Zogenix, Inc. (NASDAQ:ZGNX)
Q3 2012 Earnings Call
November 8, 2012 4:30 p.m. ET
Catherine O’Connor - IR
Roger Hawley - CEO
Ann Rhoads - EVP, CFO, Treasurer and Secretary
Stephen Farr - President and COO
Tim Lugo - William Blair
Michael Tong - Wells Fargo Securities
Daniel Cheng - Stifel Nicolaus
A very good day to you ladies and gentlemen and welcome to your Q3 2012 Zogenix Incorporated Earnings Conference Call hosted by Catherine O’Connor, Senior Director, Corporate Communications. My name is Chris and I will be your conference coordinator for today. (Operator Instructions) At this time I would like to turn the call over to Catherine O’Connor to begin. Please go ahead.
Thank you, Chris, and thank you all for joining us this afternoon. With me on today’s call are Roger Hawley, our Chief Executive Officer; Dr. Stephen Farr, our President and Chief Operating Officer; and Ann Rhoads, our Executive Vice President and Chief Financial Officer.
Earlier today Zogenix issued a news release announcing the company’s financial results for the third quarter 2012. We encourage everyone to read today’s news release as well as Zogenix’s quarterly report on Form 10-Q which will be available on our website at www.Zogenix.com.
Roger will open the call with an update on SUMAVEL DosePro. Ann will then review our financial results for the third quarter 2012 and Steve will follow with an update on our development programs. At the end of the prepared remarks we will open up the call for a question-and-answer session.
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. We caution listeners that during this call Zogenix management will be making forward-looking statements. Actual results could differ materially from those stated or implied by these 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 Zogenix’s news releases and SEC filings including its annual report on Form 10-K. This conference call also contains time sensitive information that is accurate only as of the date of this live broadcast, November 8, 2012. Zogenix undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call.
Now I’d like to turn the call over to Roger Hawley, Chief Executive Officer of Zogenix.
Thank you, Catherine and thanks to everybody for joining us today on our third quarter 2012 conference call. And before I begin on our business, I would just like to take a minute and express our concern for physician customers and their patients, all the business partners and the members of the investment community that have been affected by hurricane sandy. I know it’s been a devastating storm. Fortunately, all the Zogenix employees on the East Coast are safe and accounted for, although we are still assessing a potential impact on our customers in the affected region.
So let me get started. At Zogenix it continues to be a very exciting and eventful time for all members of our team. During the third quarter we continued to drive some of DosePro revenue while moving our key pipeline initiatives forward on schedule. Each of our major product programs have near term milestones that we believe have the potential to significantly enhance the value of the company with successful outcome.
I will start with our results for the third quarter on SUMAVEL DosePro. Our net product revenue for SUMAVEL DosePro was $8.5 million. Total prescriptions for the quarter were approximately 20,000 prescriptions, relatively constant over the previous quarter. The Covidien or Mallinckrodt full product promotion, began at the start of the fourth quarter with the third quarter results on -- our focus was on sales training and launch preparations with Covidien.
Our refill rate remains at 43%, consistent with our second quarter 2012. Overall, third quarter SUMAVEL DosePro results were in line with our expectations for the quarter. It’s still early in the promotion cycle to measure the results of the new co-promotional efforts, by the Mallinckrodt team is now fully trained and now both of our teams can focus on driving prescription growth.
Initial prescription data for the early weeks of November looks good, however we don’t know yet what the potential impact of hurricane sandy will be on our business in the North East and the Mid-Atlantic regions. However, the impact of the co-promotion, the transition during the second and third quarter, where we were without a co-promotion partner has been greater than we anticipated and therefore we are refining revenue guidance for the year to the low end of the range and we will review the full guidance in her remarks.
For the both the Zohydro ER and Relday programs, we are fast approaching key milestone events. We are focused on preparing for the FDA advisory committee meeting which will be held on December 7, while we continue to develop our commercialization strategy for Zohydro ER. We continue to include looking at bringing on a partner or leveraging our commercial infrastructure and expanding our internal sales force to approximately 150 representatives to launch the product.
We will not be expanding before approval if we decide to launch alone and we plan to launch late in the second quarter if the product is approved. We expect to refine this strategy and continue to evaluate partnering opportunities in parallel with the advisory committee meeting and the FDA approval for Zohydro ER over the next several months. The Relday Phase I clinical trials is ongoing and on track so we still expect to complete the study by the end of the year. Assuming the results are positive, we will be in an excellent position to leverage the data to attract a rest of the world development, commercialization partner next year.
This product candidate is a once monthly formulation of risperidone delivered subcutaneously for use in treating patients with schizophrenia. The Phase I study includes subcutaneously delivery with both our needle free DosePro system and with conventional needle and syringe. Relday could be a major advance over the current twice monthly intramuscular delivery which also requires reconstitution prior to administration. Both Zohydro ER and Relday represent significant market opportunities for Zogenix. Both have the potential to further leverage our commercial infrastructure and also provide partnering opportunities.
Steve will provide an update on our efforts with Battelle to out license our dose platform to other companies. We will continue to examine potential improvements to the DosePro technology and it that regard we did submit a prior approval supplement to the FDA regarding a minor design change to soften the [sand] when administering SUMAVEL DosePro. This did not affect the drug product or the operating aspects of DosePro. But we did receive a complete response letter from the FDA about this mechanical change and we are working with them to agree on the details of implementing this improvement. This has no impact on the availability of SUMAVEL DosePro.
Also during the third quarter, we raised net proceeds of $65.4 million in an equity offering which allowed us to repay our term debt and provided cash resources to support the ongoing growth of SUMAVEL DosePro and our Zohydro ER and Relday programs.
Now I will turn the call over to Ann Rhoads, our CFO, for her financial review. Ann?
Thank you, Roger. During the course of the discussion today, I will be referring to today's press release and to the attached unaudited statement of operation and balance sheet. I’ll be rounding numbers for purposes of this call, so please refer to these documents for the precise figures.
Net product revenue on sales of SUMAVEL DosePro for the third quarter 2012 was $8.5 million, it was down 4% compared to the $8.8 million in the third quarter of 2011. We had no contract revenue for the third quarter 2012 compared to contract revenue of $1.6 million in the third quarter of 2011. Contract revenue in 2011 reflected the amortization of license and milestone payments received from the Astellas co-promotion agreement. We recognized all of the remaining Astellas license and milestones payments in the first quarter of 2012 in conjunction with the termination of our partnership agreement with Astellas. There will be future contract revenue recognized related to the Astellas agreement.
Cost of sales for the third quarter 2012 was $4.2 million compared to $5.5 million in the third quarter of 2011. Gross margin was 50% in the third quarter of 2012 compared to 38% in the third quarter of 2011. Royalty expense for the third quarter was $325,000, reflecting royalties to [Airadyme] on the sales of SUMAVEL DosePro. This compared to $343,000 in the third quarter of 2011.
Our research and development expenses for the third quarter of 2012 were $3.7 million which represented a 64% decrease from $10.1 million in the third quarter of 2011. This was driven primarily by lower clinical costs associated with the company’s Phase III clinical trials for Zohydro which were completed in 2011. The third quarter in 2011 also included a onetime $2.25 million upfront license payment made to Durect in connection with the execution of our Relday development and license agreements and $750,000 milestone payment to Alkermes made in connection with the completion of the Phase 3 801 study for Zohydro ER.
Selling, general and administrative expenses for the third quarter 2012 were $10.9 million, this represented a 26% decrease from the $14.7 million in the third quarter of 2011. The decrease in SG&A expenses was due primarily to the end of the company’s co-promotion agreement with Astellas on March 31, 2012, and a decrease in advertising and promotional expenses. This was partially offset by an increase in product sampling costs and field sales force costs. As a reminder, going forward we will begin paying a quarterly service fee to Mallinckrodt that is calculated as a percentage of net sales over a base line amount to its prescriber audience. This service fee was not material in the third quarter 2012, given Mallinckrodt’s sales training in late Q3, with the full launch for SUMAVEL DosePro beginning in October.
Other expenses for the third quarter 2012 were $8.6 million, which includes $3.6 million non-cash mark-to-market adjustment in the fair value of the company's outstanding warrants. Also included are non-recurring costs associated with repayment of the company's debt obligations and issuance of warrants in connection with its July 2012 public equity offering. We have provided a table with a full description of the items in other expenses in our press release issued earlier today.
Our Net loss for the third quarter 2012 was $19.3 million, or $0.21 per share, compared to a net loss of $22 million, or $0.59 per share, in the third quarter of 2011. Non-GAAP net loss for the third quarter 2012 adjusted for certain non-cash or non-recurring items, was $0.16 per share as detailed in the non-GAAP financial results table included in our financial results press release issued earlier today. The weighted average shares outstanding for the third quarter 2012 were 90,370,000 shares. We finished the quarter with cash and cash equivalents of $49.6 million.
Now we turn to financial guidance. As Roger indicted we are refining our revenue and prescription guidance for the full year 2012. While the third quarter results were in line with our expectations, the revenue in prescription trends were tracking towards the low-end of our expectations for the quarter. We now anticipate total revenue to be $45.5 million at the low end of the previous range of $45.5 million to $48.5 million. This includes $37 million in net product revenue plus $8.5 million of contract revenue from the Astellas co-promotion agreement that was recognized in the first quarter of 2012. No further contract revenue relating to this agreement will be recognized.
We expect 2012 prescription growth to be approximately 20% year-over-year including quarter-over-quarter growth in Q4 with the Mallinckrodt team fully in place while our sales team focuses on driving growth in our specialist segment. Last month, we increased the price of SUMAVEL DosePro by 5% to a new [WAC] price of $94.19. We expect this to result in a net selling price in the mid-60s going forward, up from the low 60s that we have seen previously this year.
We are also refining our gross margin and operating expense guidance at this time. We now expect gross margin to be 48% to 49% for 2012 compared to the previous range of 46% to 50%. And research and development expenses are expected to be approximately $22 million for the full year at the high-end of our previous range of $20 million to $22 million. Selling, general and administrative expenses are expected to be $50 million for 2012. This is at the high end of our previous range of $48 million to $50 million.
Finally, we continue to expect net interest expense to be approximately $10 million for 2012, unchanged from the previous guidance, reflecting the payoff of the debt obligation with Oxford Finance and Silicon Valley Bank.
I will now turn the call over to Steve Farr for an update on our product pipeline. Steve?
Thanks, Ann, and good afternoon all. Today I’ll provide a brief update on our Zohydro ER and Relday investigational programs, as well as DosePro technology developments.
As discussed on our last quarter’s conference call in mid-July the FDA officially accepted our NDA for Zohydro ER and assigned a PDUFA date of March 1 next year. Since then we have been busy with our pre-approval and pre-commercialization activities. In September this year, the data from our pivotal efficacy and long-term clinical studies were presented in three [poses] at both the Annual PAINWeek Meeting and the Annual Meeting of the American Academy of Pain Management. To our knowledge these were the first published studies to evaluate the efficacy and safety of single-entity hydrocodone in the treatment of chronic pain.
Most importantly, we have been actively preparing for the FDA advisory committee meeting to discuss our NDA for Zohydro ER which is now confirmed for December 7. Our team has been focused on thoroughly preparing for this important step in the approval process. We are confident that our clinical data strongly supports the medical benefits of introducing Zohydro ER in the treatment of moderate to severe chronic pain, which together with our initiatives to assure safe use of the product, will demonstrate a favorable benefit risk argument to the committee.
We believe we are well positioned to meet our goal of being the first company to gain approval and launch an extended release hydrocodone product without acetaminophen for the treatment of moderate to severe chronic pain in patients requiring around the clock opioid therapy. Assuming there are no changes to the timeline, we remain on track to potentially launch Zohydro ER in the second quarter of 2013.
For Relday, our second DosePro product candidate, we began patient enrollment in our Phase I safety and PK trial in July. The study is on track and we expect it to be completed by the end of the year. As a reminder, this study is being conducted in the U.S. in patients with schizophrenia with the goal of establishing the safety and pharmacokinetic characteristics of a proprietary subcutaneously administered once monthly formulation of risperidone, for the treatment of schizophrenia.
We believe positive results from this initial human trial will support continued product development and position us to being seeking a rest of the world development and commercialization partner.
Finally, we continue to move forward with our Less is More co-marketing campaign with Battelle for the DosePro technology. Together we are successfully introducing this enabling needle-free delivery technology to potential development partners around the world. We have been very pleased with the initial response and feedback from Battelle’s customer base and are working closely with Battelle to focus our efforts on the most viable potential partner
And with that I will now turn the call back to Roger for closing comments.
All right. Thank you, Steve and thank you, Ann. Let me just summarize quickly and then we will get on to questions and answers.
First, we continue to make progress in our efforts to drive adoption of SUMAVEL, including preparing the Mallinckrodt pain management sales force. At the backend we are preparing for the FDA advisory committee meeting for Zohydro ER and advancing our pre-commercial activities ahead of our March 2013 PDUFA date. Assuming we receive FDA approval with no change to the timeline, we expect to be ready to hit the ground running with the launch of Zohydro ER in June of 2013 with or without a partner.
And third, our Relday Phase I clinical trial is on track. And if the data are positive, we believe it will be a clear indication that Relday is a viable product candidate that addresses the unmet needs in a large growing long-acting injectible antipsychotic market. We believe our development programs represent significant new opportunities for the company and we are fast approaching key milestones for both Zohydro ER and Relday.
And with that I would like to open the line up for questions and answers, and operator if you could give the appropriate instructions.
(Operator Instructions) Our first question today is from the line of Tim Lugo from William Blair. Please go ahead.
Tim Lugo - William Blair
Maybe, Steve, could you maybe detail more about the initiatives you will presenting at the panel to ensure safe usage dose for Zohydro. I assume that quite a lot of the questions will be around.
Steve, would you like to take that question?
Yeah, we have clearly put a lot of time and effort into considering risk mitigation initiatives for the Zohydro ER product. The good news is that you know that there is now a standard REMS that was being recently introduced for all extended release opioid products and clearly our product will fit in line with that. We will become members of the REMS program companies and that we will be able to introduce education and other activities that’s in the REMS for hydrocodone, I think for the first time.
In addition to the REMS, we are looking at other activities working with experts in the field to really supplement the REMS with what we think will be meaningful activities around education as well as surveillance in order to really try and pick up any signals of misuse and abuse of the product early so that we can react to it. So we will be presenting a lot of that information at the advisory committee.
Tim Lugo - William Blair
Will you also be discussing, maybe future development plans for potential (inaudible) formulation at kind of plus marketing, sort of growth marketing commitment?
It’s not going to be the focus of the meeting by any question. We have said in the past we have an ongoing with Alkermes to evaluate a future formulation activity that will provide what we think are meaningful abuse deterrents for Zohydro ER. So that might be mentioned as part of the discussion at the meeting but certainly will not be the focus.
Tim Lugo - William Blair
Okay. And maybe just one last question. Obviously the hydrocodone [adcom] panel have cancelled but maybe in the preparations of that panel, have you heard anything from your consultants or some of your physicians regarding the safety questions that were going to be discussed and maybe anything glean towards your panel?
As you know the subject matter for the advisory committee that was just recently postponed with all around scheduling of hydrocodone. We have clearly read the briefing document that came out at that meeting talking about scheduling and the fact that from a safety perspective I think the overall conclusion was that FDA felt comfortable with the current scheduling. We expect that some of our intimation will be presented at advisory committee but in reality they are to some extent, different advisory committees. We are talking about interaction of a new single entity hydrocodone for the treatment of chronic, morbid and severe pain as opposed to the scheduling of the current combination tablets.
Our next question is from the line of Michael Tong from Wells Fargo Securities. Please go ahead.
Michael Tong - Wells Fargo Securities
Just follow-up on Zohydro. Is there any additional clinical or non-clinical data that you need to submit to the FDA between now maybe the Adcom or the PDUFA date, like sort of regular update. And then secondly, I wasn’t sure if I caught Steve’s commentary regarding REMS. Do you anticipate submitting a proposed REMS program as part of the Adcom discussion?
I will take your last question first, about the REMS. We have submitted a comprehensive REMS as part of the NDA. So that was submitted sometime ago and that will be part of the briefing document information that we hope that we will be presenting at the advisory committee. So, yes, we have already a comprehensive REMS. And just to make the point, it’s identical to the REMS, or at least the format and the template and the wording of the REMS for the other extended release opioid products. Could you just repeat your first question for me again?
Michael Tong - Wells Fargo Securities
Yeah. I was just wondering if there is any additional clinical or non-clinical data that you will submit to the FDA as part of regular update as far as the NDA is concerned ahead of either the Adcom or the PDUFA date.
Yeah, there’s no more information needs to be submitted. We did submit or 120 Day clinical update, safety update, as is normal for our new drug applications but bearing in mind there are no patients actually on therapy right now. So you could imagine that was a rather short update. But there is no other information. I will also -- just to remind you, as a Phase 4 requirement, we did agree to conduct a carcinogenicity study for hydrocodone in two rodent species. And we have initiated that. But that is a Phase 4 requirement. It’s not required for approval of the product.
Michael Tong - Wells Fargo Securities
And just a couple of questions for Ann. I notice that the gross margin is starting to stabilize. So in terms of SUMAVEL revenue run rate, at what revenue run rate you need in order to kind of make the excess capacity charges less of a concern or less of an issue. And then secondly, as you think about $37 million in SUMAVEL revenue this year. I wasn’t sure if you indicated that took into consideration what's happened out in the North East for the last couple of weeks.
Let me just go ahead and start with your excess capacity question. We don’t disclose kind of minimums that we have with our 2 CMO partners. However, the point that you made about gross margins stabilizing has in fact been correct throughout this year. It’s been a real focus of our manufacturing team. We have also worked with our CMO partners to get some contract changes that I think have made those economics better for us as an organization. We continue to monitor this and are very focused on how we optimize our manufacturing footprint with our two CMO partners and I think the guidance that we share with you for the remainder of the year, we are feeling pretty good about in terms of where we are going to end-up. Kind of in those high-40s from a gross margin for the year.
And lastly, $37 million that we have talked to you about in terms of revenue guidance for the year. This really does not consideration any potential impact from the weather on the East Coast. As Roger mentioned in his comments, it is a little early for us to be able to start to understand any meaningful data coming out of there as to what the implications may or may not be. But I think that the initial weeks that we have seen in the quarter look pretty good to us but we are clearly we are going to be watching the script trends to see what those couple of weeks that directly tied to the weather timing will look like. And I think Roger wants to make a few comments on this as well.
Yeah. Thanks, Michael for the question. There is both pluses and minuses to this as it relates to our sales and we have had some territories where, we know in the Long Island area, even Manhattan, although it looks like that will come back to normal more quickly. Some parts in New Jersey, as you probably know, pretty hard hit. We have other areas where there certainly have been a lot of disruption and it’s hard to know the impact that will eventual accrue from that as far as what will end up being the capability of the offices and the patient visits and those sorts of things.
But the other side of it is, we don’t yet have any reports or information about as of been any loss, damaged product in retail chain. It wouldn’t be our responsibility but we would -- you know that could actually represent some sales upside but we just don’t have any of that information yet. So, too early to call on that. We do know one way or another we will impacted by it. We have some of our best reps in New Jersey, Manhattan, New York area.
So obviously we are concerned about them, their customers and our business. But it’s just hard to measure the impact right now.
(Operator Instructions) Our next question is from the line of Daniel Cheng from Stifel Nicolaus. Please go ahead.
Daniel Cheng - Stifel Nicolaus
This is Daniel in for Annabel. I am interested in the comment, I think Steven you made earlier about, at the committee, supplementing the REMS with education and surveillance and signals of misuse and abuse. I was wondering if you could just talk about specifically what some of those things are and what FDA might be looking for you to do to address those.
I would prefer to withhold my sort of comments on specifics until we get to the advisory committee. I think that will be most appropriate Daniel. But I just want to make the note that we are not being asked to do this. This is -- the FDA being very clear that they see Zohydro would fit in the existing extended release opioid REMS. However, we recognize that the REMS is going to be place for a pretty short time and we feel it is appropriate for us being responsible corporate partner to think about other things that we can do to supplement the REMS. And that’s what we intend to do.
Daniel Cheng - Stifel Nicolaus
And then just getting into a little bit about the pre-commercial activities. Have you done any work as far as physician and patient targeting and how you might want to rollout the launch? If you could just share any color on that?
Sure. Thanks for the question. You know obviously in preparing for the launch we have done a lot of work both with the physicians, with patients and with payers. And a lot of that work is completed and some of it is still ongoing. So I think as far as the targeting of the efforts that we would make, you know the whole approach is to make sure that we roll this our thoughtfully and that we focus on the safe use of our product. And we are going to be calling on those physicians who are already writing extended release opioids and as I have mentioned before, it’s not our goal at all to be calling on physicians who are primary care physicians that maybe writing a lot of Vicodin for short-term acute use.
So we are going to be calling on those physicians that are already active in the ER opioid space. And we know from the work that we have done there that is a manageable number of physicians. That’s a really fairly small subset of the total number of physicians that write opioids. And that’s why I have said, as I did today that it will only take us about 150 reps to accomplish what we want to accomplish. But having said that, we are also looking at what could be done by potentially bringing in a partner and measuring that against what we could have accomplished through and expansion of our own team.
So the exact targeting as far as who does what, is still up in the air. Pending our decision, I could say that we have had some significant outside interest. And we are still engaged in those discussions and the evaluating the potential as far as exactly, if we did bring in a partner how that would work. It’s just too premature for me to give you any details on that. But overall, as you may know, in this segment there is -- it’s really that responsible marketing. There is a very limited number of things that are appropriate to do and that you can do. And we are certainly going to be following all those requirements in the rules in the spirit of what need to be done to launch a new extended release opioid.
For example, you can't sample, and a lot of our effort will actually be focused on making sure the physicians have absolutely as much knowledge as they can, and while we can't mandate that they take the education that we will be offering to them, it’s certainly our goal to spend a great deal of our time explaining to them everything they and their patients should know and will need to know about the product and that would really be the key focus, particularly at the launch of the product. And then once we get a physician well trained about product and they have begun to use it, then if other physicians start prescribing on their own, we certainly have the responsibility to also do everything we can to get to those physicians. Even if we are not calling on them to make sure that they are using our product appropriately.
So it’s very much different than a typical product launch where a lot of the things that we do have to be to make sure that the appropriate physicians are prescribing for the appropriate patients and that there is information available to both the patient, the physician, the pharmacist involved in filling the script. And that will be central part of our launch campaign, as well as educational programs and journal support that goes specifically to physicians who are involved in the practice of pain management.
Daniel Cheng - Stifel Nicolaus
Great. Thanks, that’s helpful. And just to clarify, is there already a sort of a patient database for patients who are on schedule to extended release opioids?
There isn’t a database that we have access to and certainly it wouldn’t be patient identified. I mean we have all the prescription activity. As you know we know where scripts are being written by physicians that are writing ER opioids, but we certainly don’t have access to patient level information.
We have no further questions in the queue. So at this time I will like to turn the call back to Roger Hawley for closing remarks.
All right. Well, thanks for joining us on our Q3 call. We appreciate your time. We know you had a busy schedule with earnings out and appreciate your time this evening. Thank you very much.
Thank you. So ladies and gentlemen that does now conclude your conference call for today and you may now disconnect your lines. Have a great day. Thank you very much.