Apricus Biosciences (NASDAQ:APRI) Q3 2012 Earnings Call November 9, 2012 10:30 AM ET
Edward M. Cox - Vice President of Corporate Development & Investor Relations
Steve Martin - Interim Chief Executive Officer, Chief Financial Officer, Senior Vice President and Treasurer
Jason N. Butler - JMP Securities LLC, Research Division
William Tanner - Lazard Capital Markets LLC, Research Division
Greetings, and welcome to the Apricus Biosciences’ Third Quarter 2012 Financial Results. [Operator Instructions] And as a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Edward Cox, Vice President of Corporate Development for Apricus Biosciences. Thank you. Mr. Cox, you may begin.
Edward M. Cox
Good morning, and thank for joining us today. I am Ed Cox, Vice President of Corporate Development and Investor Relations here at Apricus Bio. With me from Apricus is Steve Martin, our interim Chief Executive Officer and Chief Financial Officer; and Randy Berholtz, our Executive Vice President and General Counsel.
During today's call, Steve will review the recent corporate events, discuss third quarter financial results and recap the company's upcoming milestones and provide a brief update before opening the call up for questions.
Before we begin, let me remind you, during today’s conference call, the management team will make forward-looking statements regarding future events or future financial performance of the company. Examples of forward-looking statements include the timing for achieving certain goals, such as approval or launch of drugs, and our ability to achieve goals and expectations. Please keep in mind that such statements are based on current expectations and actual results could differ materially. Listeners are cautioned not to put undue reliance on these statements. You should refer to our most recent filings with the Securities and Exchange Commission for additional discussions on factors affecting our business. With that, I will turn the call over to Steve Martin. Steve?
Good morning. Thank you, Ed. Good morning, thank you for all for joining the call today. Before I get into the call, I'd like to briefly discuss the announcement we've made earlier this week. The Board of Directors this Tuesday appointed me interim Chief Executive Officer, replacing Dr. Bassam Damaj. On behalf of the company, I'd like to thank Dr. Damaj for his leadership and contributions over the last 3 years and wish him well in his future endeavors. I'm pleased to serve as interim CEO during this period and plan to work closely with the Board to ensure a smooth transition of responsibility and to ensure no interruption in the company's multiple opportunities.
Before speaking about the third quarter financial results of the company, I'd like to begin our call by discussing the important value creating milestones that lie ahead for Vitaros, our flagship product for the treatment of erectile dysfunction. Vitaros, in our view will be one of the first new erectile dysfunction products launched in nearly a decade. And similar to Viagra, Cialis and Levitra, we believe it is well-positioned for commercial success. This first important milestone ahead of us is the inaugural commercial launch of Vitaros. We want to start by stating clearly that Abbott is fully committed to this product and the coming launch in Canada. We are actively supporting Abbott with their prelaunch efforts and are very excited, particularly about the full announce-able launch. We believe that the Vitaros full launch in Canada will occur in the first part of 2013, and like Abbott, we are enthusiastic about the expected market reaction to this new product for erectile dysfunction.
The next major commercial milestone for Apricus is the European approval decision for Vitaros, which, if we receive approval from the EMA, will be subsequently followed by national marketing authorization in each of the European major markets. Europe has a $1.2 billion market for erectile dysfunction products today and the untreated and under treated portion of that market, we believe, is very significant as well. We have already have multiple partnerships in place, a full branch [ph] sales operation preparing for the launch and additional partnership discussions ongoing. We currently expect an approval decision in Europe in the first half of 2013 and believe that a favorable approval decision may then be followed the national marketing authorizations that will allow us to allow the product to be sold in the various major markets in Europe.
As many of you know, Vitaros is a topically applied formulation of alprostadil, a vasodilator which directly increases blood flow to the penis causing an erection. The current leading medications for ED are orally-administrated, PDE5 inhibitors like Viagra, Cialis and Levitra, but there are a number of patients who cannot or do not respond well to these medications. Third-party research has detailed that as many as 18% of patients are contraindicated due to medications or concurrent diseases. Over 20% of patients are nonresponders to the PDE5s. More than 30% of patients on those drugs drop out after the initial prescription and nearly 50% drop out within 3 years of starting on the medication. As such, we and our major pharmaceutical partners believe there's a huge market potential for a product like Vitaros.
Vitaros takes effect, on the average, in 5 to 15 minutes versus 30 minutes to 90 minutes with the oral medication. And unlike the oral medications, it is to be safely used by any patients with hypertension, diabetes, cardiovascular issues or patients on alpha blockers or beta blockers. Alprostadil, the active ingredient in Vitaros, is a widely accepted alternative to the PDE5 inhibitors for these difficult-to-treat patients. The previously marketed products were administered by unacceptable means for most patients. We believe that topically applied Vitaros is safe and effective with significantly more market opportunity because of its patient-friendly form versus the other alprostadil products.
Our commercial strategy for Vitaros within markets around the globe includes both self commercialization and partnerships. We recently announced an exclusive license agreement with the Takeda Pharmaceuticals for Vitaros in the United Kingdom. This marks our third partnership for Vitaros this year alone and the sixth partnership deal this year for our overall product portfolio. Vitaros is now partnered in geographies around the world including U.S., Canada, Germany, the U.K., the Gulf countries, certain other countries in the Middle East, Israel and Italy. In France, a very significant ED market, we are preparing to self-commercialize the product through Scomedica, our European sales division. We remain focused on partnering additional major markets in the level of interest where Vitaros remains strong.
There's a market affecting 140 million men worldwide representing $2.6 billion in revenue. Even excluding the U.S., Vitaros represents a tremendous value opportunity for us, particularly as a distinct product addressing underserved populations. Our near-term focus for Vitaros is to ensure a successful commercialize launch in Canada, to secure additional partnerships with quality development and marketing partners, to continue to pursue regulatory filings in key global territories and to prepare for commercial launches as these opportunities present.
The other legacy development product I'd like to focus on is Femprox, our topical alprostadil cream for the treatment of female sexual arousal disorder or FSAD. In recent months, we completed 3 filing meetings with Health Canada and the U.S. FDA regarding the suitability of our existing clinical, preclinical and chemistry data for Femprox to support filings in each country. We look forward to being able to provide public feedback on the results of each meeting in the near term. Our indications for this influence are primarily based on patient reported outcome measures such as FSAD. It is essential that methodology used to measure the end points are developed and validated and agreed to by the regulatory agencies.
Key elements of our prefiling discussions include the clinical trial designs and agreed end points. We will work with the FDA and the other regulatory agencies to build the best methodologies to achieve the desired outcomes. Setbacks for other companies' products in the overall FSAD space have been largely due to concerns tied to the active products in these drugs, almost always either hormone-based or SSRI inhibitors, or to very high placebo rates. We believe that Femprox's distinct characteristics, including topical delivery and mechanism of action, separate it from other development candidates on several levels. We also believe that Femprox is further along in development than any other compound in the space and is the only drug candidate to have successfully completed a 400-patient Phase III clinical trial in China in this indication. One must achieve statistical significance in its primary and secondary influence. Femprox demonstrated safety and efficacy in clinical trials and is unique among its competitors because of its direct and local mechanism of action being driven by increasing blood flow directly. No product is currently approved to treat FSAD, and estimates of its market size are on par with the erectile dysfunction market in males.
The last product I want to speak to today is MycoVa, our late-stage topical treatment for mild to moderate onychomycosis for nail fungus. In the third quarter, we participated in a pre-NDS meeting with Health Canada, and based on the agency's review of the submitted data package, reached concurrence that a reanalysis of existing Phase III development program data by disease severity is acceptable to support a new drug submission. MycoVa has successfully demonstrated its ability to kill nail fungus and improve the appearance of the nail in multiple Phase III studies, but didn't meet its primary end point of complete cure. Health Canada will therefore review the successful secondary end points and a reanalysis by disease severity to demonstrate the efficacy. Given this outcome, we expect to file the NDS for MycoVa after [indiscernible] stability is completed at our new manufacture of the products. For certain other markets, including U.S. and Europe, we expect to leverage our recent regulatory success in Canada.
I'd now like to turn to the financials. For the third quarter, I'm pleased to report Apricus recorded substantially increased revenue, having a realized meaningful income from license fees and milestone payments associated with recent partnerships, contract sales service performed by Scomedica and preliminary product sales of oncology supportive care products. Consolidated net revenue increased by $4.4 million to $5.2 million in the third quarter of 2012 as compared to $0.8 million in the third quarter of 2011 and $0.1 million in the second quarter of 2012. This included revenue from a $1 million upfront license fee in our transaction with Takeda and a $2.5 million upfront license fee payment from Abbott. In aggregate, these 2 items comprised the vast majority of the $3.6 million in license and milestone revenue for the third quarter.
We also formally closed the Finesco-Scomedica acquisition in the third quarter and as a result, recorded $1.2 million in new contract sales service revenue. As many of you know, Scomedica is a leading health -- leading health French healthcare contract sales and marketing organization that had annual revenues of approximately EUR 8 million or $10 million at current rates in 2011. We believe there's a tremendous opportunity to leverage Scomedica's strong sale and marketing infrastructure to directly launch Vitaros along with our other pipeline products, if and when approved in France.
Our research and development costs increased by $1.6 million to $2.2 million for the third quarter of 2012 compared to $0.6 million for the third quarter of 2011. Our increased research and development expenditures in the third quarter of 2012 reflected increase in expenditures for our development pipeline, including Vitaros manufacturing activities and expenses related to Vitaros regulatory filings in Europe. Our selling, general and administrative expenses increased by $2.2 million to $4.4 million during the third quarter of 2012 compared to $2.3 million during the same period in 2011. The increase in these expenses is primarily due to the acquisition of Finesco-Scomedica and the related transaction costs in added general and administrative personnel.
The company expects that the most significant expenditures in 2012 will include the development expenditures, including filing for market authorization for multiple drugs in multiple territories, product relaunches and for the overall expansion of the commercial operations of the company.
We continue to reduce our operating losses toward our goal of being cash flow positive. The net loss for the third quarter of 2012 was $2.5 million or $0.09 per share compared to a net loss of $4.9 million or $0.19 per share in the most recent quarter ended June 30, 2012. As of September 30, 2012, we had cash and cash equivalents totaling $16.9 million compared to $7.4 million at December 31, 2011, and $17.9 million at June 30, 2012. We remain in a very strong cash position and believe that we have sufficient capital to achieve our growth initiatives.
We made tremendous efforts in 2012, which we hope to explore it [ph] dramatically in 2013 and beyond. To recap, our upcoming milestones include, first, the Canadian launch of Vitaros by our partner Abbott Laboratories as a first-line treatment for erectile dysfunction. One of the first ED products to be launched in nearly a decade and a unique product addressing a large, underserved population in the first part of 2013. Second, a potential marketing approval of Vitaros in Europe, a $1.2 billion market space in the first half of 2013. Third, the feedback from the regulatory agencies including the FDA on the next step for Femprox and its clinical development. And fourth, the feedback from the regulatory agencies and the next step for MycoVa's regulatory path forward as well.
Additionally, we continue to engage in partnership discussions for Vitaros, as well as our other pipeline products throughout territories in Europe and other global markets. And related to our commercial oncology supportive care franchise, we are currently building or sourcing the required manufacturing infrastructure to support global or regional supply capacity for Totect and Granisol. These assets create a commercial platform that is not only meaningful revenue potential, but partnership potential in certain designated markets, something we hope to take advantage of in the near term.
Finally, I want to commend our entire staff and team here at Apricus. The work the company has put in throughout 2012 will pay significant dividends, and I know that the entire Apricus team is excited and committed to seeing Apricus become a market leader based on the assets that we have now. We look forward to updating our shareholders and the market as we achieve those -- these value creating milestones. And with that, I'll now open the call to questions. Operator?
[Operator Instructions] Our first question comes from the line of Jason Butler of JMP Securities.
Jason N. Butler - JMP Securities LLC, Research Division
First, I was just wondering if you could give any more color on the CEO transition both in terms of any reasons you can give why there was a change, but maybe more importantly, the attributes of who you're looking to bring in and whether there's any change in the company strategy there?
Good question, Jason. It's always tough to talk about the things that go on in the Board room. Again, it's a very personal decision. Bassam chose to resign from the company and all the reasons behind that are really private to the Board of Directors and Bassam. We thank him for his contributions. We've come a long way in a couple years and we're very pleased with the position the company is in for 2012 and 2013. The Board is very much behind the company. They've very strongly expressed their motivation for the opportunity to continue to grow this business. They've put a lot of faith in me, and I thank them for that. They were even in the office this week to make sure there was a full support of the Board of Directors towards this company. They've expressed they want to find a very senior commercially-experienced CEO who's been able to be very successful in growing pharmaceutical companies and bring him in or her in to grow us to even a higher level. So the sights are set rather high, we have big plans for continued growth in this company and I think we can attract a very good candidate for that position.
Jason N. Butler - JMP Securities LLC, Research Division
Okay. Great. And then just moving onto Femprox. You said that you're waiting from feedback from FDA. Is this anything more than just waiting for the FDA minutes or is it that usual step you're waiting for? And could you maybe give us a little bit more detail on the potential outcomes that we should be thinking about?
Good question. So as you know, with the regulatory environment, there's a meeting, there's a back-and-forth with the minutes and there's evaluation to try to make sure there's agreement of what was expressed. Certainly, our focus is to try to set the end points for the appropriate clinical trial that we think we can be successful with, with our Femprox products. Certainly, we also want to get the trial design in order and so, this won't be the final meeting on that area, but the idea was to try to clarify the clinical end points, clarify the design of the clinical trials, decide the validity and strength of our Chinese trial to support additional trials, and then make sure we're clear with the FDA on the path forward. So we're still looking to that process, we'll be able to update the market wholly once we have complete clarity and we'll do that.
[Operator Instructions] Our next question comes from the line of Bill Tanner of Lazard Capital Markets.
William Tanner - Lazard Capital Markets LLC, Research Division
One, just on the strategic front as it relates to the search for a new CEO. Just curious, any commentary on how you see somebody fitting in, in terms of their viewpoint on the company's strategy, the portfolio. Would you be amenable to somebody who had a bit of a different viewpoint if that required some, not necessarily -- dismantling is perhaps too harsh of a word -- but some redirection either on the focus or in the portfolio? And then I had a follow-up question.
Sure, Bill. It's a good question. Sounds like maybe you have a candidate for us, I don't know. It all depends on certainly, the profile of the candidates. We'll expect to interview quite a few people from different backgrounds and experiences. Certainly, new eyes always bring a reason to evaluate all the things in our pipeline and all of our strategies. The Board is confident that the combination of their expertise and some new eyes on the business will only give us a chance to go higher and farther. So I don't think we have a specific answer to the question now other than when we attract a top candidate, certainly, we get some new inputs and we hopefully build on that.
William Tanner - Lazard Capital Markets LLC, Research Division
Yes, I mean, the case [ph] of my question was just trying to gauge the flexibility the company might have versus trying to shoehorn somebody in to kind of a set portfolio or a strategy and obviously, maybe trying to thread the needle of -- wanted to make sure that you did have new eyes, but also wanted to make sure that everything that's been done over the last 12 or 18 months doesn't get undone in a fashion that's, perhaps, not helpful to bringing the ball down the field. And then I guess I had a question as it relates to how you see, potentially, it sounds like there could be opportunities for generic Viagra or sildenafil in Canada, how you see that, or really, do you think those are completely -- it's a different market or a different sub segment of the MED [ph] market?
Sure. We were aware of that [indiscernible] and I'm going to let Ed make a comment on that.
Edward M. Cox
No, I think that's a fair question people ask. I think there's 2 parts to this. One is that the patent for Viagra in Canada was always expected to expire by 2014. So that's one thing that is important for people to understand, is that it was clearly understood that it was inevitable. What's a whole lot more important is that the product that we have, Vitaros, and the partners that we've put in place, the main value driver behind the product is treating all the under treated and untreated people. I mean, Steve went through these numbers before, and I don't want to just rattle off statistics, but it's important to understand sort of general market size of what we're talking about. Nearly 20% of the patients are contraindicated to the PDE5s. Another 21% of the patients are nonresponders and 31% drop out within the first couple of days taking the drug, and within 3 years 50% are gone. So for us, I think that the market opportunity for this product and the reason Novartis and Abbott and Takeda brought this product on is because despite the fact that there are very good drugs out there, and now, there's going to be a generic version of a very good drug, there's still a major portion of the population, maybe as high as 40%, that's totally untreated. And so, for us, that's what we're focused on and that's why I think the partners signed on, because, I mean, they were clearly expecting this to happen at some point anyway. I think that's the greatest value of Vitaros, is treating under treated and untreated patients.
[Operator Instructions] Our next question comes from the line of John Nevins of Wells Fargo.
Could you guys -- Ed, could you kind of go through some of the opportunities that still remain in Europe and Latin America and kind of give us an update of how late stage those may be? I've certainly, hearing -- and also, could you comment or give us any kind of reasons or just a general state of affairs as to why now Abbott launch is slipping into '13. I would assume that you guys are very confident about these dates since we don't have a great track record of exactly hitting dates, which by the way, I don't really -- that's not a big deal to me, but it seems to be to the market. And also, the European approval is now first half of '13 as opposed to kind of Q4, Q1. So just comment on that -- in that regard would be helpful.
John, we'll break it into 2 pieces. I'll have Ed give a quick update on the partnership discussions and I'll take the Vitaros dates.
Edward M. Cox
John, thanks for the question. Yes, just in a real kind of summary way so people can understand the Vitaros partnerships we're pushing on in addition to the other drugs. We still have Spain, which is a major market. It's the last of the G5 that's remaining. We have the Russia, Turkey CIS block. CIS stands for Confederation of Independent States, which is the former Soviet Union. That market is on par with the same size as Spain. We have the collective which is the rest of Europe, which is even larger than Germany. We have Japan and the remaining Asian territories. And then we have Central America based around Mexico and South America based around Brazil. And we're either expanding or continuing conversations on all those territories and they remain a key focus for the business development team. And so, we remain bullish on getting those deals done which really talk to your partners. So that -- nothing has changed around that and those are the territories that we still believe, we'll be great partners in.
And John, related to the dates. Certainly, the most important steps for us are the going on to the markets with Vitaros in Canada by Abbott, and then the European approval, we expect early part of 2013 for those markets. So a little bit of the background. So we talked about soft launch in the past and I think that's a little bit hard to measure, and so we've been in constant contact with Abbott. I think what's more appropriate for the market is when Apricus can start to see the economics related to those transactions and that would be when they have a full launch. And so, I think what would be appropriate is just make I just give updates on expected full market launch and work with Abbott. Again, they remain as committed as ever as do we. We think that's early part 2013 and we'll keep you posted as that develops. With respect to Europe, again, we're still moving to the response, and finally, in the flux-stop processes that continue to the latter part of this year and, we think, early next year. And so, we think with the early part of 2013, we expect to receive that approval decision, following by national market approvals and then we go into the launch processes with our various partners. So I think what we're going to just try to do is clarify for you and the market how that comes in 2013.
[Operator Instructions] Our next question comes from the line of David Douglas [ph] of Jamaica [ph] Capital.
Steve, Ed, I had a question about the Abbott payment. Did I read in the 10-Q that it was actually collected in October?
Yes. The way that works is that all the steps for achievement of the milestone have to occur in the quarter and in some cases, there's a receivable and collected just after. So that balance was in accounts receivable at September 30.
And did the 10-Q state that it was actually collected in October?
It did. Yes, the money has been collected.
And then as a follow-up to that, could you give us a little more color on what the cash situation looks like moving forward through the fourth quarter and into next year in terms of what kind of revenues we expect and what kind of costs we expect to incur?
Yes, sure. Good question. So we're $17 million [indiscernible] at the end of the quarter. We continue to be successful with the partnership transactions. Our costs are really going to vary based upon our needs to do manufacturing activity related to Vitaros or other major market opportunities. We haven't guided on our revenue estimates in the near term. We haven't done that publicly. The things that we'll continue to bring in were the things that you see
the license revenues that are choppy because it's been doing the deal [ph] that gets closed, but those are the upfront moneys and the various markets for various products. And then of course, we have growing product sales revenue from oncology supportive care business which is going to start growing substantially in Q4 in 2013. We have a nice, steady flow of revenues from our Scomedica contract sales revenue operation and that's pretty steady. The costs are going to be relatively consistent with the Q3 numbers other than the fact that we had some transaction costs in Q3 and we have a little bit higher manufacturing cost for Vitaros. So we'll probably actually see the costs drop a bit. So without giving specifics on 2013, I think that should give you a little bit of background in how we expect to see the cash flows during next year.
Ladies and gentlemen, we have reached the end of our question-and-answer session. I would now like to hand it back over to management for any closing comments.
Edward M. Cox
We want to thank everyone for joining us on the call today. And as always, if you have questions, please do not hesitate to contact the company directly. Thanks again for everyone's time.
Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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