Neos Therapeutics, Inc. (NASDAQ:NEOS) Q4 2018 Results Conference Call March 14, 2019 9:30 AM ET
Richard Eisenstadt - CFO
Jerry McLaughlin - CEO
Conference Call Participants
Louise Chen - Cantor Fitzgerald
Jason Butler - JMP Securities
Bill Maughan - Cowen and Company
Gary Nachman - BMO Capital Markets
Jacob Hughes - Wells Fargo
Good morning. And welcome to the Neos Therapeutics' Fourth Quarter and Full Year 2018 Financial Results Conference Call. Today's call is being recorded. At this time, all participants are in a listen-only mode. There will be a question-and-answer session to follow.
For introductory and opening remarks, I am turning the call over to Richard Eisenstadt, CFO of Neos Therapeutics. Please go ahead.
Thank you. Good morning, everyone. And welcome to our fourth quarter and full year 2018 financial results conference call. This morning, we issued our financial results and corporate highlights press release, which is available on our Web site at www.neostx.com. I am joined on today’s call by Jerry McLaughlin, our CEO.
Before we begin, I'd like to read the following regarding forward-looking statements. During this call, we will make statements related to our business that may be considered forward-looking and are made pursuant to Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements concerning the commercialization of Adzenys XR-ODT, Cotempla XR-ODT and Adzenys ER oral suspension, the growth and profitability of our business, the intended benefits of our new commercial strategy, our expectations regarding the brand exclusivity for our ADHD products, our patient access programs, the capabilities of our technology and our product research and development activities, including the timing, progress, cost and commercial opportunities of our product candidates, expansion of our product pipeline through business development activities with terms of our refinance debt facility and our financial position.
Forward-looking statements may often be identified with words such as we expect, we anticipate, upcoming, or similar indications of future expectations. These statements reflect our views only as of today and should not be reflected upon as representing our views as of any subsequent date. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations, including but not limited to, the inherent risks associated with development and commercialization of our products and product candidates that we may not realize the intended benefits of our new commercialization strategy and that preliminary or early indicators of performance may not reflect actual results of operations for any period. For a discussion of material risks and other important factors that could affect our actual results, please refer to those contained in our most recent SEC filings.
I will now turn the call over to Jerry.
Thank you, Rich. And good morning everyone and it's great to be with you today. Since joining Neos in mid-2018, I have been working with the team to look at the whole company to see how we can drive growth and create value for our stakeholders. Sitting here today, I’m proud to say we have accomplished a tremendous amount and laid strong foundation for 2019 and beyond.
In fact, we have several key operational highlights from the fourth quarter alone; first, we strengthened our balance sheet by completing a 43.4 million net equity raise, while concurrently restructuring our debt; second, we realigned our commercial organization, including the sales force; third, we licensed NT0502 and NTE for the treatment of sialorrhea or excessive drooling commonly associated with CNS disorders such as cerebral palsy, Parkinson's disease; four, we gained additional clarity on brand exclusivity for our ADHD products completing a Paragraph IV settlement with Teva for Cotempla XR-ODT and now expected exclusivity until at least July 1, 2026; finally, we reported both record prescription volume for our ADHD business in the fourth quarter, as well as growth in net revenues. I will start today by discussing the new commercial strategy we implemented to support the long-term growth for our ADHD business and then I will discuss our pipeline before turning the call over to Rich to review the financials.
Turning to commercial. As many of you know in the third quarter of 2018, we initiated a comprehensive process of assessing our commercial strategy to identify growth drivers and to realize operational efficiencies for our ADHD business. In late November, we unveiled the new strategy that we believe will accelerate our path to profitability with a focus on both increasing our net revenue per pack and increasing market share for Cotempla XR-ODT and Adzenys XR-ODT. As a result, we flattened the reporting structure, eliminated Chief Commercial Officer position and creating two new commercial leadership positions. Darren Heath joined Neos as Vice President of Sales and Greg Pyszczymuka, now the Vice President of Commercial Strategy and Market Access. Both Darren and Greg had a wealth of experience, including a track record of success in leadership positions across several specialty pharmaceutical companies. They are packed with executing against our new commercial strategy and report directly to me.
Additionally, we realigned our in-house specialty sales force to approximately 75 territories with sales representatives targeting healthcare professionals at the highest net revenue potential for ADHD medications. We made these changes and focused our sales efforts on healthcare professionals and geographies where we could help the most patients and also advance toward and operate a growing profitable ADHD business. In fact, with the new alignment, the net revenue potential of sales territories on average increased by 55% compared to territories in the previous alignment, creating an opportunity for sustainable long-term growth of our ADHD business. At Neos, we are very fortunate to have outstanding medications for the treatment of ADHD with both Adzenys XR-ODT and Cotempla XR-ODT.
However, in today's ever more complex healthcare environment and broadly across the industry, it can be difficult at times to get the prescriptions filled in many pharmacies due to stocking challenges. This is a source of great frustration not only to patients and their caregivers, but also physicians who believe in and prescribe our medications. To help mitigate these issues and provide better and more predictable patient access to our medications, earlier this year, we began to enhance our patient access program with the introduction of Neos RxConnect, a patient support offering which puts patients and healthcare professionals first by enhancing their ability to access our products and create improved and consistent affordability for the Neos ADHD medication. Early feedback is overwhelmingly positive and we intend to focus on continually building and expanding Neos RxConnect throughout 2019. We are confident in the capabilities and skills of our talented sales force and regional sales managers to execute against these strategies. They have embraced our new commercial model and are making a tremendous contribution to success. We are working closely to solicit feedback on our strategy and tactics from the field sales team. And as recently as last week convened our field sales advisory board to listen, learn and brainstorm new and better ways to engage our healthcare professionals.
Looking at some early 2019 metrics to evaluate our new strategy, we are really encouraged by what we're seeing. While it's early in the year, we believe that our strategy is sound and we are optimistic based on early indicators of commercial performance. Looking at prescription performance, despite the many changes we made to our commercial organization and strategies that in the short-term are expected to put downward pressure on prescription volume growth, recent total prescription performance has masked that of the market. In fact according to IQVIA through the four weeks ending February 22, 2019 versus the prior four weeks, our ADHD product portfolio increased 2.54% consistent with 2.58% for the overall ADHD market.
At the same time, we are making excellent progress and are encouraged by the early 2019 improvement in net revenue per commercial prescription for ADHD franchise. Typically, net revenue per commercial prescription declined from December to January driven by the annual reset of high deductible insurance plans. A year ago, in January 2018, the net revenue per commercial prescription for the Neos ADHD business declined 29% from the previous month, December 2017. For the same comparison this year, net revenue per commercial prescription not only did not decrease but actually increased 15% in January 2019 versus the prior month, December 2018. We provide these early 2019 commercial performance metrics today to provide some insight given the number of changes we made to the commercial strategy late in 2018 and at the beginning of 2019. In the future, we plan to only report full quarterly results for revenue associated key performance metrics. We believe these favorable changes can be attributed to the implementation of our new commercial strategy, including deployment of the Neos RxConnect program with enhanced patient co-pays. While the data for prescriptions and net revenue for commercial prescription are early 2019 measures, we’re quite encouraged and remain focused on the execution of our commercial plan. We look forward to providing quarterly updates as the year unfolds. Finally, we are confident that our commercial strategy coupled with smarter allocation of sales and marketing expenses will accelerate our path to profitability.
Regarding our growing CNS development pipeline, we announced in October the addition of NT0502, formerly referred to as NT0501, a new chemical entity for the treatment of chronic sialorrhea, a condition where patients exhibit excessive salivation or drooling. We hope to address the significant unmet medical need for treatment options for adult and pediatric patients with neurological conditions such as cerebral palsy, ALS, Parkinson's disease and mental retardation. Sialorrhea if not adequately managed can lead to significant physical and psychosocial complications, including perioral chapping, dehydration, infection, foul odor, stigmatization and increased dependency on level of care. All of which can create an additional burden for these already medically complicated patients. We believe this compound offer a new treatment option to patients and their caregivers that will provide improved tolerability profile and more accessible dosing regimen due to the preferential selectivity of the molecule for receptors in the salivary glands, and the ability of our micro particle technology to optimize the pharmacokinetics, route of delivery and dosing regimen.
We plan to develop NT0502 as an easy to swallow orally administered formulation that could be dosed once or twice daily with no complex titration required. We are actively in formulation development and expect to complete IND enabling studies in 2019 and initiate pilot PK work by the first half of 2020. The product, if approved, will provide a new and we believe better option for many of the more than 1.4 million patients in the U.S. who suffer from this condition with millions more worldwide, helping them overcome the isolation and stigma associated with this disorder so they can live more comfortable lives. NT0502 is the first step in our objective to build a broader central nervous system focused development pipeline. We believe there is a large opportunity to address symptoms associated with neurological disorders that exacerbate overall disease burden.
Briefly, in November 2018, we strengthened our balance sheet with an underwritten public offering that raised net proceeds of 43.4 million. Simultaneous with this financing, we also amended our term loan from Deerfield Management. Finally, in late December 2018, we also secured clarity on brand exclusivity for Cotempla XR-ODT. We entered into a settlement and license agreement with Teva to resolve all ongoing litigation with Teva involving our patent. Teva has the right to develop, manufacture and market its own generic beginning July 1, 2026. We previously secured brand exclusivity for Adzenys XR-ODT, anticipated until September 01, 2025, following a settlement license agreement with Actavis.
In closing, we believe we have made the necessary strategic changes to position us to become a successful and profitable specialty pharmaceutical company and we continue to build our ADHD commercial business and develop and expand our portfolio with a focus on making a significant difference in patients' lives. Our competitive advantage comes from the products we offer to patients and the people within this company who are committed to the success of Neos both today and for the long-term. Going forward, we have identified key components that are important for our continued success. We will focus on; one, maximizing the net revenue of our ADHD portfolio with our newly realigned sales force and enhanced patient access programs; two, creating an outstanding work environment for our employees; three, demonstrating operational excellence with our newly streamlined commercial infrastructure and disciplined approach to investment here; and finally, we will look at always to continue to grow our business today and for the future by advancing NT0502 and evaluating additional licensing and acquisition opportunities.
With that, I thank you. And turn the call over to Rich to review our financials.
Thank you, Jerry. Total product revenues were $50 million for the year ended December 31, 2018, up from $27.1 million for 2017 and $10 million for 2016. Total product revenues for the three months ended December 31, 2018 were $15.4 million versus $9.2 million for the three months ended December 31, 2017. Total product revenues for our ADHD franchise were $14 million for the three months ended December 31, 2018, which represent 17.6% growth over the $11.9 million ADHD product revenue reported in the three months ended September 30, 2018.
During the three months ended December 31, 2018, net revenue per pack for Adzenys XR-ODT was $97 and Cotempla XR-ODT was $95. With the adoption of new revenue standard ASC 2014-09, revenue from contracts with customers or topic 606, the high deductibles from insurance plan year rollovers begin to negatively affect net revenue per pack in our fourth fiscal quarter. Net revenue per pack for the fiscal year ended December 31, 2018 averaged $97 for Adzenys XR-ODT and $90 for Cotempla XR-ODT.
Looking forward to first quarter 2019 and beyond, we expect the net revenue per pack to increase as we begin to move beyond the annual earlier high deductible period and the impact of our new commercial strategy becomes evident in the data. Net product revenues for our generic Tussionex for the year ended December 31, 2018 were $4.4 million compared to $5.2 million for our 2017 fiscal year. Net product revenues for our generic Tussionex was $1.4 million in the three months ended December 31, 2018 compared to $600,000 in the same period in 2017.
Gross profit for the year ended December 31, 2018 was $23.1 million compared to $13.1 million for the same period in 2017. For the three months ended December 31, 2018, gross profit was $7.6 million compared to gross profit of $5.6 million for the three months ended December 31, 2017. R&D expenses for the year ended December 31, 2018 were $8.5 million compared to $9 million for the year ended December 31, 2017. R&D expenses were $2.4 million for the three months ended December 31, 2018 compared to $1.8 million for the same period in 2017. The increase in the fourth quarter was primarily due to clinical trial expenses associated with post-marketing commitment studies of Adzenys XR-ODT and Cotempla XR-ODT, as well as license fee paid for NT0502.
G&A expenses were $13.9 million for the year ended December 31, 2018 as compared to $13.8 million for the year ended December 31, 2017. For the three months ended December 31, 2018, G&A expenses were $3.3 million compared to $3 million for the same period in 2017. Selling and marketing expenses for the year ended December 31, 2018 were $44.1 million compared to $46.9 million for fiscal year 2017. And for the three months ended December 31, 2018 were $9.1 million compared to $11.9 million for the same period in 2017, a decrease of 23.5%. Selling and marketing expenses in the fourth quarter included approximately $1 million for charges associated with restructuring of the commercial organization.
For the 2018 fiscal year, net loss was $51.7 million or $1.60 per share compared to $65.8 million or $2.66 per share for 2017. Net loss for the three months ended December 31, 2018 was $9.3 million or $0.23 per share compared to $13.7 million or $0.47 per share for the same period in 2017. Excluding the equity financing and debt principal repayment in November, our net cash burn for three months ended December 31, 2018 was approximately $6 million. At December 31, 2018, we held $46.5 million of cash and cash equivalents and short-term investments. Looking ahead to 2019. We are anticipating an increase in R&D expenses to low to mid teens in anticipation of increased clinical trial expenses for our Adzenys XR-ODT and Cotempla XR-ODT post marketing commitments. Our G&A expenses are anticipated to be relatively flat in the mid-teens. Selling and marketing expense for fiscal 2019 are anticipated to decrease to the mid-30s.
With that, we would like to now turn to the Q&A portion of the call. Operator?
Thank you [Operator Instructions]. Our first question comes from Louise Chen with Cantor. Your line is now open.
First question I had was, do you have a profit margin target that you would like to reach for 2019, or how do we think about it relative to 2018? And then also in terms of revenues per script, how much do you think that they will increase after the first quarter? And will it be a sequential increase? And are you still going to hit the peak targets that you had talked about before? And then last question I had here was in terms of your cash runway. Where does that get you to with what you have today? Thank you.
Thanks Louise, I will take it and make it on the same order that you asked. But the net revenue numbers we expect to increase throughout the year. We expect they tend to increase through third quarter now and then they take it dip through fourth quarter. We still believe that and year-over-year third quarter being our high watermark, we would be disappointed if we’re not in the mid 120 for net revenue per script for both of our products, our lead products by that point in time. We don’t give guidance as far as profit margin. We haven’t indicated or given guidance as to when we expect to be profitable. But we do believe the cash that we now have in the company is sufficient to get the cash flow positive and to be able to sustain ourselves off of our revenues going forward.
Thank you. Our next question comes from Jason Butler with JMP Securities. Your line is now open.
The first is on the commercial changes, obviously, you’ve made several changes anything that stands out as being the primary or key driver of both the Rx stability and net price gains? And then in contract anything even at this early point that you've seen as necessary to changing the strategy? And then my second question is on the pipeline. Obviously, you’re making progress with 0502. But can you talk about how you are thinking about continuing to leverage the proprietary delivery technology platform and the manufacturing capabilities? Thanks.
Jason, good morning, this is Jerry. I will handle those questions. On the Rx stability, we think it's in the leadership and the commercial team, as well as the field sales front-line management team and our sales force embracing the new commercial model has really helped us work through this point in time with several changes where we would expect downward pressure. So we’re really excited about the team and how they embrace the changes. And we also think that in the early days, we've had some very good plausible feedback on the Neos RxConnect program. It's really been overwhelmingly positive from our customers having that patient access program in place. And as that grows, we expect that to be more favorable. So those been two drivers we think of some of the stability we’re seeing. As we previously stated, we’re going through transformation period here with some significant downward pressure on growth, but it's great. We’re very excited to see this stability in the early weeks of the year. So that’s number one.
And I think your second part was what are the key drivers here of our success. And I think if I have to pick out two, it's really the realignment of our sales force and really focusing now on not just volume growth but profitable growth. That is a combination of volume and physician targets and patients where we can generate positive net revenue. So it was a classic case. We were able to reduce our sales force footprint by almost 40% yet. And I'll refer back to the point I made, increasing the net revenue potential of each territory by about 55%, so that’s number one. And then in combination with our Rx connect program that really provides a much better and easier access program for physicians and patients that we think will facilitate and drive growth in the future. The confidence that the medication will be on the pharmacy shelves and offering what we believe are best-in-class co-pays for patients and that will be a key driver going forward. I think the further part about have we seen anything yet we need to change, not yet. But we have a list of metrics that we're measuring, both quantitative and qualitative. And we keep a very close eye on this, both in the sales organization but also working with finance as well. And the way we will run our business we will analyze it and we will make the necessary adjustments as we move forward and we will keep you advised of those as we do so, but nothing to-date on the change.
Turning to your question on the pipeline. We’re very excited about NT0502, Jason, because we see it as a great example of taking a phenomenal molecule that’s preferentially selective for salivary glands to treat sialorrhea. So in and of itself has benefit. But then applying our microparticle delivery technology, we can enhance the kinetics, reduce the dosing regimen, which has been an issue for patients where most drugs are dosed three times a day. So that’s a great first start, we think, for leveraging our technology. As we look forward, we will continue to look for ways to leverage the microparticle technology. We particularly like the CNS area where genetics matter, where plasma concentrations matter in a lot of CNS disorders. And we’re also looking and we’re receiving inbound calls about from many companies that are in the development stage who are having with difficulty with pharmacokinetics and looking for a development partner. And we believe those could eventually evolve into commercial partnerships, so we will look at that as well. Further, we are not averse. We believe we're building a commercial model with our internal team and our field sales force to provide the competitive advantage for us. And it's that commercial model we believe we can leverage. And we believe we can go afield from just ADHD and just pediatrics inside, the model itself provides the competitive advantage. So we are looking beyond just the scope of our existing portfolio as well.
Our next question comes from Bill Maughan with Cowen and Company. Your line is now open.
So I was hoping, when you say that the net revenue per territory potential is up 55%. Could you break down in any way how you arrived at that number? And then on 0502, is that going to be a locally acting module where the actual dissolution in the mouth is a key part of the portfolio? Or is that something that's generally swallowed and goes through the bloodstream? Thanks.
I will take this, Bill, thanks for your question. So when we built the territories, when we realigned our sales force organization, we examined down to the physician level. We measured profitability and then measured future net revenue potential, the coverage -- a combination of volume, managed care coverage. And then we assigned a net revenue potential for the future looking at the overall ADHD market. So that’s how we valued each individual healthcare professional and then we built up our territories, preferentially selecting those with the highest potential first. And as a smaller company, we were able to do that. This is a very large market, 75 million prescriptions for ADHD. It gave us the opportunity to select where and how to compete. And so we've been able to really push up the value of each target. For example, there is a 48% increase in productivity of the physicians in our current sales force of targeting verses previously. We've been looking to reduce the percentage of physicians who haven’t prescribed our products yet significantly. So we've really skewed the targeting to a much higher potential physician level. And so we’re really excited about that going forward. It's much more targeted where we have better return. And beyond that, a key part of this net revenue potential is where can we actually generate profitable prescriptions where more often than not, we're not the primary payer, so that goes into that analysis as well.
As far as your question on NT0502, it is not locally acting within the mount. The true benefit -- there is a benefit for having an oral-disintegrating tablet for this population or a liquid form, but the product will be absorbed systemically. The true value is for the technology is; one, giving a much more patient friendly route delivery, or form of deliver; and then, it’s the enhanced pharmacokinetic properties of that product. But it will work through systemic absorption and has preferential selectivity for receptors, in muscarinic receptors in the salivary glands. And we think that's the potential big advantage.
[Operator Instructions] Our next question comes from Gary Nachman with BMO Capital Markets. Your line is now open.
It's [Ruf A] on for Gary. As you've shifted to going after more profitable Rx. Are you expecting any hit to volume as a result of that? And then what changes if any have you made to the patient assistance program that might improve profitability?
So what we massaged previously to investors in previous calls and meetings is that we made a lot of changes at the end of the year in order to shift our business to more profitable growth. And we believe that put some downward pressure on short-term prescription growth. What that means is that we’re flat in the first quarter, doesn’t mean we’re down a little bit or slight growth, yet remains to be seen. We’re encouraged by the early data that we're moving with the market and our market share has been stable. That to what is win in these early days, given all the changes that we've made. As to second part of your question I believe is on the patient assistant program and what are we doing, we very much have simplified our co-pay programs for patients.
We had 10 or more programs in the second half of 2018 and that could be quite confusing, and really makes difficult for us from an analytics perspective. And a lot of talk with physicians and analyzing the best approach forward we've created very simple program. Basically there are two channels, one is traditional retail pharmacies, CVS, Rite Aid, Walgreens and the other is our Rx connect network. For commercially insured patients very simple is that a CVS or Walgreens is a $15 co-pay if you have coverage, if you're uncovered, it's $50. The first prescription is that every prescription then after. In our Neos Rx Connect network, we were able to actually offer zero-dollar co-pay for commercially insured patient and have coverage and at $35 co-pay for uncovered patients. And so we believe across the spectrum of our co-pay offers, one is highly predictable and consistent for patients. There is no free for a couple months and then all the sudden you're paying $50, you know what you’re paying for month one. And also we believe its best-in-class in terms of the ADHD market and the early feedback from physicians has been quite positive, that is it's clear, it's simple and we believe that could be a long-term growth driver as well for our business.
Thank you. And our next question comes from Jacob Hughes with Wells Fargo. Your line is now open.
I just had a question on the Deerfield agreement. I guess if you could just remind us the terms of it. I think your sales exceed $75 million, a payment will be deferred. So is your expectation that you will get there this year or could you just confirm that growth?
Jacob, your recollection is correct. So we have $52.5 million currently outstanding under that. So we have $7.5 million payment that’s due in May. And then $15 million payment that's due in May 2020 if we hit $75 million in revenue can be deferred to 2021, and then if we hit a $100 million in revenue next year then that could be further deferred till 2022.
Is your expectation that you will hit that this here or?
We don’t give guidance on our revenue but we give it a lot of thought that went into that number.
Thank you. And I'm showing no further questions in the queue at this time. Ladies and gentlemen, thank you for participating in today's conference. This does conclude your program and you may now disconnect. Everyone, have a great day.