Assertio Holdings, Inc. (ASRT) Q3 2013 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Depomed Third Quarter 2013 Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to August Moretti, Chief Financial Officer. Please go ahead, sir.

Thank you, operator. Good afternoon, and welcome to our third quarter 2013 financial results and business update conference call. With me today are Jim Schoeneck, President and Chief Executive Officer of Depomed; Matt Gosling, Senior Vice President and General Counsel; and Jack Anders, Senior Director of Finance. I'd like to remind you that the matters discussed on this call contain forward-looking statements that involve risks and uncertainties, including those relating to the commercialization of Gralise, Zipsor and Lazanda, as well as our projected revenue, expenses and year-end cash for 2013. Actual results may differ materially from the results predicted and recorded results should not be considered an indication of future performance. These and other risk factors are more fully discussed in our annual report on Form 10-K and in our quarterly report on Form 10-Q that we will file with the SEC this week, most particularly under the caption Risk Factors. Depomed disclaims any obligation to update or revise any forward-looking statement made on this call as a result of new information or future developments. As a reminder, Depomed's policy is to provide financial guidance and guidance on corporate goals for the current fiscal year and to update or confirm its guidance only by issuing a press release or filing updated guidance with the SEC in a publicly accessible document or providing such information on a publicly available Investor Conference Call. References to current cash, cash equivalents and investments are based upon balances as of September 30, 2013, as augmented to reflect receipt of the proceeds of the PDL transaction in October. All other guidance, including guidance relating to the company's expected revenues, expenses, year-end cash and corporate goals is as of today, November 5, 2013. I'll now turn the call over to Jim Schoeneck.

Thanks, Augie, and thanks all of you for joining us today. I [indiscernible] last quarter's call with the observation that we have been saying for some time that we believe 2013 would be a breakthrough year for Depomed. I think with today's earnings report, our acquisition of Lazanda and the recently announced sale of our European milestone interest in our type 2 diabetes portfolio, we are making this a reality. I want to start today's call by discussing our third quarter achievements in terms of product revenues. From the third quarter 2012 to the third quarter 2013, we grew our product revenues by 68%, a peak that speaks to the tremendous drive of our sales team and the success of our efforts to focus that team on high value opportunities. Revenues for Gralise grew to $9.8 million in the third quarter 2013, up from $4.8 million in the same quarter last year, an increase of 104%. During third quarter, we launched a new marketing campaign for Gralise that we believe will bear fruit in the months ahead. And we continue to advance the coverage of Gralise in key managed care plan. I'm happy to report the beginning January 1, 2014, ESI Metro commercial plants replaced Gralise in Tier II providing for broadbrand access to over 50 million covered lives. Staring January 1, we will also move from noncovered to Tier III with Med impacts Medicare Part D plan, again of over 600,000 Med D wise. Our managed care group has been very active, and we hope to have more good news for you on coverage to report. Our litigation against the 3 remaining Gralise ANDA filers over the 9 Orange Book patents for Gralise continues to progress. In June, we had our Markman claim construction hearing. The ruling from the judge has taken a bit longer than we originally anticipated, and we could see a ruling soon. As for Orphan Drug status on Gralise, the oral argument in our suit against the FDA in federal court in the District of Columbia took place on August 23, and we hope to have a decision by the end of the year. We also have a double-digit growth of net sales of Zipsor up 22% with sales increasing from $4.9 million in Q3 2012 to $6 million in Q3 2013. We believe this increase is a result of our targeted messaging and our sampling of Zipsor. We continue to hit 52 week total prescription highs with Zipsor most recently for the week ending October 18. As stated previously, we have filed suit against the ANDA filer for Zipsor and intend to vigorously defend our 5 Orange Book listed patents. Just last week, we announced that Depomed -- that the Depomed launch of Lazanda is now underway with our dedicated sales team and our new Lazanda Signature Support program. The Signature Support program is designed to streamline patient access to Lazanda. The program provides one-on-one support for healthcare professionals and their patients by offering several services, including benefit verification and prior authorization facilitation, reimbursement assistance with copay support, or reimbursement support hotline and eligibility for a free trial of Lazanda. We believe that the growth of Lazanda can be a key driver for Depomed and its very focused physician and patient population. We also achieved a significant quarter in terms of our earnings, which totaled $6.5 million or $0.11 per share. Our efforts to carefully control our spend while we grow our top line revenue contributed to a strong quarter. We are also able to show an $11 million quarter-to-quarter increase in our cash balance at the end of Q3, finishing the quarter at $85.4 million in cash. That being said, our recent sale of our non-core type 2 diabetes royalties and milestones, which includes our royalty from Glumetza to PDL Pharma for $240.5 million gives us significant flexibility to expand our business due to the acquisition of marketed products or late-stage assets. With approximately $325 million in cash currently on the balance sheet pending final tax considerations and the strength of our core business in pain and neurology, we believe that we are well-positioned to become a leader in the central nervous system specialty pharmaceutical area. We continue to aggressively pursue product acquisitions capable of driving our growth over the next several years. Importantly, we have also retained our rights to the royalties and milestones to the products that use our technology that are not in our type 2 diabetes portfolio. These include our rights to upcoming milestones and royalties from Mallinckrodt for MNK-795, which already generated a $5 million royalty payment, milestone payment to Depomed last quarter, and MNK-155, which Mallinckrodt expects to file with the FDA next year. We also retained our royalty with Yansen [ph] for acetaminophen ER and Ironwood for an undisclosed GI development program. Finally, we still control our interest in the patent infringement litigation against Perdue and ANDA. All of this interest have the potential for revenue upside. I'll hope you'll agree with me when I say that I believe Depomed has made tremendous progress since the end of second quarter. I'll now turn the call over to Augie Moretti, our CFO to get more information on the financials.

Thank you, Jim. I'll give a summary of the third quarter results. Total revenues were $37.5 million for the quarter compared to $33.3 million for the prior year quarter. Revenues for the current quarter include the $5 million milestone from Mallinckrodt and the revenues for the prior year quarter included $10 million one-time licensee from Janssen. If we back out these payments, total revenues grew 39% from the 2012 third quarter. As Jim mentioned, the increase was primarily result of increases in Gralise and Zipsor product sales. The acquisition of Lazanda in July 2013 and increases in Glumetza royalties from Santarus. Gralise product sales were $9.8 million for the third quarter of 2013, an increase of 104% compared to $4.8 million for the prior year quarter. Zipsor product sales in the third quarter 2013 were $6 million, an increase of 22% compared to $4.9 million for the prior year quarter. Glumetza royalties were $14.6 million in the third quarter of 2013, as compared to $11.6 million in the prior year quarter. We maintained good cost control during the quarter. Selling, general and administrative expenses were $26.4 million in third quarter 2013 compared to $26.8 million in the prior year quarter. SG&A for the current quarter included sales and marketing expense for Lazanda. Research and development expenses were $1.3 million in third quarter 2013 compared to $5.3 million in the prior year quarter. The decrease was largely due to the cessation of spend with regards to our SEFELSA product candidate after the FDA Advisory Committee vote on -- in March of 2013 and the complete response letter that we received in May of 2013 and expenses in 2012 related to our clinical trial of DM-1992. We were profitable in the third quarter with net income for third quarter of 2013 of approximately $6.5 million or $0.11 per share compared to a net loss of $1.5 million or a loss of $0.03 per share for the third quarter of 2012. For the 9 months ended September 30, 2013 net income was $1.5 million or $0.03 per share as compared to a loss of $26.1 million or $0.47 a share for the first 9 months of 2012. Cash, cash equivalents and marketable securities were $85.4 million as of September 30, 2013. This represents an increase of approximately $11.2 million for the quarter. Before providing revenue expense and cash usage guidance for the remainder of this year, I'd like to point out that the guidance is based on our current budget and reflects the acquisition of Lazanda in late July 2013, and estimated Lazanda sales and marketing expenses for the remainder of the year. As you can well understand the budget is based on a large number of assumptions given the complexity and scale of our business, and the uncertainties in estimating future product and royalty revenue. These assumptions may change substantially as the last quarter progresses for any number of reasons, some of which are in our control and some of which are not. Specifically, this guidance may change if we acquire or in license any additional products during the remainder of this year. Additionally, the sale of our royalty and milestone interest of PDL fundamentally changes our business. The GAAP accounting for that transaction is quite complex, and we're still working through the accounting for this transaction and the related future royalty and milestone interests. I would direct you to the Risk Factor section of our annual report on Form 10-K and our upcoming 10-Q filing for a more complete discussion of the relevant risks relating to our guidance. With that said, we're updating our previous guidance. We are revising revenue guidance for 2013 to a range of approximately $113 million to $116 million. This guidance removes any revenues related to the type 2 diabetes interest sold to PDL for the fourth quarter of 2013. And does not include a potential $10 million approval milestone from Mallinckrodt. As I mentioned before, Depomed is still reviewing the accounting for the PDL transaction, which could have an effect on reported revenues under U.S. GAAP for the fourth quarter of 2013. We believe that operating expense for 2013 will be in the range of $116 million to $118 million, which includes intangible amortization related to Zipsor and Lazanda and the sales and marketing expenses related to Lazanda for the reminder of the year. This is a reduction from our previous guidance with respect to operating expense. We expect to end 2013 with $318 million to $322 million in cash prior to payment of taxes arising from the PDL transaction. This range does not include the potential receipt of a $10 million approval milestone from Mallinckrodt before year end. With that, I will turn the call back to Jim Schoeneck for concluding remarks.

Thanks, Augie. We believe the prospects for our business during the remainder of the year and beyond are excellent. The 3 of our own marketed products and a strong balance sheet with $325 million in the bank, we think 2013 is shaping up to be the landmark year we expected. I believe we now have the feel to acquire or license the marketed and late stage differentiated assets that will drive Depomed's growth in the coming years. Thank you for your continued support. Operator, we'll now open the call to questions.

[Operator Instructions] And your first question is from Jason Butler of JMP Securities.

First just wanted to talk about the growth strategies for Gralise. Again, congratulations on the reimbursement success that you just announced. Could you just talk broadly about what your strategy is to continue to drive growth here, whether you think, for example, you need to make any more sales force adjustments and just beyond the reimbursement wins, what your focus is for 2014?

Jason, great question. I think the reimbursement certainly is and has been #1 to get additional commercial coverage like we have with the Tier II coming up ESI Medco, and then also to continue to chip away at the Medicare Part D area. That's an area that we still think is very right for us to get some more coverage, albeit a very tough area to compete in. So that's focus number 1. Focus number 2 is what we've been doing with changing the campaign. We did roll out a new campaign earlier in the third quarter, and I think it's really to refocus our message, which is really around the speed of Gralise in the category that Gralise gives to be able to get up to full doses of gabapentin. In addition to the story that we've been telling around the safety and side effects advantages you've got with the drug. So I think that combination is really what will take to move things forward. We don't at this point foresee any broad changes on the sales force side, that would drive additional growth. We really did that at the beginning of last year to really target things.

Great. I'm sorry if I missed this, but are you able to tell us what specifically in this sense ER royalties were for the quarter?

We don't call that out or disclosure that separately. It is in our other royalty line items on the face of the earnings release.

[Indiscernible] will be as the others are pulling out of that line, there will be less there for next quarter, so I think it will be pretty apparent as we get into our fourth quarter reporting.

[Operator Instructions] And our next question is from Jim Molloy of Janney.

Thanks for taking my call. This is TR on for Jim. My first question is, now that you have all of this cash at hand, is there any sort of therapeutic area that you are interested for an acquisition, and just a quick follow-up on the Gralise, I think there is expectation for the 100 million run rate was 2014, are there any changes to that?

I think let me handle the second question first, I think we've already actually talked about this one, which is that we thought that the 100 million run rate would hit beyond '14. So I think that may be from a prior discussion. In terms of the therapeutic area, I think broadly we've defined it as CNS, so central nervous system. Certainly we are currently focused around pain specialists, neurologists and we've talked previously about looking at adjacencies to that, but when broadly speaking, we are looking in the CNS area.

Is there any particular Sizeman acquisition, like a range?

Well, we said before that the target would be anywhere from kind of a low end of $20 million or so up to a high end of $200 million, obviously a very broad range, unless we saw an unusual opportunity like we saw with Lazanda, or even though that product was only doing around $3 million or so, we saw some tremendous upside for a tremendous value.

And our next question comes from Arthur Burns of Deltec.

Jim, maybe you've discussed this, but the tax implications of this sale, are we talking about some huge number or some quantifiable range, could you give us some indication of what that could be?

Actually, I'm going to turn it over to Augy and Jack for that.

As you know, we said on the conference call when we announced the PDL transaction that we would apply our NOLs at the federal and state level and our available credits against the gain. Again, just to reference this, we sold our interest in future revenue streams. We don't have a tax basis in those streams. In essence, we've accelerated receipt. I mean, that those amounts would have been taxed as received in future periods, and so the amount of the gain is $240 million. We'll apply our NOLs. There are still very complex issues associated with both the GAAP and the tax accounting for the transaction having to do with potential deferrals and periods for payment and so forth. So we haven't given a precise number other than to reference people back to the size of the gain and the applicability of the NOLs and the credits.

When will the transaction close?

It did close.

[Operator Instructions] And our next question is from Jason Napodano of Zacks.

Obviously, the business development engine is ramping over there, and I'm not going to push you too specifically on what you're looking at, but I've got a question just in terms of obviously adding in $240 million in cash gives you guys like you said a lot of flexibility. It also makes you guys a pretty attractive partner for some smaller companies that have these pain and neurology assets, given what you've done with Gralise and Zipsor, and potentially, Lazanda. I'm curious to know if besides the searching that you guys are doing in the sense of the outbound business development that you're doing, if you've seen an influx of phone calls, let's say, from smaller companies that are looking to you guys as a potential partner. So on the business development front, is it a combination of both outbound and inbound? Have you guys kind of noticed any uptick with -- say, in the past 2 weeks, now that you're cash-rich, let's say?

Jason, let me kind of break that into 2 parts. The first part being, yes, the phones from our business development people have been a bit busier. And other people noticed that we suddenly have the capital to be able to do some of these types of transactions that you're talking about. And I would say, it's really across-the-board. So that's 1. Second in terms of driving the activity though, I mean we have tended to try and keep this pretty strategic rather than simply opportunistic. So we have looked at a number of different categories within CNS what we think are attractive targets, and so we are regularly on the outbound flow and the analytical flow as well. So while something may come in that we haven't thought about, I think there's a lot that we have and that's what we continue to pursue.

Okay. And then in terms of increasing number of inbound calls, is that, I don't want to say -- I don't want to use the word distract, but does that make it more difficult for you guys to try to narrow some things down. I'm the kind of guy that when I need to go buy a new car, I just don't want to be there, right? I go and I know the car I want to buy before I even go and buy it. But my wife wants to go to like 10 different places before she picks the right car, and I kind of wonder, given all these new opportunities, does it slow the process down, now that you've got potentially a lot more to look at than maybe before?

I don't think so. I think that team has been and continues to be pretty disciplined about what they focus on. So if we get things in for whatever reason we hadn't thought about that would be in our wheel [ph] house, and would be the right stage of asset. I mean certainly, we would spend a bit more time on it. That's not a regular occurrence. I think some of the things are either a little bit farther afield or a much earlier stage than we have targeted. So we stayed targeted on marketed products and very late-stage assets that are either in or ready for registration. And the size and scope that I mentioned earlier.

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

I want to thank everyone for their continued interest in Depomed, as we're continuing to transform the company. We are now at a point where I think we're ready to take that next step and fulfill our goal of becoming a leading player in CNS specialty pharmaceuticals, and again, we thank you all for your interest.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.