeal is still pending and as we’ve indicated before the timing of the ruling is entirely at the discretion of the appealing court.

With that overview, Debbie, will review our financial results. Debb?

Debra P. Crawford

Thank you, Gerry. I’d like to add my welcome to those joining our call today. As Gerry, mentioned, total revenues for the 2012 second quarter grew 77% from the prior year period to $47.2 million.

Net income in the 2012 second quarter was $3.4 million and diluted EPS was $0.05, compared with net income of $2.7 million in the second quarter of 2011 and diluted EPS of $0.04. Adjusted EBITDA for the second quarter of 2012 was $7.1 million, compared with $5.1 million in the second quarter of 2011.

Net product sales in the second quarter of 2012 totaled $46.3 million with individual product breakout as follows: GLUMETZA net sales of $31.2 million, increased from the $16.1 million reported by Depomed in the second quarter of 2011. We reported $11.1 million of GLUMETZA promotion revenue in that quarter under our previous promotion agreement.

CYCLOSET net sales were $2 million compared with $1.7 million in the prior year period. CYCLOSET net sales in the second quarter were negatively impacted by a significant increase in our estimated allowance for product returns. Based on our assessment of actual returns of CYCLOSET product in the six months ended June 30, 2012, we recorded a $1.8 million increase in our estimated allowance for product returns associated with product sales in prior years. Prior to 2012, we had not experienced significant returns activity.

FENOGLIDE, which we began promoting in February of this year, achieved net sales of $2.1 million and ZEGERID brand and authorized generic product sales totaled $10.3 million compared with $13 million last year. We see promotion of ZEGERID in mid-2010 following the introduction of a generic competitor and we expect that ZEGERID sales will continue to decline over time.

Second quarter expenses for license fees and royalties were $12.4 million, up $10.4 million over the prior year period primarily as a result of royalties’ payable on net sales of GLUMETZA.

R&D expenses increased to $6.7 million from $3.8 million for the prior year period primarily from costs associated with our UCERIS Phase IIIb clinical study and higher compensation associated with an increase in R&D headcount. Costs associated with UCERIS Phase IIIb study for the second quarter of 2012 were lower than anticipated and we expect R&D costs to rise as steady enrollment increases in the second half of the year.

SG&A expenses were $20.6 million, an increase of $4.5 million from the prior period. But growth reflects higher costs associated with the addition of 40 contract sales representatives and associated sales management personnel in the first quarter of this year, as well as annual increases in salary and benefits.

As of June 30 2012, we had cash, cash equivalents and short-term investments of $72.1 million, an increase of $13.5 million from our balance at December 31, 2011 and an increase of $6.6 million during the second quarter.

Turning to our financial outlook for 2012, we are affirming our revenue guidance for total revenues of at least $200 million. On the expense side, license fee expenses will include the $4 million milestone paid to Cosmo for the acceptance of the UCERIS NDA, which we recorded in the first quarter.

In addition, a $10 million milestone is payable to Pharming upon successful completion of the Phase III clinical study for RUCONEST with top line data from the study expected in fourth quarter.

We are lowering our R&D expense guidance to $28 million to $30 million compared with prior guidance of $30 million to $32 million based on slower than anticipated enrolment in our UCERIS Phase IIIb clinical study, which accounts for roughly half of the R&D expense estimates.

We expect a decrease in R&D expenses to be offset by increased spending in SG&A as we prepare for the launch of UCERIS subject to FDA approval, therefore we’re keeping our net income guidance unchanged at approximately $8 million to $11 million. Our adjusted EBITDA guidance of approximately $24 million to $29 million also remains unchanged.

I’ll now turn the call over to Will Denby.

William C. Denby III

Thanks, Deb. Prescriptions written for our promoted products continue to perform well in the second quarter. New prescriptions for our lead product GLUMETZA were up approximately 31%, while total prescription grew at 34%, both compared with the second quarter of 2011.

Our feedback from the field indicates that GLUMETZA’s controlled delivery and GI tolerability are well received by physicians. They see a benefit for their patients and appreciate the competitive co-pay under our e-voucher program. The prescriber base for CYCLOSET continues to grow and our anecdotal feedback from physicians who really prescribed the product is positive.

In the second quarter new prescriptions were up approximately 56%. Total prescriptions rose 100% both compared with the second quarter of 2011. And sequential quarter-over-quarter in total prescriptions in the second quarter was 16%.

In the coming months we expect that the increase cost call frequency from our expanded sales organization will have a positive impact on the prescription growth for CYCLOSET as well as our other marketed products. Prescriptions for Fenoglide are on a solid growth new trend, new prescriptions grew 17% and total prescriptions grew 6% for the four week period ending July 27 compared with the prior four week period. We began our promotion of Fenoglide in early February of this year.

We are actively preparing for the commercial launch of UCERIS in early 2013 subject to FDA approval. Our activities include finalizing product position, messaging and campaign concepts and preparing sales training materials. We have completed the analysis of our sales force requirement and territory alignment, we plan to add approximately 80 sales representatives following the PDUFA date, brining our budgeted total of 230 sales representatives.

We plan to have all 230 sales representatives selling UCERIS as well as our other three promoted products. Our goal for territory alignment is to reduce the size of larger territories to allow for higher frequency of calls. The called on audience for UCERIS will be gastroenterologists, and for our other products will be continued to be endos and primary care physicians.

With the positive outcome on the PDUFA date, we’ll complete the hiring process for new representatives, begin training in December and hold a launch meeting in January of 2013. We plan to have exhibited two significant medical meetings following our PDUFA date.

The first is the American College of Gastroenterology Meeting, starting on October 19, and the second is the Crohn’s & Colitis Foundation Clinical and Research Conference Focusing on inflammatory bowel disease in mid December.

We expect that these meetings will give us a timely opportunity to launch awareness programs for UCERIS. Given all of our progress and the near-term catalyst it is truly an exciting time for our commercial group.

I’ll now turn the call back over to Jerry.

Gerald T. Proehl

Thanks Bill. In closing, I’d like to summarize our major goals for 2012. Growing prescriptions and revenues for our marketed products, preparing for the commercial launch of UCERIS in 2013 subject to FDA approval and conducting the Phase IIIb clinical study for the UCERIS and add on therapy and also colitis. Advancing the clinical programs for RUCONEST, rifamycin SV MMX and SAN-300 and finally managing our business to achieve our revenue and profit objectives for the year.

In addition, our business development efforts include the assessment of product and company acquisitions to accelerate revenue growth.

With that overview, I’d now like to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Frank Pinkerton from SunTrust. Your line is open.

Frank Henry Pinkerton – SunTrust Robinson Humphrey

Hi, great. Thanks for taking the question. Just for – some – can you give any update, now that you have Fenoglide in the bag for a couple of months, how does that, doctor response, and what can you make any comments about kind of where you expect sales to move and maybe peak sales of this drugs move over the next several years until the patent expiry?

Gerald T. Proehl

Well, so far the response has been very good with our called-on audience as you might know type 2 diabetes products often have cardiovascular problems as well. So the physicians are glad to have another alternative Fenoglide and as you know we have the e-voucher so it makes the product very affordable for people as well, such a good complement. We expect pretty solid growth in this product over the years to come. I think if I’m remembering the IMS numbers right, it reached the peak around $23 million to $24 million, so we are hopeful that we can get it back to that over time.

Frank Henry Pinkerton – SunTrust Robinson Humphrey

Okay, great. And then just as a follow-up. Can you give us any color on conversations you had with the FDA and the UCERIS approval, have they asked for any additional information or any clarification, or a come back to you with questions, and how is that process been going here in the last several months and preceding up until the PDUFA?

Thank you.

Wendell Wierenga

Frank, this is Wendell. The review by the FDA has been active and ongoing and preceding as well we’d expect in terms of the various sections of the application being reviewed by the medical reviewers as well as clinical dermatology CMS et cetera. At this point in time, there is nothing unusual or the ordinary relative to the review from my vantage point and we are anticipating site assessments here relatively soon on the clinical side as is normally happening towards the end stages of review process.

Frank Henry Pinkerton – SunTrust Robinson Humphrey

Thank you.

Operator

Your next question comes from the line of Annabel Samimy from Stifel, Nicolaus. Your line is open.

Annabel Samimy – Stifel, Nicolaus & Co., Inc.

Hi, thanks for taking my questions. First on GLUMETZA, I guess it was a tough layer than we would have expected. Can you give us any information on the extent to what the eVoucher program is being used, is it being used more than expected is bringing down I guess the risk in that price per prescription, just a little bit of color on that will be great?

Debra P. Crawford

Hi, Annabel, it’s Deby. With regards to the use of the eVoucher program, I think our description of that activity would be, one, we’re very pleased. I think it has certainly help to make the product more available to patients as we’ve seen a nice reduction (inaudible) for the prescriptions that have been written, we’re seeing many more of those being filled. I think the general cost of the eVoucher program has stabilized. I mean we had it out there of a number of quarters and generally speaking it’s in the $50 to $60 range. If you would think about it as Santarus cost of offering that program on a per prescription basis, so we’re not seeing that move, is very clear now that has been in place for a period of time. So I think really when we think about GLUMETZA and the go-forward, we are looking forward to the benefit of having traditional sales reps out in the field making more and more calls to the endocrinologists and the primary care physician. We could take a pricing action right at the end of the quarter and that certainly should also have a benefit to us on a net basis going forward.

Annabel Samimy – Stifel, Nicolaus & Co., Inc.

Okay, great. If I can ask another question on CYCLOSET, I guess we are – it’s a little surprise to see an allowance for product returns is this I guess an indication of CYCLOSET is not growing as you would have expected and what way or sort of read into that?

Gerald T. Proehl

Annabel, this is Gerry. I think as Bill mentioned in his prepared remarks, it’s actually, CYCLOSET is growing nicely, the quarter-over-quarter growth was 16% and we are seeing continued increase in the number prescribers of CYCLOSET. The $1.8 million increase in our estimated allowance for product returns is really associated with the product sales in prior year. What I will say is, from that result, change we’ve made to improve the manufacturing process for CYCLOSET, which resulted in a temporary reduction in our finished product inventory and the resulting shipment of short-dated product.

The good news is that based on the information that we learned while improving the manufacturing process, we are actually able to file a new patent application for CYCLOSET in May of this year under the recently implemented accelerated review process at the USPTO.

The contents of the new patent application are confidential, but we expect the PTO to actually complete their review by May of next year, certainly if we are able to get a patent issued it would give us an additional 20 years on the product. So while it’s a little bit of a negative hit for us in the quarter, we are hopeful that what we’ve learned through the manufacturing process will potentially result in a much longer life of the product.

Annabel Samimy – Stifel, Nicolaus & Co., Inc.

That’s good to know. Just on CYCLOSET, if you could just provide us, now it’s been around for about 18 months, and if you could just give us some feedback what you are hearing or they saying good, (inaudible) reductions or is it really the cardiovascular safety that they are sort of focusing on in terms of their reasons for prescribing?

Wendell Wierenga

Hi, Annabel, this is Bill. They focus on both almost equally. We are seeing good traction with the product, it has taken longer than we had expected due to low pre-launch awareness. But we’re seeing very good traction with this drug now, so I am hopeful for the second half here even an accelerate growth for this product.

Gerald T. Proehl

Yeah this is Jerry. Just one other comment, I think we mentioned before is, we have been working closely with the endocrine society in working with them to get CYCLOSET in their updated guidelines. They’re actively updating their guidelines we expect from time by the end of the year, but that will have those guidelines updated and CYCLOSET will be included in them, and I think that cardiovascular safety profile of the product we’re hopeful will be discussed in their guidelines and certainly will be helpful as we look to continue to sell the product to endocrinologist.

Annabel Samimy – Stifel, Nicolaus & Co., Inc.

Thank you very much.

Gerald T. Proehl

Thanks.

Operator

(Operator Instructions) Your next question comes from the line of Scott Henry from ROTH Capital. Your line is open.

Scott R. Henry – ROTH Capital Partners LLC

Thank you, and good afternoon. I guess just for starters following up on yesterday’s news about the Markman claim. Could you just give any color on how you saw the Markman hearing went in I guess compared to how it went with Lupin any color on that?

Gerald T. Proehl

Yeah, Scott this is Jerry. What I would say is we were pleased with the outcome of the Markman hearing. The claims construction were pretty much along lines to what we thought it would be and so we think we continue to be in a very good position with GLUMETZA.

Scott R. Henry – ROTH Capital Partners LLC

Okay. And I guess, standing on GLUMETZA and this is somewhat similar to the last question. When I look at prescriptions for the first quarter it worked out to be about $385 per script. Given the continued, and I believe there was a price increase in there as well. But in the second quarter, it looks like it dropdown to about $380 a script; I haven’t run the number yet. Can you give any color, I mean, was there any stocking in the first quarter or perhaps some destocking in the second quarter?

Debra P. Crawford

Well, I wouldn’t say that there was anything material, but you are absolutely right. The shipment activity and the cutoff on quarters can have a slightly different trend in the prescription. So I think net-net, we feel good about the overall value that we are seeing on a per prescription basis and we would anticipate that would improve in the second half.

Scott R. Henry – ROTH Capital Partners LLC

Okay. And then as well ZEGERID, if I’m interpreting this correct, at $10 million versus $8.5 million last quarter, should we expect that to get back down I assume?

Debra P. Crawford

Yeah, so I think with ZEGERID, we saw a similar differential in shipments versus prescriptions again more of a – just timing differences, so we had actually more shipments in the quarter. But we did also have and have seen lower utilization under the few managed care contracts that we have for that product. So we did see a slight increase in the value of the brand. I think overall, the big picture, it’s more appropriate to anticipate declines in ZEGERID sales. So I would say your comment is a fair one.

Scott R. Henry – ROTH Capital Partners LLC

Where there any price increases in the quarter?

Debra P. Crawford

Yes, at the end of the June, we took some pricing action.

Scott R. Henry – ROTH Capital Partners LLC

Okay.

Debra P. Crawford

So the quarter should have a benefit from those actions.

Scott R. Henry – ROTH Capital Partners LLC

Okay. But I guess could you share that what products and to what amount?

Gerald T. Proehl

Yeah, in GLUMETZA, we took a 10% price increase on the 1000 milligram and a 15% price increase on the 500 milligram mainly…

Debra P. Crawford

20%.

Gerald T. Proehl

I’m sorry, 20% increase. Mainly we try to get the 500 up closer to being half of the thousand, which still a little bit slower, but we want to get it little bit closer.

We also took a price increase in CYCLOSET and that was 10% and we took the price increase in ZEGERID of 12%.

Scott R. Henry – ROTH Capital Partners LLC

And just about done here. The UCERIS Phase IIIb trial I guess have you disclosed how many patients you’ve enrolled today?

Gerald T. Proehl

Just a little over 60.

Scott R. Henry – ROTH Capital Partners LLC

Okay. And then, why do you think it’s taking a little longer than expected than expected.

Gerald T. Proehl

I think the enrollment behind because of our forecast anyway because of side activations we had a very aggressive side activation schedule in the first half of the year and it was moving well in North America, but it’s behind in Europe, Eastern Europe and we are anticipating that that’s going to be catching up here in September, October time frame. So it’s really correlated primarily with the number of sites, in total we have close to 150 when all the sites are activated and we were only about 65% to our target in terms of site activation at this point.

Scott R. Henry – ROTH Capital Partners LLC

And Greg, thank you for taking all the questions.

Gerald T. Proehl

Thanks, Scott.

Operator

We have no further questions in queue. I’ll turn the call back to Gary.

Gerald T. Proehl

All right. I would like to thank everyone to your interest in Santarus and for joining us on today calls, if you do have any further questions, please feel free to contact me Debbie Crawford or Martha Hough. Have a great day.

Operator

Thank you for your participation in today’s conference call, you may now disconnect.

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