Bausch Health Companies Inc. (BHC) Q4 2007 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the Ista Pharmaceuticals 2007 year end earnings conference call. My name is Andrea and I will be your coordinator for today. At this time, all participants are in a listen only mode. We will facilitate a question and answer session towards the end of this conference. If at any time during the call you require assistance, please star followed by zero and a coordinator will be happy to assist you. I would now like to turn the presentation over to your host for today Miss Christy Engelfee, Director of Finance and Controller. Please proceed ma’am.

Before we get started, I’d like to remind you that during the course of this call ISTA’s management may make statements of a forward looking nature. Although we believe that our forecast opinions projections and other expectations reflected in any such forward looking statements are reasonable as of the date of this call. We cannot guarantee future results, levels of activities, performance or achievements. Actual results may differ materially from ISTA’s current expectations depending upon a number of factors including among others inherent uncertainty associated with financial projections and estimates, timely and successful implementation of ISTA’s strategic initiatives with some uncertainties related to ISTA’s product development program including the difficulty of predicting the tinier outcome of product development efforts, the tiny scope and outcome of FDA and other regulatory actions and decisions risks and uncertainties related to market acceptance of and demand for ISTA’s approved products, the impact of competitive technologies, products and pricing, uncertainties and risks related to the continued availability of third party source products and raw materials on commercial regional terms or at all risks related to the validity enforceability of patents related to ISTA’s products and technologies and the impact of patent and other intellectual property we have rights held by third parties and such other risks and uncertainties as detailed from time to time in ISTA’s press release and period public filings with the SEC including but not limited to ISTA’s annual report on form 10K for year end December 31, 2006 and quarterly reports on form 10Q for the quarters ended March 31, 2007, June 30, 2007 and September 30, 2007. Except as expressly required by law ISTA disclaims any intent or obligation to update any forward looking statements made during the course of this call. At this time I’d like to turn it over to Vincente Anido President and CEO.

Thank you and good afternoon everybody. Obviously as you know we spent a lot of time talking with investors and we tried to prepare our comments today to focus on the top questions or things posed to us each quarter. I hope we’re addressing them proactively. Everybody asks us about our commercial progress and increasingly our expectations for this year 2008 as you saw from the press release, our sales grew a pretty healthy 78% in 07 over ’06 . Xibrom is still growing pretty strong, it doubled in revenues over the prior year and we expect the revenue growth for Xibrom to continue to be strong in 2008 in fact if you take a look at IMS revenues and for the month of February and compare them to prior years, we were up roughly 45% which we think is a pretty healthy growth and its not only Xibrom that’s driving that but all last year grew at 37% even mitrates grew at 23%. We continue building relationships with the divisions in this space every day and we’re making progress toward achieving our goal which is to be number one in dollar market share for each of the segments in which we compete. Lauren Silvernail our CFO will provide you guidance for 2008 in just a second, including for the first time will be providing expected revenue ranges for 2008. Needless to say we expect to continue to grow in our business a healthy clip as we try to achieve profitability in 2009. The next set of questions we typically get relate to Xibrom QD filing that we did at the end of December and a potential generic for Xibrom BID which are expected sometime in early 2009. First of all from the QNDA as you saw from our press release, communications with the FDA as they reviewed our file and during that review, the agency requested additional clinical data specifically comparing the Xibrom QD which is a .18 concentration product dosed once daily and wanted to see that compared and see how it worked against the currently marketed drug which is Xibrom BID .09. Now the twist to this thing is they wanted us to try dosing that particular product which is now dosed twice a day only once a day. So we set up a clinical trial with roughly 500 patients with the exact same protocol with pre dosing and carrying the patients out roughly 14 or 15 days and it’s the same protocol we used that we used for our safety net [inaudible] trial for the Xibrom QD filing. That study has been underway since late last year and we expect to have results here shortly and we’ll report that out sometime in the second quarter. In order to meet the agency’s request and get the data from that particular trial into the NDA, we administratively withdrew only the clinical section of the NDA. This gives us the opportunity to incorporate the requested data into our NDA filing. The FDA did provide additional questions or suggestions on the file of interest are that none of the questions or comments dealt with the safety or efficacy of Xibrom QD. Most dealt with comparisons to the existing marketed product. The non clinical and a chemistry manufacturing control section which is called the cmc section of the NDA remains on file and the agency has informed us that these sections are being reviewed as presubmissions in anticipation of our resubmission of our clinical section in the second quarter. We do intend to announce top line results for the additional clinical data that will come out of the trial I just mentioned preparing the two concentrations of Xibrom some time in the second quarter. And additionally we expect to complete the resubmission of that clinical section as well as dealing with the other questions and comments that the FDA addressed in their letter to us which we received this past Tuesday. We do continue to expect the Xibrom QD prior to the expiration of the patent of a twice daily formulation which will occur sometime early next year. Now regarding generics to date, no dmf or drug master file has been filed with the FDA. Now assuming that if they did that today we do expect that they would see something like a 16 month review which is pretty standard for generics and it would be reasonable to expect a mid year 2009 approval if in fact they started the review process today. We’ve also done quite a bit of work trying to find out where possible sources of raw material are because we’ve got the only source in the U.S. tied up under contract for ourselves and we found only one or two sources of raw material and both of them were coming out of Chinese plants. So obviously we wanted to stay pretty close to that to see what’s going to happen there. In addition to that we’ve undertaken a series of steps to strengthen our competitive position and differentiate our product for possible generic versions and all of that will play out well before the patent expiry date in January 2009. As you saw from our press release, we also had news for the first time in quite a while regarding the dispute resolution with the FDA in regards to Tpred. The communications we’ve held with agency during the dispute resolution process have resulted now in a reasonable path forward for that product. We’re still working to clarify a couple remaining questions particularly those related to the final study designs that we need to put forth. We believe any final studies that we have to do for both the prednisolone and the tobramycin portions of this mission we’ll take us about four to six months to complete and as soon as possible after those studies are completed we will amend our NDA with the data from those studies. As we stated from the onset, we are committed to bring Tpred to the market and while dispute resolution process took a little longer than we expected mainly because as we went up the line we finally felt like we were getting some traction and Doctor John Jenkins who many of you have seen has been quoted recently as head of Cedar actually kicked it back to the review division so that we can resolve all of the issues that remain. It took us about two to three months to get those meetings set up and a series of phone calls et cetera and so finally the culmination was this last Tuesday we met with the agency and were able to resolve many of the issues and so that’s why we now believe we have a reasonable path forward. We didn’t think that having gone through this with the agency, it’s given us access and insight to the scientific rationale for some of the things they are currently doing and we’ve begun to identify some subtle and sometimes not so subtle changes the agency, we believe they will apply into our future programs. During the Bepreve® filing and approval there, Bepreve® is a member of bepotastine for allergic conjunctivitis we think it’s proving to be clinically and commercially exciting product for us it makes up a significant portion of our investor conversations. The Phase III trial for Bepreve® for the efficacy side is fully enrolled and expect completion shortly and as we said we will announce results of that sometime late in the second half, I’m sorry in the first half of this year and then the safety study has also been fully enrolled and since Vivotasten is a new chemical entered in the U.S. we must do a fairly extensive safety study that we need to complete in order to file our NDA. Because both of the efficacy and safety studies are completed we believe that we’re on track for a second half of the year filing of our NDA. We continue to work with the agency daily in our development programs and we started working with a number of key opinion leaders and their showing support and showing a lot of interest in this particular product specifically because they believe in the speed in which it will treat ophthalmic itching and redness and its ability to create multiple allergic rhinitis symptoms that we showed original Phase II/3 study. Now we quite a few other products in the pipeline, we’re going to continue our focus on communication only on the status of Xibrom QD, Tpred and Bepreve® because we think these are the major value drivers for our company over the next 18 months or so. We made the necessary announcement on the other products that we have in the pipeline is they’ve reached a significant development milestone so for example when we complete the next Phase II study for echovet for the treatment of dry eyes, we’ll announce those results and then we’ll announce at that point our decision on future Phase III trials on that particular product. So at this point I’d like to turn it back over to Christy Engelfee, Director of Finance and our Controller to go through the numbers for the end of the year and for the fourth quarter.

Thanks with regards to the financial results Xibrom showed a 100% year over year growth in prescriptions. As a result, we increased net revenue by net revenue by 56% as compared to the fourth quarter of 2006 and 78% as compared to the year ended December 31, 2006. Gross margin for the fiscal year 2007 improved 300 basis points as compared to fiscal 2006 did changes in product mix. R&D increased in 2007 primarily due to the number of clinical trials that were initiated and completed during the year. R&D expenses were higher than we had guided in the fourth quarter of 2007 as the pre clinical trial enrollment at the end of 2007 was higher than we had originally projected and they are higher than anticipated stock based compensation expense. SG&A for the fourth quarter and year ended December 31, 2007 was slightly under guidance. This was primarily due to lower than anticipated stock based compensation expense. At this time I’d like to turn it back over to Lauren Silvernail – CFO

Great. Thank you very much Christy. Turning to 2008 guidance we offer very specific ranges in our press release. I’d like to put a little bit of color on those as well as the first quarter although I want to emphasize we will not be providing quarterly guidance in 2008. We expect our net revenue for the fiscal 2008 to be between 75 and 82 million. Vince mentioned during his remarks that the demand for our products measured 9% of total prescriptions for the first two months of this year, is up about 45% compared to the first two months of last year. So as you prepare your models for the first quarter of 08 we really suggest that you use that comparator Q1 to Q1 ’07 to ’06 and look at approximately 10 million for last year to eliminate any seasonality between year ends when we tend to have more inventories in the channel. We also ask that you realize that during the first quarter of this year, wholesalers to date have reduced inventories by almost two thirds of a month as compared to the end of last year. With regard to gross margin we expect our gross margin to fall in the range of 70 to 73 percent obviously subject to quarterly variations based on revenue mix. With regard to the progress of our clinical and pre clinical program we expect our R&D expenses to be between 34 and 38 million in 2008. You may have noticed in the earnings release that we moved some of our stock based compensation expense in 2007 to R&D from SG&A. We used to book it all in SG&A. So for this year you’ll notice that we’ll include stock based comp in all of our guidance. For 2008 therefore we estimate that R&D will include stock based comp of approximately one and a half to two million. In addition, R&D activities are being accelerated in 2008. Many of you may be wondering why R&D is so high this year, we are really focused on profitability in ’09 and we want to make sure we hit all key milestones on the key programs before we move into ’09. And therefore we expect R&D expense will be lower in 2009 than it is in 2008. As usual, for ISTA we expect considerable fourth quarter variations as we start and finish clinical trials. In particular, R&D expense for the first quarter of ’08 will be higher than other quarters in ’08 as we complete our work with Xibrom QD and finish our clinical studies our phase III and our safety study. We anticipate that our general administrative expenses for ’08 will be between 50 and 54 million including stock based comp of about two and a half to three and a half million. We recently undertook and completed the addition of five to ten additional reps to continue the growth Xibrom and prepare for the launch of Xibrom QD later in the year. We expect our SG&A expense will also vary from quarter to quarter depending on the status of our promotion plans. Now I’d like to turn it back to the operator and open it up for your questions. Thank you.

Ladies and gentlemen, if you wish to ask a question, please press star followed by one on your touch-tone telephone. If your questions have been answered or wish to withdraw your question, please press star followed by two. All questions must be submitted at this time in order for it to be registered. Questions will be taken in the order received. Please press star one to begin. Our first question comes from the line of Dave Linley with Jeffries and Company. Please proceed.

Thanks for taking the questions, hi. Lauren would it be possible to quantify in dollars the amount of inventory increase at year end contributed to revenue in the fourth quarter.

I think if you look at it, we moved up and I’m thinking here how to explain it because it always depends if you look at it trailing or forward et cetera, but if you look at it, we ended the year specifically a little over a month of inventory and so we probably have between one and a half and two weeks at the end of the year of extra inventory. We’ve got the sales for the quarter at 19 million if you look at it on a trailing basis.

Okay, all right that’s all. Well thank you. Vince on the Xibrom QD additional clinical data request is this the first time the company is talking about that?

It is and unfortunately Dave this is the first time that ophthalmology is talking about that. We were the first ones through this process, they started making noise about this thing when we went to our pre NDA review with the agency back in the late summer so we decided to get ready for it. What’s interesting is again, the study that they’re requesting is not versus placebo, it is just simply a head to head comparison between the old formula dosed once daily which right now we believe you need to dose it twice daily in order for it to work versus this new once a day formula that we put together.

And the end point in that trial is what, non-inferiority or superiority?

What we need to do is show any significant difference between the two formulations.

Okay, okay.

And so it’s again an identical study to the one that we used for the QD Phase III safety net trials and based on all the work we’ve done, the currently marketed formula works pretty well through about 10 hours and that’s why you have to dose it twice daily. And we ended up actually testing a higher concentration using that the old formula and we couldn’t get it to work once daily so we actually changed the concentration and the formulation in order to put together a formula that would work once daily.

Okay.

And that’s what we submitted the NDA for.

And you say any statistically significant difference is what you need to show.

That’s correct. And there’s no placebo arm at all in the trial.

Okay and then on the gross margin in the quarter and the gross margin guidance for 2008 there was a little bit of a sequential drop and I wondered if you could describe if that was a mix issue or more of a gross to net issue and then also I think the guidance for 2008 is that, I’m just wondering it looked like it was a bit lower than what you’ve seen for the first part of the year and wondered if that was also a gross to net issue?

Sure. Good questions there’s really two contributors to it, we’re still small enough that there is some quarter to quarter variation as we do go through our inventory and write off batches from time to time. That probably played a smaller part in the fourth quarter than just general changes in the gross to net for that quarter. I do think fourth quarter though is very indicative going forward which is why we’ve guided in the range of 70 to 73.

Okay Lauren thanks, I’ll jump out. Thank you.

You’re welcome.

Your next question comes from the line of Sam O’Brien with Parke Segal. Please proceed. Sam O’Brien: Good afternoon guys. I was wondering Vince if you could just give us an update on just clarify on Tpred the four to six months that you’re talking about is that from today or is that from the time that you start your next study?

No it’s really from today. Sam O’Brien: Okay.

Because we’re going to need to put the sites together et cetera remember we’ve got two different issues going here, one on the penicillin side we’ll have to do another corneal cap study much like we did before, that took us start to finish about four months to run and we need to, based on the agreement now with the agency on how to study tobramycin side we believe again that’s going to take us about the same period of time that it took last time which is about four months or so. Sam O’Brien: Okay and approximately how many patients do you think you’re going to use for this?

We think it’s pretty consistent with what we did last time probably a few hundred patients, a couple hundred maybe. And the main difference there is we’re going to limit the number of time points that we need to use and so you may remember last time we took we had a whole long tail of four or five different time points beyond the sixty minute peak and now we’re just going to be concentrating that pretty tightly but keeping the number of patients the same so that we can get better power at each time point. Sam O’Brien: So I guess at this point in the game you’re pretty confident that you have a clear plan in place to get this approved.

Yes, we think the agreement that we reached with the agency in terms of the statistical analysis that needs to be done, the time points that need to be taken care of on the pronisilin side will get us to where we want to go and we think the agency asking a really good resolution on the way that we should be testing tobermycin which makes an awful lot of sense for us and certainly based on a lot of the probe studies and preliminary work we’ve already done we believe that we can achieve the efficacy goals there based on the changes the FDA accepted. Sam O’Brien: Okay good and just on the approve if you could just talk about the current phase III how many patients and how does this study differ from the last one in terms of the overall design.

Well the study design is identical to the study design we used in the phase II pre trial. That is we’re looking at ocular itching and redness in a chamber and we are looking at both concentrations a higher concentration in dose once daily a lower concentration dosed twice daily. The major difference in the studies is that the original study was done only as a single site or one or two sites maximum. This time we’re going to do it in quite a few of the other sites and we’re going to do about 120 patients to 150 patients in the efficacy side and then we’ve got quite a few hundred patients probably closer to 700, 800 patients for the safety side of the trials. Sam O’Brien: Okay good. And then Lauren just a quick one. Where there any price increases in the fourth quarter?

Yes we took a price increase in November. Sam O’Brien: Okay how much was that?

It was a small one in the middle single digits. Sam O’Brien: Okay great thanks guys.

You’re welcome.

As a reminder ladies and gentlemen if you wish to ask a question, please press star one on your touch tone phone. Your next question comes from the line of Frank Peterson of Bank of America Securities. Please proceed.

Hi Vince, can you just repeat what you said regarding the data that you currently have for Xibrom BID versus QD and then maybe just to throw out a follow up after you run that by why is that data not significant for the FDA why do they need a full trial?

How about I answer that last one first and the honest answer is I’m not sure why they insisted on a full trial. Other than we think that they’re setting up new administrative guidelines for line extensions and that they’re going to request full blown clinical trials in the future. Now related to the data that we have, let me just backstep a second and let me just talk through how we just got through the current once a day formulation. So the currently marketed product which is .09 percent dosed twice daily has a particular formulation in which it resides. The first step that we try to do is take that particular product to simply increase the concentration double it and see if that would work once daily. There are a number of other ophthalmic products just simply doubling the concentration has seemed to work and there able to get enough product into the consumer to last for 24 hours. When we ran that trial, we found that doubling the concentration in the currently marketed formulation didn’t get us the 24 hours, it only got us to about 15 hours of efficacy. So we changed the formulation, doubled the concentration and that combination of changes is what got us to the 24 hour period. So that was the underlying basis. So in this trial which again we think is more an administrative you know show if you want line extension your now going to have to go back and compare it to the existing marketed product I think we’re comparing the QD formulation which again we have to change to the old currently marketed formulation which is a lower strength one and we’re only dosing it once a day as well. And that’s what the FDA wanted to see.

Okay thanks for the color of that. And then maybe just a second question and more of a general follow up, you know when I look at the cash balance you guys have here at the company and also by my model burning somewhere in the mid 20 millions in cash next year, just what are your thoughts on you know ability as you move forward spending on R&D, spending on launches for these drugs can you give us longer term forecast. When do you reach that cash break even and the need maybe for future funds in the company?

Well let me try to answer that and then if you need more specifics Lauren can certainly jump in. We think that the current amount of money that we have available certainly gets us into profitability and that’s our goal for 2009. What we try to do in the R&D budget for 2008 is put in the expenses that we thought we could put in that we thought made sense so that we can tee up all of our programs so that depending upon how the revenues came in we could then either open up the faucet or shut it off in as we go into 2009. So we think the revenue trajectory that we currently have which is in a pretty good position to hit the revenue targets, the range that Lauren just outlined and certainly starting off the year about a 45% increase over prior year at least in IMS dollar sales certainly makes us feel pretty good that the forecast is coming as the range is outlined and we think that will continue and hopefully given some of the progress that we expect in the pipeline and we still think that we’ll be able to get Zigram QD approved in time prior to the generics hitting that with now looking at the additional work that we need to do with Tpred we should be able to launch that next year and then also filing the NDA in the second half of this year will allow us to launch it in the second half of ’09 we think that the revenues that we suspect in ’09 will allow us to hit that break even point so we don’t really see the need for financing.

Okay then final question and this is maybe more of an observation and you can tell me what kind of build out and manpower you’ve added but it seems like the R&D department is being asked to do a whole lot in 2008 so from a standpoint of employees there and how those trials and different studies are being handled and taken care of is there enough employees, is this a place we need to be putting more focus? Thank you.

We added, Frank you may remember our discussions we typically add some pretty senior people in key positions so they can manage broader and broader projects towards the end of last year, Tim McNamara who runs clinical and medical for us actually added two or three people at the director level that are critical in managing our outsourcing of a lot of these projects so we don’t tend to hire a lot of CRAs and the like while we have a few here we tend to outsource a lot of those, the data management we outsource et cetera so really we bring in these senior level folks so they can manage two or three outsourcing partners or sources pretty easily so that gives us the flexibility to get the additional work done that we’re currently doing and without having to unduly build up the overhead structure in staff.

All right, thank you.

We have a follow up question from the line of Dave Lindley with Jeffries and Company, please proceed.

Hi thanks for taking my follow up. I want to go back to the Xibrom QD, so Vince for clarification, you expect to be able to report out this data when in the second quarter is that right?

Yes just in the second quarter; and then also within that quarter we expect to refile the clinical section amended obviously for the additional data.

Okay and then from a regulatory review cycle, what do you expect to get in terms of response date?

Oh, so based on the information that we have so far, we believe that the FDA has done a fairly extensive review of our clinical section already and that this bit of information that they are waiting for was among the last bits of information that they needed to analyze. The rest of the NDA the non clinical portion as well as the chemistry manufacturing and control section is still under review with FDA. The compliance guys which are the ones that do the inspections are still on duty basically to come in and inspect either us or the clinical sites et cetera manufacturing facilities and so we think that will all continue. So we really don’t’ think that its going to have much of an impact if any on the approval time frame which we still think will be before some time in the fourth quarter.

Okay, so remind me when you originally filed, did they award you a pedufa date or was this or have they not accepted fully for filing?

What they did Dave, this is Lauren, what they do is that when you are accepted for filing, they give you the date and since we withdrew the clinical section, we do not have an acceptance of the filing.

Okay so when you resubmit, so you don’t’ believe that it would be ten months from then?

That’s correct we really don’t know if they’re going to change it or not, it doesn’t appear to based on the information that we have, we do know based on historical data, the resubmissions have been reviewed inside of six months.

Okay and then when they asked you for this additional data, I think you said the study had been ongoing since late last year, I’m curious about your discussions with your lawyers about the materiality of that information.

We didn’t believe and still don’t believe that it was material because it’s not a pivotal trial for efficacy and safety, it’s basically a comparison trial. Its one of probably four or five different things that we’re doing in anticipation of getting the product approved and having marketing materials and comparison trials et cetera available to adequately market the product or additional work that we’re doing in the labs that will strengthen any questions that the FDA may throw our way.

Okay thank you.

There are no further questions in the queue at this time. I would now like to turn the presentation back over to Vince Anido for closing remarks.

Obviously in 2007 we had a terrific year from a commercial point of view as well as moving the pipeline forward. Each and every day in this company we now set our goals forward to strive toward reaching profitability in 2009 and building value in our company over the next few months our upcoming milestones are as follows: We will continue to drive to be profitable in 09, we continue our commercial success with Xibrom , Istalol Vitraze by obtaining our goal, number one in that position in each of their respective market segments; we expect to announce the results of clinical study comparing the Xibrom QD formula to the currently marketed formulation and we’ll do that in the second quarter. Also in the second quarter we plan on refilling the clinical section of the Xibrom QD NDA. In addition to that it will be a busy quarter because we expect also in that quarter to be able to announce the pre phase III trial results as well as the results of the safety study. So we’re obviously excited about ISTA's future and we thank you for your continued support. Have a good day.

Thank you for your participation in today’s conference. This concludes the presentation, you may now disconnect and have a great day.