ISTA Pharmaceuticals, Inc. Q1 2010 Earnings Call Transcript

| About: Valeant Pharmaceuticals (VRX)
This article is now exclusive for PRO subscribers.

ISTA Pharmaceuticals, Inc. (ISTA) Q1 2010 Earnings Call Transcript April 30, 2010 10:00 AM ET


Jeanie Herbert – Director, IR

Vince Anido – President and CEO

Brian Drazba – VP, Finance and Chief Accounting Officer

Lauren Silvernail – CFO and VP of Corporate Development


Frank Pinkerton – SunTrust

Aaron Mishel – Thomas Weisel Partners


Good day, ladies and gentlemen and welcome to the first quarter 2010 ISTA Pharmaceuticals' earnings conference call. My name is Frances and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today, to Jeanie Herbert, Director of Investor Relations. You may proceed.

Jeanie Herbert

Thank you, Frances. Welcome to the ISTA Pharmaceuticals' first quarter 2010 conference call. On our call today are Vince Anido, President and Chief Executive Officer, covering the market, business, and R&D pipeline status; Brian Drazba, Vice President of Finance and Chief Accounting Officer, reviewing quarterly financials; and Lauren Silvernail, Chief Financial Officer and Vice President of Corporate Development, covering the Senju-Xibrom royalty situation and hosting the Q&A session.

During the course of this call, ISTA's management will make statements of a forward-looking nature. Although we believe that our forecast, opinions, projections, and other expectations reflected in such forward-looking statements are reasonable as of the date of this call, we cannot guarantee future results, level of activity, performance or achievements.

Actual results may differ materially from ISTA’s current expectations depending upon a number of factors as detailed from time to time in ISTA's press release and other periodic filings with the SEC, including, but not limited to ISTA’s Annual Report on Form 10-K for the year ending December 31st, 2009. Except as expressly required by law, ISTA disclaims any intent or obligation to update any forward-looking statements.

At this time, I would like to turn it over to Vince Anido, the company's President and CEO. Vince?

Vince Anido

Good morning, everybody and thank you, Jeanie. We are obviously following a strong 2009 performance with a very strong first quarter for 2010. Obviously, we had superior growth across all the products. Our revenues are up 40% and it really is significant increases for all for our marketed drugs.

We are looking at 2010 as a breakout year for us. As we've said many times, we expect first – it will be our first full year of profitability and we do expect to dramatically improve our cash position. Several things with – that I would like to do with in terms of highlighting the quarter's success.

First, talking about Bepreve. We are off to a great start with the prescription activity on Bepreve. There's three things I would like to point out relative to what's going on in the market.

First of all, as you know, especially for those of you who live on the East Coast, this has been a pretty rough winter season and has been much wetter and colder than normal. It did delay the allergy season by what we think is about two to three weeks relative to last year. So it did somewhat negatively impact our Q1 sales for Bepreve. However, the good news of that is that that wet and cold season we just had is often followed by a very, very strong spring pollen count season, which is having a pretty dramatic impact on allergy sufferers.

As I travel around the country, visiting with allergists, it's pretty clear that they are seeing a fairly dramatic uptick in the number of patient visits, some of them are even calling this season a perfect storm in terms of the number – the amount of pollen they are seeing, the number of new patients that they are seeing, et cetera. And so – again, we think that's playing out pretty well and certainly while in the first quarter it was a little bit late, we more than made up our expectations in – with the start that we've gotten to the second quarter.

In April, we saw the beginning of a very strong reorder cycle from wholesalers for Bepreve and we are seeing the prescription activity doubling almost on a weekly basis over the prior weeks. So we are very excited about that – where we have started that this season.

Second of all, I would like to point out that from a market share point of view, with just shy of 3% market share, looking at a full-year impact where we are trying to shoot for about a 5% market share for the year to hit our greater-than-$20 million guidance that we provided for Bepreve for the entire year, we passed OPTIVAR, which is one of the four products that are in the marketplace quite a while ago.

We are catching up to ELESTAT, the second product that we are after, catching up to them pretty quickly. What we are finding is that if you look on a per milliliter basis, because our bottles are basically twice the size of the ELESTAT bottles on a per ml basis, we are at or above their market share. So again, that makes us feel pretty good about the progress we are making in the marketplace.

And third, you may remember that we increased the size of the sales force to 165 in order to reach a much broader audience that we need to reach for this particular product. And we noticed that our major competitor Alcon has been using both their glaucoma, as well as their allergy sales forces to promote their allergy products and when we look our – at our share of voice, we are just slightly below theirs for the same period of time.

So again, we feel very, very good about the impact we are having in the marketplace, our share of voice, and the success we are having from a market share point of view. In fact, data that you probably get much access to is that we currently have about 15% of our sales force that has market shares that are either matching or exceeding what we are going to have to hit on a national average to meet or exceed our guidance. And so we think that – again, it shows that we are off to a very, very good start and we do expect that to continue as the allergy season progresses in the second quarter.

Turning now to Xibrom, sales and market share there continue to grow as expected. As I did before with Bepreve, there are several things I'd like to point out. Again with the really rough winter that we had in several parts of the country, we lost about a week or two of cataract surgery business as folks just couldn’t get into surgery fast enough, created quite a bit of backlog that we think that physicians are just now working their way through.

We've seen also a very interesting shift in the prescribing activity that's caused by our competitors. In prior years, it was pretty common for a – one or both of our major competitors to go in and provide free samples of both a non-steroidal, as well as a steroid and for that they were asking the physicians to write their antibiotics. Now, what we are seeing recently because of some of the concerns that they are facing relative to potential DoJ investigations, et cetera, we are seeing that that practice is slowing down and in some cases, it's stopped completely.

So all of a sudden, we are noticing some physicians who prior to this event were pretty low in terms of the number of prescriptions for non-steroidals they were writing, all of a sudden popping up and writing a huge number of prescriptions for non-steroidal. It’s important to note that the more prescribers that are out there that just means more targets for us because we still think we have a product that has the best characteristics for their patients and so we see that as a net positive.

Additionally, we've also, because of the – one of the major products in the category, Acular, going generic last fall, we've seen a huge amount of generic prescriptions for Ketorolac.

Now, we think that this is somewhat unintentional, I think there is a lot of physicians who are still writing for it by its brand Acular or Acular LS and then it's getting genericized at the pharmacy counters. And so we think again, because it is unintentional, it gives us an additional target to go after in terms of talking to those physicians, making sure that they know that the prescriptions are being genericized, again, potentially creating a new audience for us.

So again, for both of the major products, we are off to a terrific start and I think it's been said many times when two of them are going that strongly, the other two that we have, Istalol and Vitrase, obviously had great quarters as well.

Now, what I'd like to do is spend a little bit of time talking about the R&D side of the business. As we said at the end of last year and beginning of this year, in 2010 we are focused on three projects. Number one, trying to get XiDay, our once-a-day version of Xibrom, approved; two, we are trying to move our Bromfenac lower concentration into Phase III trials for treatment of dry eye; and three, we want to start our development plan for Bepotastine or Bepreve in a nasal spray form.

Regarding XiDay or once-a-day formulation of Xibrom, as you know, we have a PDUFA date of October 16th of this year. We were requesting a priority review to be granted. Unfortunately it was not, so now the October 16th is the date that we are shooting for. We are going to be ready for a launch on that date.

And so – and we think that because we have 4,000, 5,000 physicians that were going to be – that are the primary prescribers of Xibrom, we'll be able to get those physicians to switch to the once-a-day form pretty quickly and move on. We think that's important because we still believe that we will get three years exclusivity on the once-a-day form of Xibrom that we call XiDay and that will grant us three additional years of exclusivity for what we expect to be a franchise of well in excess of $100 million.

The second late-stage product in the pipeline we have is a lower concentration of Bromfenac for the treatment of dry eye. It's a huge market, we had strong Phase II results for this product. A lot of other products in this category have failed in their clinical trials. We had the opposite at our clinical trials, we had great success and so we are excited about moving forward with basically two Phase III trials for efficacy and we are going to do two Phase III trials for safety.

We expect to start all of those in mid-summer. Both sets of trials would be under Special Protocol Assessment, so we are in the process of negotiating that with the Agency as we speak. And as soon as we hear back from them and get those locked and loaded, we'll be able to start the enrollment.

Now, this is – this product is under – using a new formulation where we have filed a patent, we expect to add some additional wording to the patent, and it could grant us an incremental 14 or 15 years of protection. Again, once-a-day extending the franchise for Bromfenac well beyond where we are today.

The third product that's in the pipeline is Bepotastine or Bepreve in the nasal spray form. We do expect to dose humans this year – later on this year and we are hoping to file an IND in the United States before the end of the year and that will allow us to move into some of the seasons that we need to hit in terms of starting our clinical trials to accelerate the development of that particular project.

So we are making great progress in our pipeline, our commercialization strategies are working. We are obviously energized by the progress we are making with Bepreve and the continued strength of Xibrom and certainly believe we are well on our way to meeting our goals and the guidance of exceeding 40%-plus growth in the in-line products and we are hoping that, as we've outlined, that we get XiDay approved before the end of the year and that we begin the clinical trials for both the lower concentration of Bromfenac for the treatment of dry eye, as well as Bepotastine or Bepreve's nasal spray form yet this year.

And so – again, we are poised pretty well for what we expect to be an exciting year. Now, at this point, I'd like to hand over the call to Brian Drazba, for a review of our first quarter financials. Brian?

Brian Drazba

Thank you, Vince. I'm pleased to report that ISTA's first quarter results are on plan. Hopefully, you've had time to read our earnings release issued earlier this morning and my comments are going to focus on the areas that may need further explanation.

Our first quarter results are typically lightest in terms of full-year sales and due to the recent sales force expansion, was heavy in SG&A expenses compared to the prior-year quarter. Our revenues were impacted by about $100,000 for additional Medicaid rebates related to the health – the new health care legislation. Our gross profit margin was down slightly compared to last year due to higher sales of Vitrase and Istalol, which are lower-margin products.

On the SG&A line, we expanded our sales force to 165 representatives and we incurred our first full quarter of expenses in the quarter. So our selling expenses increased about $4 million due to the sales force expansion. We also had added marketing expenses associated with the launch of Bepreve and our SG&A expense is now fully loaded for the year. So you should assume a similar run rate for the rest of the year.

On the other income line, we reported a $7.2 million non-cash gain as a result of marking our warrants to market. This resulted in us reporting net income of $476,000 or $0.01 per share. Without the warrant adjustment, our net loss was $6.7 million or $0.20 a share based on 33 million shares outstanding.

For modeling purposes for the next three quarters and for the year, if we have a net loss, shares used to calculate EPS will be based on our outstanding common shares, or about 33 million. If we have net income based on today's market price, shares used to calculate EPS will be approximately 44 million shares, which include outstanding shares of our common stock, plus warrants and stock options on a treasury stock basis.

In terms of cash, at the end of March, we had about $43 million. Receivables increased this quarter, which impacted our cash by about $7 million. We anticipate being cash flow positive by $6 million to $10 million for the year, and at the end of the year we will have $60 million to $64 million in cash, which is about equal to our long-term debt. In other words, we expect our balance sheet to continue to strengthen in 2010.

That covers the first quarter 2010 financials. Now, here is Lauren Silvernail. Lauren?

Lauren Silvernail

Great. Thanks, Brian. Thanks, Vince. As you can see from the financials, our first quarter was very strong on the selling side with Xibrom and Bepreve and also with Istalol and Vitrase.

During the quarter, we made investments in sales and marketing for the launch of Bepreve. As a result, we remain on track to meet our full-year performance expectations. We also, in the release issued this morning, reiterated guidance for full year 2010 and that's the same guidance we issued back in February. And I want to point out this guidance includes any changes in Medicaid rebates due to health care reform.

In the earnings release, we also made an announcement with regards to our Xibrom and XiDay franchise and our partnership with Senju. In the course of reviewing our licensing agreements for compliance reasons, we determined that after the relevant patent expired in 2009, we had no further obligation to make royalty payments on sales of Xibrom. Having established that, we approached Senju to obtain their views and Senju informed us we would in breach of our obligations if we did not continue to pay those royalties.

As a result, we filed a complaint yesterday against Senju, seeking a declaratory judgment with regards to the Bromfenac patent and disputed royalty obligations. In more simple English, the reason we do not owe royalties to Senju for Xibrom today or XiDay in the future is because the patent covering both has expired and it would be illegal to collect royalties on an expired patent. I want to point out though that all other terms of our Xibrom license remain in force.

Xibrom and XiDay royalties included in our 2010 guidance are in the range of $13 million to $17 million or approximately $0.30 to $0.39 per share using 44 million shares. Also, it may take us a while to conduct and resolve this litigation. Therefore, we've not taken into account any impacts from this potential upside in our 2010 guidance.

Now, I'd like to turn it back to the operator so we can answer any questions you may have. Operator?

Question-and-Answer Session


Thank you. (Operator Instructions). And your first question is from the line of Frank Pinkerton with SunTrust. You may proceed.

Frank Pinkerton – SunTrust

Great. Thanks for taking my questions. Vince, you made some color – comments on the Bromfenac dry eye studies. But can you just give us detail on what the endpoints will be on the efficacy side and then just remind us what the length of those trial – those studies will be. I think the safety ones are maybe a little longer. Thank you.

Vince Anido

Sure. Good morning. So the efficacy trials, the primary endpoint that we are going to be shooting for is staining score, improvement in staining score, not corneal staining, just overall staining scores. We are using Lissamine Green as the vehicle to show improvement in that metric.

Now, we will be looking at some other secondary endpoints, but that improvement in the overall staining score is – we think it's well vetted by the Agency and we did very, very well when we conducted our Phase II trial that way. That will have multiple end – multiple time points that we are going to be measuring. But all in, we expect that that trial from start to finish, the two sets of trials will take about 12 months to complete. So let's say we started them – we got lucky and started them June 1st, it will be the end of May of next year before it's all completed.

Now to the safety, we are going to be conducting a couple of different safety trials. Remember that we can file with six-month safety data. So we will be able to execute on that plan. Again, we think a six-month safety trial because of enrollment obviously occurs at different times. It's going to take roughly a year to run. We do have a one-year requirement as well. So – but we can file with six-month data. So what we are hoping is that all in, we will be able to file the NDA sometime in 2011, obviously in the back half. And then that will allow us to get approval sometime in '12.

Frank Pinkerton – SunTrust

Great. Thanks for the color there. And then just on Bepreve, I guess, can you give me any type of further detail between the allergist and the ophthalmologist? And I know you made some comment with some of your better reps and where their shares are. Are you making more penetration in one market versus the other and is the allergist market really a little more seasonal such that you have windows that open up or is that also kind of a mark you would be sending your reps to year-round?

Vince Anido

No, the – so let me address it going backwards. So first of all, I don't think that there is a whole lot of difference in terms of when either allergists or ophthalmologists are seeing patients. I think that the – if you take a look at the prescription activity on a weekly basis or in some cases, we have some folks who are looking at them on a daily basis, it was about four weeks ago when it actually started kicking in, and kicking in hard. We saw prescription activity increase each and every week to the point where it was doubling for us each and every week over the prior week.

And we don't see a huge difference right now in terms of the number – which prescribers are really – are moving forward here, recall on all of them that are decile 6, 7, 8, 9, and 10, so the upper crust guys. We are all – we are calling on those guys on a very, very regular basis and we have a pretty good smattering of all three specialties, allergy, ophthalmology, as well as optometry, who are supporting the brand.

Frank Pinkerton – SunTrust

Okay, great. And then just a final question. You made a note to the increased generic substitution in the ophthalmic NSAID class and some of the things you were doing to combat that. Can you hazard a guess as to what we should expect, because it looks like, overall, maybe the marketing is down and that class has slowed? With only two kind of players there, is it possible to get back in and get some of that generic and reaccelerate the class? Just – what would be expectations overall, given the transformation in the landscape there?

Vince Anido

Yes. So I do think that – as I said, the generic Ketorolac business being as big as it is, is unintentional. I still think that there is an awful lot of physicians out there who are writing for Acular and Acular LS and are not realizing that's being genericized. And so we think that does create a great opportunity obviously for us and unfortunately so, it also creates an opportunity for Alcon to go after that business too. So I do think it's going to be coming back.

I think, Frank, the reason you saw a little bit of a tail-off in the prescription activity on the non-steroidal category has really not a lot to do with the genericization component, but it has to do with the fact that in order to get the product off the ground, Acular or ACUVAIL was being given away for free. They were giving out – not just coupons for 20%, 30%, they were giving the stuff away for free. So it took a huge chunk of prescriptions with them, even though both Xibrom, as well as NEVANAC continued to grow, the overall market contracted because the prescriptions were given away for free.

And so we think that that program has stopped and the minute that it stopped, we saw ACUVAIL's market share go from about 17% down to – I think they are somewhere in the 6% range right now and steadily declining. And so we think that there are some things that are going to be happening here soon that may take it even lower than that. So I do think it's going to be bouncing back.

Frank Pinkerton – SunTrust

Great. Thank you for the color.


(Operator Instructions). Your next question is from the line of Aaron Mishel with Thomas Weisel Partners. You may proceed.

Aaron Mishel – Thomas Weisel Partners

Hi. I jumped on the call just a couple of minutes late, so I may have missed this, you may have already explained this. But on Bepreve, I know that it was sort of a little delayed from the allergy season. But if you look at the IMS prescription data for January, February, March, I think it was a little over 13,000 prescriptions.

And so if my math is correct, I think that implies kind of demand-based revenues of about $1.2 million. And so I'm just wondering kind of is there – can you explain sort of the disconnect between that and kind of what you reported, maybe talk about revenue recognition policy or channel inventories or anything else that might explain that? Thanks.

Lauren Silvernail

Aaron, good morning. It's Lauren Silvernail. How are you doing?

Aaron Mishel – Thomas Weisel Partners


Lauren Silvernail

I wanted to kind of have – take you back through the process and I think about how much we shipped in last year for the launch. And so what we did was we worked those inventories down and what we actually have seen, we mentioned this in the press release, as that – in April, as the season kicked in, we had exhausted all that revenue that we had shipped in the fourth – third and fourth quarters. And so we see significant sales kicking back in April as reorders start to take off with the allergy season starting.

Aaron Mishel – Thomas Weisel Partners


Lauren Silvernail

Did that answer your question?

Aaron Mishel – Thomas Weisel Partners

I think so, yes. That's helpful. Thank you.


At this time, there are no other questions in the queue. And now I would like to turn the call over to Jeanie Herbert for closing remarks.

Jeanie Herbert

Thank you. Frances. As for our travel calendar, we will be attending the Ninth Annual JMP Securities Research Conference May 12th in San Francisco and the Jefferies Global Life Sciences Conference June 9th in New York, plus we will be on the road visiting with investors throughout the year. We are excited to share our business model and talk about ISTA's prospects. We hope to see many of you in the coming months and thank you for your interest in ISTA Pharmaceuticals. That concludes our call.


And ladies and gentlemen, thank you all for your participation in today's conference call. This concludes the presentation and you may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!