Aquestive Therapeutics, Inc. (AQST) Q3 2019 Earnings Report, Transcript and Summary

Good morning, and welcome to the Aquestive Therapeutics' Third Quarter Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, this call will be recorded. I would now like to introduce your host for today's conference, Ms. Stephanie Carrington, Westwicke Investor Relations. You may begin.

Thank you, operator. Good morning and welcome to today's call to review Aquestive Therapeutics' results for the third quarter 2019 and business highlights. On today's call, I am joined by Keith Kendall, Chief Executive Officer; and John Maxwell, Chief Financial Officer, who are going to provide an overview of recent business developments and performance in the third quarter. Additional members of our leadership team will be available for Q&A. In total, we expect today's call to last approximately 60 minutes. As a reminder, our remarks today correspond to the earnings release we issued after market close yesterday. In addition, a recording of today's call will be made available on Aquestive Therapeutics' website within the Investor Relations section shortly following the conclusion of this call. To remind you, we will be discussing some non-GAAP financial measures this morning as part of our review of third quarter 2019 results. A description of these measures, along with a reconciliation to GAAP, can be found in the earnings release we issued yesterday, which is posted to the Investors section of Aquestive Therapeutics' website. During the call, the Company will be making forward-looking statements. We remind you of the Company's safe harbor language, as outlined in yesterday's earnings release as well as the risks and uncertainties affecting the Company as described in the Risk Factors section included in the Company's annual report on Form 10-K filed with the SEC on March 14, 2019, and in our quarterly reports on Form 10-Q. As with any pharmaceutical company with product candidates under development and products being commercialized, there are significant risks and uncertainties with respect to our business and the development, regulatory approval and the commercialization of our products and other matters related to operations. Given these uncertainties, you should not place undue reliance on these forward-looking statements, which speak only as of the date made. Actual results may differ materially from these statements. All forward-looking statements attributable to Aquestive Therapeutics or any person acting on our behalf are expressly qualified in their entirety by this cautionary statement and the cautionary statements contained in the earnings release issued yesterday. The Company assumes no obligation to update its forward-looking statements after the date of this conference call whether a result of new information, further events or otherwise, except as required under applicable law. With that, I'll now turn the line over to Keith.

Thanks, Stephanie, and thanks to everyone on the call for joining us this morning as we discuss a number of important developments in our business during the third quarter and through October. John and I are going to walk through some details on our remarks today and will then be joined by additional members of the Aquestive leadership team during the Q&A session afterward. The third quarter was an important and successful quarter in the evolution of Aquestive. We have, as previously committed, completed our proof-of-concept study for epinephrine, AQST-108, for the treatment of allergic reactions, including anaphylaxis, and have requested a pre-IND meeting with the FDA. We've continued to grow SYMPAZAN more than 50% since the end of the last quarter and successfully completed the FDA-requested crossover study of Libervant in patients against the reference listed rectal gel. Let's discuss in more detail each of these key areas of focus for the Company. First, let's talk about AQST-108. In late September, as promised, we completed the Phase I proof-of-concept clinical trial for AQST-108, our sublingual film formulation delivering systemic epinephrine. The proof-of-concept data demonstrated our ability to deliver systemic epinephrine via our PharmFilm formulation. Notably, we achieved similar ranges of mean values of Cmax and Tmax to that reported for injectables EpiPen and AUVI-Q. Last week, we submitted our request to the FDA for a pre-IND meeting. We are waiting for feedback from the agency regarding potential dates for this meeting to discuss the development pathway for AQST-108. At this juncture, we anticipate this meeting will be scheduled for the early part of 2020. The central focus of our company at this time is our CNS franchise. As you all know, we launched SYMPAZAN at the very end of last year. SYMPAZAN is a product we believe will ultimately generate $65 million of peak annual net sales. SYMPAZAN has a meaningful value proposition for caregivers of patients suffering from Lennox-Gastaut syndrome or LGS. SYMPAZAN also represents a significant step forward in establishing our commercial infrastructure and raising the profile for Aquestive's technology as we continue to drive toward an ultimate approval and launch of Libervant. We launched SYMPAZAN, whose prescribers overlap greater than 90% with potential prescribers of Libervant, late last year with the aim of raising the profile of our PharmFilm technology. SYMPAZAN was developed and launched as a commercial precursor and eventual complementary product in support of the Libervant opportunity. SYMPAZAN gave us the opportunity to build out and pressure-test our commercialization capabilities and processes prior to the commercial launch of Libervant. All of our commercialization efforts relating to SYMPAZAN provide an opportunity for direct conversations with health care practitioners, patients, caregivers, advocacy groups and others about the value of the PharmFilm technology that will be the basis for Libervant. On a sequential quarterly basis, we continue to be focused on the growth and further market penetration of SYMPAZAN. The latest monthly SYMPAZAN shipment volumes to retailers has grown over 50% since the end of the second quarter. The prescribing base also continues to grow, over 56% since the second quarter, with over 83% of prescribers writing multiple scripts and over 70% of the patients refilling their scripts. Additional contracts with payers and PBMs were signed since the second quarter, and we continue to expect to achieve our goal of having over 70% of lives covered by the end of the year. SYMPAZAN is a strategic -- is strategically accomplishing what was intended when we developed and launched the product last year. The work we do to continue to build the revenue stream and market penetration for SYMPAZAN will be an important foundation for the successful launch of Libervant expected in 2020. The Company's efforts are most sharply focused on bringing Libervant to market. Libervant represents a major contribution to patient care for the treatment of seizure clusters in patients with epilepsy and we believe will potentially contribute up to $200 million to $300 million in peak net revenues. Over 1 million patients in the U.S. have active, uncontrolled epilepsy and a need for rescue medication. Less than 10% of these patients are successfully treating their seizures with the current standard of care, a rectal gel application of diazepam. A medicine is only as good as its ability to be used by patients where they need it, when they need it and in a form they accept. As we announced previously, during the third quarter, we successfully completed the single-dose crossover study for Libervant. We believe that we've met the specific requirements for approval communicated to us by the FDA, and our product continues to prove that it has attributes lacking in all of the current or pending formulations of diazepam. As shown in the recently completed crossover study trial comparing Libervant with the rectal gel in patients, the peak blood concentration of diazepam following buccal film administration was comparable to that of diazepam rectal gel. Also, the performance of the film measured by peak concentrations was more consistent across weight categories compared to the performance of the rectal gel. Importantly, the data continued to show that there were no nonresponders to Libervant. The rectal gel, however, continued to show, as it has historically, low and nonresponders of 10% or more in our latest study. This is a critical milestone for our lead asset and puts us on a clear and straightforward path to completing the filing of our NDA for Libervant. We filed the CMC portion of the rolling New Drug Application submission with the FDA in September. We expect to file the clinical data portion around the end of November, which will mark the completion of our submission. Assuming a 10-month review cycle, we are anticipating receiving a PDUFA goal date around the end of the third quarter of 2020. We believe that Libervant will become the preferred rescue medication by patients and providers looking for an alternative, potentially superior and clinically differentiated treatment to manage and interrupt seizure clusters. This is based on strong data that shows the product can be quickly and safely applied, results in consistent therapeutic levels and comes in a form preferred by patients. Based on patient survey data, Libervant is preferred by 80-plus percent of patients when compared to nasal sprays. Once approved by the FDA, Libervant will be the only treatment option usable by and delivering a consistent, predictable dose to virtually all patients to whom it's prescribed. We plan on having a strong presence at the American Epilepsy Society Annual Meeting in Baltimore in early December. We have multiple poster presentations, and we're planning to hold an investor and analyst R&D event on December 9 that will feature a handful of key opinion leaders in the epilepsy field. Moreover, we're sponsoring a scientific exchange meeting at AES the morning of December 9th for clinicians and others to learn more about Libervant and the expanded clinical data set that we'll be showcasing at the meeting. We believe AES is one of the most important epilepsy conferences of the year. With the imminent filing of Libervant, we believe this is an important event for us to showcase our technology and product offerings. Finally, in line with our expectations, Exservan, our PharmFilm formulation of riluzole for ALS, continues to move toward a November 30 PDUFA date. As we've said previously, we're seeking to license the product outside the United States, and we've begun the process of identifying potential commercial partners in the U.S. as well. Looking ahead for the remainder of 2019 and into 2020, we are focused on advancing our proprietary products. We will continue to grow SYMPAZAN shipments and revenue while establishing strategic relationships for us in the epilepsy market in advance of a Libervant launch. And we expect to complete the NDA filing for Libervant around the end of November, as I said before, and continue the regulatory process through the early part of 2020. We look forward to continuing to update you as we make progress on these key deliverables during the remainder of the year and in the early part of 2020. I'll now turn the line over to John Maxwell, who'll provide specifics of our financial performance and outlook.

Thank you, Keith. Good morning, everyone.I will use my time this morning to address the impact of our continued strong revenue performance on our guidance ranges and provide an update on our capital planning. By now, you have seen our financial results in our 10-Q and earnings release that were filed yesterday after market close. I want to draw out a few points that are important to an understanding of our updated 2019 financial guidance published in the release. To the extent that there are questions on the Q3 results, we can take those during Q&A. First, Suboxone performance has been strong through the third quarter, and we are changing our Suboxone revenue outlook as a result. In the third quarter of 2019, we produced 72 million doses of Suboxone and the authorized generic product compared to about 75 million doses in Q3 of 2018. Based on the franchise's market performance and our order book, we are updating our full year guidance for Suboxone manufacturing volume to a range of 260 million to 270 million doses, up from a previous guidance of 240 million to 260 million doses. This translates into a $32 million to $33 million revenue outlook for manufacturing and supply revenue and is above the top end of our previous guidance range. As we have discussed previously, Suboxone is an asset that represents Aquestive's past. Our future is the group of proprietary assets we are developing and commercializing, specifically SYMPAZAN, Libervant and AQST-108, epinephrine. We will continue to be the sole and exclusive supplier of Suboxone to Indivior worldwide, even as the dynamics of the U.S. market continue to change. Suboxone will remain a contributor of meaningful revenue and cash flow, even as overall revenue and volumes continue to decline into the future. We will continue to assess the impact of changes in the Suboxone market and plan to provide 2020 guidance in the first quarter. While we do not specifically guide on SYMPAZAN revenue, as Keith mentioned previously, our trends on wholesaler shipments to retail pharmacies and growth in new and repeat prescribers are very solid quarter-over-quarter. Our revenue recognized is affected by wholesaler inventory levels. The major wholesalers are moving us towards an inventory level as low as 7 to 14 days. The effect of this inventory management will continue to drive a disconnect between the revenue timing and our commercial market trends into 2020. As we mentioned before, we are very pleased with the commercial performance of SYMPAZAN, as this most importantly prepares us for the launch of Libervant expected in 2020. As a result of exceeding our Suboxone and authorized generic product volume and revenue expectations for the quarter, we are raising our 2019 total revenue guidance range to $45 million to $47 million, which is above the previous guidance range. While we do not provide guidance on the other components of total revenue, all components of revenue continue to perform in line with our expectations. Our adjusted gross margin continues to perform in line with the previous expectations. Our adjusted gross margin in the third quarter 2019 was 68%. We have left adjusted gross margin guidance unchanged as a result. Over the long term, we would expect gross margins to rise as the mix of revenue from our proprietary products rises as a component of total revenue. As with 2020 revenue, we plan to set full P&L guidance in early 2020. As outlined in the earnings release issued yesterday, our full year non-GAAP adjusted EBITDA loss range has been improved to $49 million to $50 million from our previous guidance. The new guidance reflected continued strong revenue, higher costs from continued IP litigation, acceleration of the Libervant crossover trial and the costs related to the timing of our debt refinancing partially offset by cost management efforts. We have been very good at creating revenue opportunity to offset delays in key milestones like those from apomorphine, particularly with the opportunity to drive additional revenue from the melting ice cube in Suboxone. These additional revenues carry a lower gross margin than the milestone revenues we had originally expected. So this fact, combined with the pressure of the higher-cost items just mentioned, along with working capital timing, have kept pressure on our year-end cash position. As a result, we're maintaining our cash burn guidance at approximately $60 million to $65 million after considering the guidance ranges and timing of working capital changes. As you know, we plan to monetize the apomorphine royalty stream once the product is approved. We are expecting this to be in the second quarter of 2020 based on Sunovion's most recent public statements. We are beginning to work now to prepare for monetization of this royalty stream, and we'll update as this develops. We continue to expect the monetization of this royalty stream could provide an additional capital of up to $100 million. After considering that noteholders will have the option to buy down debt with up to $40 million of proceeds from a monetizing event on apomorphine, we expect that the Company will be left with a substantial new cash position and a reduced debt balance from this apomorphine monetization event. After completing the submission of Libervant later this month, we will evaluate accessing the first reopener as available under the indenture subject to majority lender approval. In summary, our spend reflects investments in our future high-value proprietary assets, including establishing an expanding position in the epilepsy market. Our capital position has been improved by our senior notes issued in July. Our debt payments have been pushed out well beyond the expected Libervant launch, and our revenue continues to be strong from our proprietary and licensed products. Moreover, as discussed, we are optimistic as to the apomorphine royalty stream, which we expect to provide significant new capital as early as the first half of 2020. Operator, we will now open the line for questions.

[Operator Instructions] Our first question comes from Gary Nachman with BMO Capital Markets.

It's Rafay on for Gary. So starting with Libervant, can you comment on how familiar physicians and patients are with the product currently? And outside of AES, what activities do you plan on conducting over the next year to raise awareness? And then how should we think about the launch curve compared to what we've seen with SYMPAZAN thus far?

Ken, do you want to take that?

Yes, I'm happy to. And if you look at the physician base that we currently call on, the 4,100 SYMPAZAN prescribers, they're extremely familiar with the platform and actually very familiar with the Libervant program. A good number have actually participated in the development plan. If you look at what we'll do over the next 12 months, a big part of that is the scientific platform and publication strategy that supports Libervant. You'll see the front end of that at AES. We've got 5 posters going into AES. We've got a medical scientific exchange which usually draws about 200 physicians, where we'll have KOLs present that data again in a more intimate setting. We'll have 2 advisory boards, and then we'll have your normal booths there. Now the booths will be limited to talking about SYMPAZAN since that's our commercial product, but we have a big presence and allows us to talk about the platform. If you look at that product's uptake curve, if you'll remember with SYMPAZAN, you're competing in a very small market. It's LGS. There's about 55,000 patients. About half of them are on clobazam. They're very tightly managed. They're very tough to control, and they're very slow to change. So there's a fundamentally flatter uptake curve in a market like that. When you move into a market like rescue, you move outside of just those LGS and highly refractory patients, and those highly refractory patients into a population that is looking for a rescue strategy that may not be as severely as good as the LGS patients. So first of all, it's a bigger pool. When you look at that market, it's completely dissatisfied as well. If you look at SYMPAZAN, clobazam is available. So there's some level of satisfaction. If you look at the rescue market that we'll be moving into, it's completely dissatisfied, and you can tell that by the range of ways people try to control their seizures. There's really no standard of care. So that creates a lot more interest when you come in with a preferred route of delivery for a medicine they're accustomed with. So you would expect a faster uptake. And maybe one other point on the SYMPAZAN uptake curve. That's a fully generic market. That slows down your, that flattens out your curve as well.

And for the epinephrine product, when do you think that could potentially come to market? What kind of penetration would that have? And how much of a need is there for a sublingual form?

This is Dan Barber. So we are, we, as Keith said, we just submitted our request to meet with the FDA and walk through the early part of our clinical program. We'll have clarity on that early in 2020. We're very bullish on the process we'll need to go through from a clinical perspective. So we don't see this as a long development time line, I would say in the 3- to 5-year range is a very reasonable time period to assume. What we like about this market is, similar to Ken's comments on our Libervant product with the epinephrine anaphylaxis market, you have the same dynamics where you have devices that people don't like to use. We have a highly unsatisfied group of patients, and we think we can provide a consolidation with a new standard of care that is a big step forward for all patients. So in terms of penetration, I don't think we're in a place today to give you precise penetration numbers. But we see it as a disruptive force in that marketplace.

And this is Keith again. And we intend to update everyone once we finish our meeting with the FDA and have the minutes from that meeting about what the regulatory and clinical path forward is going to be so that we can fine-tune our view on development time.

Thank you.

Thank you. Our next question comes from Liana Moussatos with Wedbush Securities. Your line is open.

Thank you for taking my questions. Can you give us a little more color on what you're doing right with SYMPAZAN growth? And with cash, what's the runway estimate?

Ken, you want to take the SYMPAZAN growth?

Yes. I mean as John stated, we're very pleased with the growth of SYMPAZAN. It's performing in line with products that have come into this market before us that have filled niche like this -- niches like BANZEL and FYCOMPA's liquids. So we're tracking in line with those. You're seeing really good uptake in our target physicians. To date, we've got around 350 physicians who have written the product, virtually all of them multiple times. We probably will close the year with around 400 physicians having written it. That's a very, very solid base of clinicians. We're seeing a strong refill rate. 70% refill rate is our calculation based on our copay card. So that's slightly above the industry standard. And as I mentioned, the vast majority of the physicians who are writing are writing more than once, which is a good sign. That number is 83%.

In terms of capital, Liana, we think we have all the options available for us to provide the capital we need. The gating factors for us are the filing of apomorphine and the filing later this month of Libervant. Apomorphine, as you know, represents a significant nondilutive capital opportunity for us. And once that is filed by Sunovion, and their public statements continue to say that, that's going to happen here shortly. But once it is filed, we'll focus on creating a transaction for that royalty stream that we think creates, as John laid out in his prepared remarks, a significant nondilutive capital stream for us going forward.

Thank you very much.

Thank you. Our next question comes from Jason Butler with JMP Securities. Your line is open.

Hi, thanks for taking the question. First one, can you just give us any color on how we should think about the riluzole launch from an organizational perspective? And then secondly, on the work you're doing with 305, can you just talk a little bit more about the reformulation work? What your target profile is and any granularity on time lines?

Sure. Well, I'll let Dan talk about 305 and comment on that in a second. In terms of the first part of your question, as we have been indicating to everyone, our intent is to license that product first outside the U.S. and then secondly in the U.S. We are not likely to spend very much time other than preparing to manufacture the product for a potential partner on launching riluzole once it's approved. Jason, is that okay?

Yes. That's great. Yes.

Okay. Dan, you want to talk about 305?

Sure. And on 305, we continue to work on the formulation and the -- and dialing in on the curve that we would like to see. We obviously had our results earlier this year from our POC, and we're using those results to continue to modify the formulation as we move forward. We'll have more to say about that, I would say, at some point in time.

Our next question comes from Thomas Flaten with Lake Street Capital.

Just a quick question on the additional $10 million draw. Is that on submission or acceptance of the file by FDA that, that would be drawable?

That's on submission. And then we would need a majority lender approval once it's submitted. So as we indicated, we would expect that to be filed in late November. And we will reach out after that.

Got it. And then with respect to Suboxone, I know this is looking forward a bit. But given that Indivior has terminated the Sandoz agreement, should we be thinking about volumes just as branded, which is two third of what they're selling? Or should we be thinking about the branded growing to take some of that share from the Sandoz volume as we look forward?

I think that -- this is Keith again, Thomas. I think that the fact that the authorized generic represents about third of the market is clear. Exactly based on their actions, how much of that goes away, in other words, is absorbed by the other generics in the market. And how much, if any, is reclaimed by the brand remains to be seen. Our view is it is not all going to go away to the other generics. But what that looks like, we continue to work with Indivior to create a forecast. Right now, we're focused on delivering what's in our order book into the early part of 2020. We'll continue to work with Indivior to understand that very new market action, and we'll provide, I think, clear and specific guidance in the first quarter when we guide on 2020.

And then one final one for me. Could you talk about, if it's indeed true, there was a citizen's petition filing with respect to Neurelis' intranasal product? Is -- can you talk about that, if that's indeed what you did?

There was actually a citizen's petition filed with respect to Neurelis' VALTOCO product.

[Operator Instructions] Our next question comes from Ram Selvaraju with H.C. Wainwright.

So I just wanted to go back to the inventory management on Libervant versus SYMPAZAN and ask if you could just give us any additional granularity and comparison between what you expect to occur with Libervant versus what you have been seeing historically with SYMPAZAN. Is there likely to be any inventory management issues in common between those 2 products? And if not, why?

I think that remains to be seen. I think the dynamics of the 2 markets are very different. And 10 or 11 months out from that, I'm not sure we have done all the updating on Libervant because it hasn't been filed, while the submission hasn't been completed yet. I think Libervant is a very, very different market than SYMPAZAN. SYMPAZAN is highly fractious in genericized. There's multiple product alternatives in a number of different forms, and all of the mechanisms within the market like that are at play, including inventory management. Libervant, there is no alternative. There's certainly no generic, there's certainly not going to be any generics when Libervant comes to that market, and you have less than 8% of the patient population accessing the standard of care for a variety of reasons. So we, the exact dynamics of inventory management remains to be seen, but the uptake curve, regardless of how inventory is managed, we think, is going to be a lot more favorable in that open market than it was and is right now for SYMPAZAN.

And then with respect to what you anticipate the user experience to be for Libervant, is there anything that has emerged in your market research and your clinical assessment with this product that would lead you to believe that there might be any kind of near-term challenges to uptake upon approval based solely on patients getting more familiar with the product, physicians becoming more familiar with the product, particularly from a usage and administration standpoint?

I'll let Ken add color to this, but absolutely not. The, all of our polling indicates that the form is vastly preferred over what the potential alternatives might be in the market. Every one of our studies indicates that the product performs better on all the key dimensions for patients and caregivers than the current alternative and any prospective alternative. So we're very, very pleased with the outlook for this product and very pleased with the market it's going into, a underperforming standard of care with no real alternatives and no generic prospects.

Yes. And Ram, I would add a couple of places to look, and you can look at the triptan market in order of entry and where orals ultimately shook out versus nasal and injection. You can look at the allergy markets when oral decongestants or antihistamines compete with inhalation products, and the orals always shake out as the preferred route of delivery. We've spent some time validating that in our market. We've asked -- we asked 60 caregivers their preference and how they would like to administer medicines. And as Keith -- I think Keith or John, one of the 2 referenced, an 83% preference for an orally administered medicine. And when you scratch that a little bit to try to understand why, you come back with a lot of very interesting attributes that I think Libervant is uniquely -- will be uniquely positioned to take advantage of. The first is portability. A medicine is absolutely useless if it's not where you need it when you need it. And if you look at the various products that are in the market or coming to market, I think you would characterize all of them as not very portable. It's immediacy, it's how quickly you can get it from the package to the patients. And I think -- and you've seen our strip. You saw one when we demoed it with you. I mean it's a simple fold, tear and stick, and you've got drug going into the patient. You're not going to do that with drug-device products. I think it's painfully obvious when you look at the rectal and the nasals don't seem to simplify that or improve that very much. So there are attributes like that, that are going to separate out an orally delivered molecule from a rectally or nasally delivered molecule, and I think that'll drive our utilization.

Great. Fantastic. And just on 305, can you comment on whether you expect the potential approval of Mycapssa next year to provide advantages or disadvantages for this program? Firstly, it probably would establish a clear reference framework for regulatory authorization of products in that class. But obviously, it is potentially a competitor as well. So if you could just give us some clarity on that.

Good morning Ram. This is Dan. Yes, from our perspective, it would be helpful that it would be the first oral product in this space, and we think there's plenty of need and plenty of room for continued improvement over the years. I don't think that takes away, though, from our focus right now in Libervant and getting Libervant to the market and making sure that we do all the things we need to do to be successful on that front.

Okay. And then last question on the Sunovion product. Obviously, we've seen a lot of recent activity by Dainippon Sumitomo, particularly focused on the U.S. market that has nothing to do with this product. And just wanted to know if you're seeing on corporate levels from their side any evidence whatsoever that they are not as committed to this product as they were in the past.

Absolutely not.

Okay. Thank you very much.

Thank you. And I'm currently showing no further questions at this time. I'd like to turn the call back over to Keith Kendall for closing remarks.

Well, as usual, thank you, everyone, for taking the time out of your busy day for -- to spend with us. We hope this update was useful to you, and we look forward to keeping you updated on all of the events we discussed today as we move into 2020. Have a great day, and we'll talk to you all soon.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.