Quince Therapeutics, Inc. (QNCX) Q2 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. And welcome to the Cornerstone Therapeutics Second Quarter 2013 Financial Results Call. [Operator Instructions] As a reminder, today's call is being recorded. With that said, I'd like to turn the call over to Amy Diebler of Cornerstone Therapeutics. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Cornerstone Therapeutics' conference call to discuss our second quarter 2013 results. We are glad to have you with us. I am Amy Diebler, Senior Director of Corporate Finance and Development for Cornerstone Therapeutics. We are joined by Craig Collard, Cornerstone's Chief Executive Officer; and Alastair McEwan, Cornerstone's Chief Financial Officer. Craig will provide perspective on both the quarter and on our 2013 outlook, and Alastair will cover the financial and operational results. Both Craig and Alastair will be available to answer your questions. We issued a press release this morning containing financial results for the quarter ending June 30, 2013. Before we proceed with the call, please let me remind everyone that the following discussions and responses to your questions reflect management's view only as of today, August 6, 2013. Any statements about future expectations, plans prospects, including, without limitation, statements regarding our business strategy, future operations, financial position, anticipated regulatory approval of our products, possible therapeutic benefits, market acceptance, prospects and management's plans and objectives, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results and events may differ materially from those indicated by our forward-looking statements. Additional information about factors that could cause actual results or events to differ materially from those indicated by our forward-looking statements is included in the Safe Harbor statement in today's press release and in our filings with the Securities and Exchange Commission, including Item 1A to our Annual Report on Form 10-K filed on March 14, 2013, and in our subsequent Form 10-Q and other filings with the SEC. Cornerstone disclaims any obligation to update its forward-looking statements except as required by law. In addition, please note that Cornerstone's remarks contain supplementary non-GAAP financial measures, including non-GAAP income from operations, non-GAAP net income and non-GAAP net income per share diluted. A reconciliation of these measures to the comparable GAAP numbers is included in the press release, which is posted on our website. With that, I will now turn the call over to Craig.

Thank you, Amy, and good morning, everyone. We appreciate you joining us on this call. This was another very successful quarter for Cornerstone. In fact, it was the second consecutive quarter during which we achieved record revenue. We were extremely pleased with these results, which reflect the success of our strategic focus on the hospital and adjacent specialty markets. These results are also a testament to the strength of our products and everyone's supporting on the Cornerstone. Because of our continued positive momentum, we believe that our company is well positioned for ongoing growth. Some highlights from this quarter include: net revenues reached $40.4 million, which again is the highest quarterly revenue in the company's history; gross margin increased 16 percentage points compared to the second quarter of 2012 primarily due to the addition of CARDENE to our product portfolio and improved margins on CUROSURF and ZYFLO. On a sequential basis, gross margin improved by 7 percentage points. We believe that we will be able to achieve similar or slightly better gross margins for the remainder of 2013. Profitability greatly improved, as net income per diluted share jumped to $0.19 from a loss per share of $0.17 during the second quarter of 2012. On a non-GAAP basis, net income per diluted share tripled from the second quarter of last year to $0.33 in Q2. Our marketed products all continued to perform well and achieve growth. Let me give you a quick overview of each one. I'll start with CARDENE ready-to-use bags, which is indicated for the short-term treatment of hypertension in the hospital market when oral therapy is not feasible or desirable. We acquired the worldwide rights to this product in June 2012 with the acquisition of EKR Therapeutics, and we are pleased with the positive impact it has had on our business, including our gross margin. The market for CARDENE is exhibiting strong growth, up 8% by our measurements in January through May versus the same period last year. Net sales of CARDENE exceeded our expectations for Q2, and the strong performance was due mainly to our selling efforts and also to the generic product shortage which occurred during the latter part of the quarter. Our average selling price for CARDENE is also exceeding our expectations. In fact, the average selling price in June 2013 is only 1% lower than in June 2012. Moving to CUROSURF, our market-leading natural lung surfactant for the treatment of Respiratory Distress Syndrome in premature infants. CUROSURF continues to be a strong product for us. For the first time since 2009, the market for surfactants has resumed growth, and we have taken advantage of this improvement to boost sales. During the quarter, CUROSURF posted its highest quarterly revenues ever. Importantly, we are outpacing 2012 performance in terms of the number of new account acquisitions and also the total volume of CUROSURF they represent. Zyflo CR, a niche product indicated for prophylaxis and chronic treatment of asthma in adults and children 12 years of age and older, continues to perform as predicted. Demand for ZYFLO remains remarkably stable with pharmacy orders from wholesalers consistently averaging over 1,000 bottles per week. Lastly, on July 29, we initiated sales and marketing efforts for PERTZYE, indicated for the treatment of exocrine pancreatic insufficiency, or EPI, due to cystic fibrosis or other conditions. During our last call, we discussed our acquisition of the exclusive U.S. rights to market PERTZYE for patients suffering from cystic fibrosis or CF. With this product and the upcoming launch of BETHKIS, we are building a strong portfolio in the CF space and expect to have 2 products on the market in 2013. Cornerstone is an established partner with the national CF organizations, including the CF Foundation, the Boomer Esiason Foundation and the CFRI. Our representatives have been busy building relationships in the relevant treatment centers and with the patients and families at CF events around the country. It is exciting to now be launching our promotion of PERTZYE and the premarket development for BETHKIS following this effort. I'll provide more detail on this and our outlook for the remainder of 2013 in a moment. First, though, I'll turn things over to our CFO, Alastair McEwan, to comment on our financial and operational performance in the second quarter. Go ahead, Alastair.

Thanks, Craig. Good morning, everyone. As Craig indicated, we're very pleased with our performance this quarter with strong top and bottom line growth and cash generation. Net revenues grew 88% year-over-year, bringing us to $40.4 million compared to $21.5 million in the second quarter of 2012. Looking at the marketed products that Craig mentioned, for CARDENE, net product sales were $14.2 million for the quarter compared to sales of $736,000 for the second quarter of 2012. You will recall that Cornerstone acquired CARDENE's product rights just before the end of the second quarter of 2012. As a result, we only reported revenue for a few days within the second quarter of 2012, causing the significant year-over-year increase in sales. CUROSURF net product sales totaled a record $11.3 million during the quarter, representing an increase of 21% compared to the second quarter of 2012. This increase was driven by increased unit volume and an increased net selling price. The ZYFLO family of products continues to be a solid performer. Net sales amounted at $14.8 million for the second quarter of 2013, an increase of 37% over second quarter of 2012. Growth was largely due to price increases, which were partially offset by a slight reduction in unit volume. Gross margin for the second quarter of 2013 was 75%, up from 59% in the comparable quarter of 2012. This increase was driven by product mix and particularly the addition of CARDENE. The drop in estimated rates of chargebacks and price adjustments for CUROSURF, as well as improved margins for ZYFLO also aided gross margin. Looking to expenses, SG&A were $13.8 million during the second quarter of 2013, a 55% increase over $8.9 million in 2012. This was driven by higher payroll, travel and other related employee benefits due to the continued growth of the company's products and related sales force as well as timing of advertising and promotional expenses related to CARDENE, PERTZYE and BETHKIS. While I mentioned earlier, the EKR transaction closed at the end of June 2012, and so our expense ratio compares favorably to last year's when taking into account the increased scale of our business. Our R&D costs decreased to $615,000 compared with $686,000 in the second quarter of 2012. Our development expense is going to vary from quarter-to-quarter depending on product development stages and the activities undertaken to advance a candidate within a given quarter. This quarter, R&D costs decreased due to costs related to LIXAR incurred during the second quarter of 2012, which were partly offset by an increase in development expenses related to RETAVASE during the second quarter of 2013. For the quarter, we reported net income of $5.8 million, or $0.19 per diluted share, compared with a net loss of $4.4 million or a loss of $0.17 per diluted share in 2012. On a non-GAAP basis, net income for the quarter tripled to $9.9 million to $0.33 per diluted share, up from $2.8 million or $0.11 per diluted share in the same quarter of 2012. For clarity, non-GAAP net income and net income per diluted share exclude stock-based compensation expense, amortization of product rights, transaction-related expenses, acquisition adjustments related to inventory sold, the change in acquisition-related contingent payments and the gain on divestiture of certain product rights. Lastly, looking at our cash position. At the end of the second quarter, we had the $55.5 million in cash and cash equivalents, a decrease of $700,000 compared with December 31, 2012. The impact on cash was largely due to our upfront payment related to the license of PERTZYE, which was $10 million, and continued payments related to CARDENE of $2.6 million. This was offset by $12 million cash generated by operating activities during the 6 months ended June 30, 2013. Now back to Craig for a look into the remainder of 2013. Craig?

Thanks, Alastair. As you can see by our continued financial and operational progress, we are more confident than ever that we have the right strategy in place and that our company can successfully execute within this market. Let's now take a look at what lies ahead. As we have said, in addition to our market products, we developed and maintained a promising pipeline and are working diligently to move these products forward through approval and commercial launch. Leveraging our commercial strength and all the know-how from growing our current product portfolio, we are confident in their prospects. I'd like to share a few additional updates regarding our pipeline. Let's start with our generic equivalent of Tussionex, used for the relief of cough and upper respiratory symptoms associated with allergy or a cold in adults and children 6 years of age and older. We are pleased with the significant progress of the manufacturing efforts in the most recent quarter and continue to look forward to entering the market for the upcoming 2013 cough and cold season. We do not anticipate any further delays. Looking at RETAVASE. As we've discussed during the Q&A on our last earnings call, there was an unknown inherent stability failure. We have identified a number of manufacturing issues that may have contributed to this failure, and we are making good progress in our work on the stability data. The silver lining in the stability failure is that it provides us the opportunity to do something that Cornerstone does very well, and that's improving the supply chain of products that we acquire. We have made great strides towards improving the RETAVASE supply chain. To be clear, there are 3 steps in the RETAVASE supply chain process. These steps are: one, manufacturing of the API; two, the intermediate step also referred to as the dialysis filtration; and three, finish/fill and the lyophilization process. Our focus is on both improving the supply chain at each of these steps and streamlining the overall process as much as possible. We're confident that our work in this area will allow us to both achieve a target relaunch in late 2015 and to develop a more robust process. In parallel, we are moving forward with our catheter clearance program, utilizing Reteplase, the active ingredient in RETAVASE. In regards to LIXAR, we continue to prepare our request for a meeting with the Division of Cardiovascular and Renal drug Products of the FDA, including any additional statistical analyses of the existing data. We expect our discussion to cover not only these data, but also to engage the FDA in a thorough dialogue regarding the contents of the Complete Response Letter received on October 31, 2012, for our NDA for LIXAR. This request will be submitted by the end of Q3. Following such meeting, we will determine the appropriate action regarding our LIXAR development program. Moving to BETHKIS, our Tobramycin Inhalation Solution indicated for the management of cystic fibrosis patients with Pseudomonas aeruginosa. This is a very common condition in patients with CF, and nebulized tobramycin is considered the gold standard in treatment. Manufacture of this product is progressing, and we expect to be on track to launch in early October. As we discussed on our last call, we believe BETHKIS and PERTZYE, our newest products, represent a strong portfolio in the CF space. PERTZYE is a marketed treatment for a difficult and common condition faced by an estimated 90% of cystic fibrosis patients, called exocrine pancreatic insufficiency, or EPI. For patients with EPI, food is not properly digested in the intestines, causing malabsorption and nutrient deficiency. Our initiations of sales and marketing of PERTZYE in July is the first step in bringing our CF portfolio to market. We believe that PERTZYE will have an immediate, positive impact on our sales. Additionally, with net sales of PERT products reaching approximately $200 million in the CF category, we see significant opportunity for growth. It is also worth noting that PERTZYE is protected by exclusivity rights from its FDA approval into 2017 and enjoys the protection of other patents and know-how, making it extremely difficult to mimic. PERTZYE is promoted by our specialized sales force in the hospital. We've expanded our territories to a total of 59 in order to allow us to maximize our entry into the CF market maintain our sales momentum on CARDENE and CUROSURF. This same sales force will also promote BETHKIS when it is launched later this year, representing yet another step in our commitment to build a portfolio of industry-leading brands for the growing U.S. hospital market. These products further illustrate our commitment to the CF community in helping to ease the treatment burden for those living with this disease. Before I close, I wanted to update you on 2 legal matters. First, on July 24, 2013, we filed a complaint in the United States District Court for the District of Delaware after we received notice that Exela had filed a supplemental New Drug Application seeking approval to market a ready-to-use injectable formulation on nicardipine hydrochloride. The complaint alleges that Exela's product infringes our patents related to CARDENE. The initiation of this suit is consistent with our stated intention to vigorously enforce intellectual property rights to protect our innovative products and technologies. We believe our patents are valid and will protect our products against this challenge. We do not expect that Exela's application with the FDA will have any immediate impact on our business now or in the foreseeable future. By filing this suit, we have automatically triggered a 30-month stay under the Hatch-Waxman Act. This will prevent the FDA from approving the Exela product until 30 months have elapsed from the date of receipt of Exela's notice or until a decision is rendered by the court. Also during the second quarter, we were extremely pleased that the dismissal of a lawsuit filed by ONY Incorporated was upheld on appeal. You will remember that ONY originally claimed to have been harmed by the publication of an article that appeared in the September 2011 issue of the Journal of Perinatology. The article described a study sponsored by Chiesi and concluded that others' products were associated with significantly higher mortality rates than CUROSURF. Cornerstone was named in this suit as well given our U.S. commercial rights to CUROSURF. We argued that the article described rigorous research and its conclusions were properly set out as the opinions of respected researchers. The trial court agreed with us and dismissed ONY's claims. The Court of Appeals now has upheld that ruling, enabling us to continue to refer to this valuable information when answering customers' questions. Lastly, we realize there are many questions that investors would like to answer about the Chiesi buyout proposal. But we are not in a position at this time to answer any questions or address this topic. With this, we are ready to take your questions. Operator?

[Operator Instructions] We'll hear first from Matt Kaplan with Ladenburg.

I just want to start out maybe focusing on your current portfolio of products a little bit first. Can you talk about CARDENE and its potential kind of looking forward, especially with, I guess, the Paragraph IV filing by Exela, which you mentioned in your prepared remarks?

Yes. So Matt, I would start by -- let's kind of separate the issues first, just looking at CARDENE and how it's doing. One of the things that we're seeing is the -- that the CARDENE market in general is growing a little higher rate than I think we had forecasted. But all along, we've said that we'd like to have some unit growth and we'd like to try to maintain price as best we can, although we realize that price may -- just with the competitive nature of having generics out there and that type of thing, could decrease. But the good news for us is that we had, I think, 8% in unit growth, but we also -- price year-over-year is only down like 1.2%. So it's doing much better than our expectations. So we're really pleased with CARDENE's performance. And I think the other piece of this, too -- being able to integrate these sales forces with the Cornerstone group and the EKR group to -- in such a short time frame, and now to show the kind of performance that we're showing, I think, goes a long way to show what Cornerstone does very well as far as commercialization. In regards to the P IV, I mean, obviously, as we stated, we're in a -- into the stay under the Hatch-Waxman Act. I mean, there's going to be a lot of things going back and forth, obviously, over the next several months. But at this point, it's going to be business as usual until we obviously get to a point of the court date and so forth. So longer term, I just -- I don't have an answer yet to how that plays out, but we feel very comfortable with our patent position. We did a lot of diligence around this when we bought about the product and feel very comfortable there.

And just remind us in terms of your patent position. When does it go out to on the bags [ph]?

2027. And there's 3 patents.

Great. Now CUROSURF also, you guys did a great job there of $11 million. What do you see going forward, for CUROSURF and growing the sales there, I guess, in light of potential competition as well?

Yes, no, I mean, it's -- we're still -- I think every time we have this call, we talk potentially about new competitors and so forth. But taking that aside, the best thing that we've seen that's -- hasn't happened for several years is that the surfactant market is again growing, and when -- we've been growing share and growing ml [ph] usage in a declining market. And we've literally had that happen since we've owned the product or since we've been marketing the product. So to have -- in the last 6 months to see that turn around and to see growth in the market has really been helpful to us. But even with that said, to give you an idea of how we're performing, we've already converted over 70 hospitals, which is about the total that we converted entirely -- in its entirety of last year, and we're also -- for -- at half a year, we've already sold more mls or grown more mls than we did all of last year. So the product is performing extremely well. I think again, this goes back to now having the sales force. We have much more territories now. I mean, we had situations before where we would have a rep covering 4 or 5 states. And I think now, having basically a rep in every state and having much smaller territories and much more focus around the product, I think it's really beginning to show. So again, we feel very comfortable with where we are. We think we'll continue to grow. We're the market leader, and we think we've got the best story. In a sense, CUROSURF is more concentrated than the other competitors and you use less volume. And you're dealing with patients that are obviously very small in weight, and we think it's the best product on the market.

Okay. And then ZYFLO, it seems as though -- and maybe -- sorry, just back to CUROSURF one more time. In terms of ability to increase price, where do you see that going forward, I guess, in the remainder of the year?

We did take a price increase earlier this year. And again, this is a fairly price-sensitive market, and a lot of that depends on market dynamics. So a little bit -- you mentioned ZYFLO. A little different than that market obviously. So again, we're going to continue to seek price if we can, but we're also going to be competitive.

And then ZYFLO, it seems like you, as you said, got stable demand there, but you've been able to increase price there to drive the revenues. And is that going to continue, that trend? Or what are your thoughts?

Yes, we just took a price increase actually a couple of weeks ago. And so again, we've been able to maintain our unit volume, which is typically about 1,000 bottles a week, and that's stayed pretty consistent. And again, we have been able to take price. And you're dealing with such a niche market and such a specialized patient. I mean, we're getting really the tougher-to-treat asthmatics, and the product performs very well in that market. So now that we've niched this product, we've been able to do a lot more with price and "specialize" the product, if you will.

Right, right. And I guess now, PERTZYE is part of the portfolio. Help us understand what the opportunity is there, I guess, going into 20 -- for this year and then out looking into next year as well.

Yes. So we've -- in fairness, I don't have a ton of data yet just because we've just started selling the product. We had a national launch meeting in Denver a few weeks ago, and so we're 2 weeks into selling the product. What I can say is we've got a hub set up. We've got all these specialty pharmacies set up. I think this is going to be a nice runway, if you will, into BETHKIS, which I think will be helpful to get that product launched, which should be out in October. But so far so good. We think we've got a really nice message. And with the product, with this bicarbonate story, typically patients can get away without having to use PPIs in this product. And it really differentiates itself within this marketplace. I think the tough thing for us is going to be -- is if a patient has been on enzyme [indiscernible] for quite a while is converting that patient over, but we've got a nice story in order to do that. And you start getting into body mass index and that type of thing. And we really help train the reps around understanding that, understanding things to look for in patients to convert some of these over. But this is a $200 million marketplace and growing just within the CF space and largely dominated by really 2 folks. And so we feel fairly confident that we can get the product certainly back to where it was, which it was approaching $20 million before when it was on the market, and the prices are a bit higher now. So there's some flexibility there as well. But we feel very confident with the product, and we think we're in a good space.

Now in terms of the ramp-up to potentially $20 million, is that something you think you could either exceed by next year or its first full year in the market? Or what's your sense?

I would probably reserve that until we have a little more data just due to the fact that we're just getting started with the product. But our intention is that sort of peak sales, we would certainly be north of that.

Good. Now shifting, I guess, to the pipeline. In terms of RETAVASE, where are you in terms of addressing the manufacturing instability issues?

Yes, so we spent quite a bit of time, as you can imagine, trying to search for root cause and that type of thing. And we believe we've come up with some reasons that the product did fall off stability. And again, keep in mind we inherited this, and this was not visible to us upon acquiring the product. There have been no -- there would have been no way to see this. However, what this has done, and again not being overly optimistic, but it really has allowed us to take a step back and improve this whole process. I think where we end up going from here, as I mentioned in my comments, you've got sort of 3 steps to this process. And we're going to pull 2 of these steps together in our API manufacturer, which is in Germany called SCIO. That's S-C-I-O. And so those first 2 steps will be done there. But we're still finalizing and looking at a couple of other sort of finish/fill manufacturers. But there's a really good possibility that all this will now be done in Germany. And the reason that's important is Roche is there as well, and we're -- as you know, when this process was working properly, Roche was behind it and making the product. So having their help, I think, is going to prove to be invaluable to us. And they're sort of walking hand-in-hand with us now and we're -- actually, our Head of Development is over there now in Germany with Roche. And so, we feel very confident that we'll make stability batches this year and get the product back and then also in parallel start the work on the cat clearance [ph]. So again, it's a product that's going forward. We're still comfortable with where we are. And again, I think we'll have this sorted out, and we'll have this out by 2015.

And then just a sense of time line for the cat clearance program?

That's going to be a little bit behind just because we've got more work to do with the FDA and so forth. But what we have said is 2017, we're hoping we can cut that down a bit. But as of now, that's what it looks like.

Okay, okay. And there's a couple more questions on the pipeline in terms of the product launches -- additional product launches this year, 067. You -- in your prepared remarks, you said you plan to enter the market later on this year for the cough -- cold season. So should we assume that all the manufacturing issues that you ran into previously are behind us?

Yes.

Great. And I guess last question, in terms of BETHKIS' launch in October. What's the potential for that product?

Well, again, you've got a really big market out there. There has been a number of price increase with tobramycin. Our issue is just runway, if tobramycin is supposed to go -- or Tobi, excuse me, is supposed to go generic in late '14. And so, the question will be how much share can we gain in that time frame. Again, I've thrown numbers out before that in a couple year time frame, they were able to get about 20% in Europe. We feel pretty confident this could be a $15 million to $25 million drug in that time frame. And again, with having PERTZYE now, having -- being built and building some of these relationships and so forth out there, we think that's going to be helpful. But we've -- we're getting quite involved with the CF Foundation and others, and we feel pretty confident that there's a real possibility for patients to try this because it does offer some advantages. And again, it's another treatment to try for some of these patients who are sometimes having a really difficult time when they go on a tobramycin-type product. So again, I think we'll do quite well with it, and I think the response will be fairly quickly on the uptake.

Great. I guess a question that I understand you can't comment on, but I have to ask in terms of the KAC [ph] negotiations and where they are. It seems they have taken perhaps a lot longer than I would have expected. Perhaps the CARDENE Paragraph IV came into play there as something that slowed down the negotiations. But I guess fundamentally, has the KAC presence at all impacted your ability to, I guess, continue to grow the business as you look -- continue to be acquisitive in your business?

Yes, no, it does [indiscernible] matter. Again, I think Alas and I sincerely apologize that we can't comment because we don't have anything to say because we don't know. And it's a difficult position to be in, but I'm sure everyone out there on the phone understands. I think it -- if I'm in your position or others as an investor, I think the thing you mentioned is really -- the point is what's the business doing in this time frame that one could argue may have taken longer than we had hoped or what have you and you've got the Paragraph IV and so forth? And the comeback to that would be we just recorded 2 record quarters this year, and we're only half of the year, into the -- halfway into the year. So I would say the business is doing better than it ever has under these circumstances. And we're also launching 3 products, and we're clearing up things with the RETAVASE and so forth. So I think all that is going extremely well. From the acquisitive [ph] side, we've got a number of things that we're still looking at product-wise and companies and so forth. And so, it really depends on how this deal goes. Either way, I think will have no impact, quite honestly, because I think we'll continue to thrive as a business and we're in a better position to do all the things that you mentioned than we ever have. So -- and if you look, too, Matt, think about the cash position we have now, and we continue to throw cash off and we think that's going to continue. And especially with ZYFLO, we have this in our models to come off patent in September, but the likelihood is that's not going to happen. And so that's going to continue to throw out more cash for us even more so than we predicted. And the longer that goes, the more cash it throws to the bottom line. So we're really in a good spot. I mean, it's unfortunate. I do wish we could talk more about this. I just don't know anything. And so, we just keep our nose to the grindstone. We keep doing what we do.

And I guess just one follow-up in terms of -- do you see any -- I guess in terms of time line, what -- where this could finally get an answer or a conclusion to this KAC question?

Yes, again, I don't know. I mean, obviously, this can't go on forever. And we're impatient as well. And so we'd like to see a decision either way soon. But again, I've certainly voiced my opinions, and I think they're heard. But that's really all I can tell you.

[Operator Instructions] And at this time, I show we -- there are no further questions. I'd like to turn the call back to Craig Collard for closing remarks.

We'd just like to thank everyone for joining the call today and look forward to speaking to everyone next quarter.

This does conclude today's conference call. We thank you for your participation. You may now disconnect.