Acura Pharmaceuticals, Inc. (NASDAQ:ACUR)

Q2 2014 Earnings Conference Call

August 5, 2014 08:30 a.m. ET

Executives

Peter A. Clemens – Senior Vice President, Chief Financial Officer

Robert B. Jones – President & Chief Executive Officer

Analysts

Vernon Bernardino – MLV & Company

James Zimmerman – Wells Fargo Advisors

Thomas Marks

Operator

Good morning, ladies and gentlemen, and welcome to the Acura Pharmaceuticals, Incorporated Second Quarter 2014 Results Conference Call. This call is being recorded.

I would now like to turn the meeting over to Mr. Peter Clemens, Senior Vice President and CFO. Please go ahead, sir.

Peter A. Clemens

Good morning everyone and welcome. As is usual, before we begin I’d like to remind you all that any discussion that takes place during this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements reflect management's current view of future events and operations, including but not limited to statements pertaining to the company's expectations regarding our goal to enter into a license agreement for our FDA approved AVERSION oxycodone product, expectations regarding our AVERSION hydrocodone with acetaminophen product, expectations regarding NEXAFED and the line extensions of the NEXAFED franchise, the company's product development pipeline, the commercial potential of the company's products and plans to maximize this potential, future product sales and financial results and the company's strategy for long-term growth. Forward-looking statements involve certain significant risks and uncertainties, and actual results may differ materially.

Given these uncertainties, you should not place undue reliance on these forward-looking statements. Certain factors that may cause actual results to differ materially from the forward-looking statements are discussed in our press release issued yesterday evening and in the Risk Factors section and other sections of the Form 10-K for the year ended December 31, 2013 and the Form 10-Q for the quarter just ended as filed with the Securities and Exchange Commission.

Okay. Now I'll turn the call over to Bob Jones, our CEO, for a general corporate update. Bob.

Robert B. Jones

Thanks Pete. Good morning everyone. Thank you for joining us. Starting with AVERSION opioid franchise, the new drug application for our FDA approved AVERSION oxycodone product, which transferred back to us in late May following our April 9 termination agreement with Pfizer. We now have full ownership of the product. We are in discussions with a third-party manufacturer of the product, and believe we can re-establish supply without any difficulties.

We understand that some changes have been made to the manufacturer’s operations, which may require us to revalidate the manufacturing process for at least one strength of our AVERSION oxycodone. We are in active discussions with potential partners, who are interested in commercializing AVERSION oxycodone. Our goal remains to have AVERSION oxycodone back on the market by year-end. However, this is a very aggressive target. The ultimate timing of the relaunch of AVERSION oxycodone will depend on many factors, most importantly the time it will take to finalize any partnering deal and the preparations by the selected partner to get ready for their relaunch.

For the AVERSION hydrocodone with acetaminophen development product, we had a meeting scheduled with the FDA on August 14 to discuss FDA’s comment regarding the relevance of snorting hydrocodone with acetaminophen products and the impact it may have on the development of our product. We also are completing the final analysis of the study’s 302, 303 and 304. These are the three pharmacokinetic studies required to establish the safety and efficacy profile of our hydrocodone acetaminophen product. We anticipate announcing results from these studies in this quarter.

Turning to our NEXAFED franchise, we added approximately 200 new retail pharmacies during the quarter, principally from two regional chains. NEXAFED is now stocked in approximately 9200 pharmacies. Rite Aid’s 4600 pharmacies make up the bulk of our retail distribution. We understand that Rite Aid has identified certain high meth risk stores, and offers only meth-resistant products like NEXAFED in those stores. We have seen some reordering from Rite Aid for their stores, but believe we have additional opportunity to increase sales by engaging the Rite Aid pharmacist in the stores that stock multiple single ingredient pseudoephedrine products.

Gross shipments of NEXAFED in May of this year was 70% higher than in January, reflecting the continued national trend towards methane-resistant products. Shipments in retail distribution taper off from June through August during the cold/allergies off-season. Many pharmacies revisit their cold product stockings in the fall in advance of the winter cold season.

West Virginia, once again has been at the forefront of the movement to meth-resistant products. In July, CVS announced all their West Virginia stores would only stock meth-resistant single ingredient pseudoephedrine products, making a vast majority of West Virginia pharmacies meth-resistant stores. We understand that public and political pressure is being focused on the remaining non-compliant pharmacies. Prior to the CVS announcement, the Charleston Gazette reported meth lab seizures are trending down 20% in West Virginia, and purchases of pseudoephedrine products in the state are off by 30%.

West Virginia law enforcement has noted that recent meth lab seizures tend to be using pseudoephedrine combination products, but move away from the more popular and less expensive single ingredient products. As West Virginia continues to demonstrate success with meth-resistant products, we are hopeful that other states will make similar request of their pharmacies. Our first NEXAFED line extension, which will help address the shift to combination products in meth making is on track for introduction later this year.

We also continue to advance some promising early-stage formulations of the sustained release product as well. We are pleased with the progress we are making with our NEXAFED franchise. We remain committed to building a broad offering of meth-resistant NEXAFED products and making meth-resistant a standard of care in US pharmacies. We will opportunistically consider partnerships that advance our objectives.

I’ll now turn the call over to Pete, who will review our second quarter financial results. Pete?

Peter A. Clemens

Thanks Bob. Last night, we reported a net loss of 3.5 million for the second quarter of 2014 or $0.07 per diluted share compared to a net loss of 3.1 million or $0.07 per diluted share for the same period in 2013. We recognized revenues from NEXAFED sales of 34,000 in the second quarter, resulting from additional pharmacies stocking the product as well as a certain number of repeat orders from prior customers. Not surprisingly, orders for decongestants like NEXAFED decreased during late spring and summer, when allergy season abates and before the fall cold season initiates.

As we previously disclosed as the shipments of NEXAFED continue to build we defer recording a certain amount of that shipments as sales to account for potential refunds. As of June 30, we had approximately $300,000 of such deferred NEXAFED sales. If pharmacy returns were made at the low levels we have experienced so far, and new pharmacy customers follow with repeat orders, we would expect to recognize these revenues in the coming quarters.

Research and development expenses were 1.3 million in the second quarter 2014 compared to 0.8 million for the same period in 2013. This increase reflects critical costs associated with the pharmacokinetic studies regarding our AVERSION hydrocodone with acetaminophen product, which Bob referred to earlier, from which we expect to announce results in the third quarter. This increase also influenced the task of advancing our first NEXAFED product line extension, which is expected to launch later this year.

Selling, marketing and general administrative expenses were 1.9 million in the second quarter of 2014 versus 2 million in the same period last year. Selling expenses consist of advertising and marketing activities for NEXAFED, including our initial consumer advertising in selected markets. Promotional and educational materials and efforts directed to national pharmacist organizations, appear at pharmacy trade shows, and outreach to every stage organizations seeking solutions to methamphetamine abuse in their states and communities.

As of July 31, 2014 the company had cash, cash equivalents and marketable securities of $16.5 million and $10 million in term debt financing. The company is required to pay interest only on the debt through next March of 2015, and thereafter principal and interest over 4 years. The cash balance reflects a second quarter payment of $2 million to Pfizer in connection with the complete termination of their license to our AVERSION oxycodone and technology.

Operator we can now open the call for questions. Go ahead and poll the audience.

Question-and-Answer Session

Operator

(Operator Instructions) And we’ll take our first question from Vernon Bernardino with MLV & Company.

Vernon Bernardino – MLV & Company

Hi, good morning and thanks for taking my question. I just had a few, and then I will get back in the queue, just wondering what your plans are for product line extensions beyond NEXAFED, I’m sorry if I missed them, especially I guess, I will go in more detail about the immediate release pseudoephedrine product?

Robert B. Jones

Sure. Vernon thanks for the question.

Vernon Bernardino – MLV & Company

Hi Bob.

Robert B. Jones

We launched NEXAFED, which is 30 mg single ingredient, product back in December 2012. That market came to product under FDA regulations known as the OTC monographs, which allowed us to market the product without a prior approval application to the FDA. There are other such products that we could develop under the monograph systems and some combinations with additional active ingredients.

When we move into sustained release products, the sustained release products all require a prior approval application to the FDA. So it will take – it will obviously take a little more time to develop. The bulk of the marketplace that we have identified in the past is really in sustained-release formulations. The meth [cooks] eventually did not start there. They typically start with the 30 mg tablet simply because it is the easiest tablet for them to work with. They get the best yields out of it.

What we are seeing as we said are – law enforcement are seeing in West Virginia now is that there is a concerted shift to both immediate release combination products as well as sustained-release combination products. So there is clearly an opportunity there for meth deterrence and they represent the biggest opportunities in the market. So the products like Claritin-D, Zyrtec D, Allegra D, they represent some of the largest product opportunities in the marketplace.

Vernon Bernardino – MLV & Company

So do you think an immediate release combination product would be the first product line extension?

Robert B. Jones

Yes. The product that we have coming out this fall will be a immediate release product. It will come out under the OTC monographs. For competitive reasons, we have not disclosed the ingredients in that combination.

Vernon Bernardino – MLV & Company

Okay, and the product as far as the FDA’s position on the intranasal route, has there been any further discussions or in fact, from experts in the field about this route, obviously there is data out there that is relevant to a lot of abuse, but perhaps it is up or down or what is the current thinking and what have you learnt from FDA’s discussions?

Robert B. Jones

Yes. We haven’t at this point had a follow up meeting with the FDA. That meeting will occur on August 14, and we were surprised as you were Vernon, we had submitted to the agency as they had requested an assessment of the routes of abuse of hydrocodone products and specifically the route by snorting, and found exactly what you said that there is a number of data sources out there published in the literature, as well as what is contained in the government’s own drug abuse warning network database that there is a level of hydrocodone abuse by intranasal administration that is taking place out there.

So we’re a bit surprised by the FDA’s comments to us in their letter on May 27, and we just need to get clarification from them and have a discussion as to, what their data sources are, what their definitions are and why the government’s own database is apparently irrelevant to the FDA.

Vernon Bernardino – MLV & Company

Okay. We will just have to wait for after that meeting then, one more question and I will get back in the queue, regarding the length of return for NEXAFED on product shipments, what is the typical length of the period?

Robert B. Jones

Pete can you handle that one?

Peter A. Clemens

I beg your pardon, what was that question again Vernon, can you repeat it?

Vernon Bernardino – MLV & Company

So, regarding the rate of return for NEXAFED product shipments, what is the typical length of that period?

Peter A. Clemens

Well, they typically have a year to return product. When you are launching a product, it sounds a little odd to say we are still launching the product. We are not launching the product and allow the early adopters, but as we continue to add new pharmacies and it is still in the launch phase for that group, and that is what is happening. We have grown from a very small handful up to now 9200. So, I think the point that really is more relevant here is when will we see reorders occur.

That is what we are looking for, and we are starting to see that now and I think what will happen specifically in the fall when the cold and cough season picks up that is when you will see real clarity from the pharmacies we are stocking the product. So that is why, while they have a year to return the product to us under the terms that is not really the relevance time provision we are looking at. We are looking at movement in the pharmacies and sales.

We are able to track individual pharmacies who order and reorder. So that is when we think we will have a real clear idea. I think we are being conservative here. I think we clearly could have recognized more I guess if we had really pushed – as a public company, we have quarterly review with our outside accountants. They are in complete agreement with our approach here. It is pretty common that when products are in the introductory phase and in the growth phase, you be a bit conservative. But I think we will have more real clarity in the next couple of quarters.

Vernon Bernardino – MLV & Company

Okay. I will get back in the queue, although I do have one more question.

Robert B. Jones

Go ahead and ask your question?

Vernon Bernardino – MLV & Company

Okay, so I guess one of the things we are also looking for regarding I would say is what are your thoughts about another likeability study?

Robert B. Jones

It is clear to us now Vernon that we most likely will have to run another likeability study for nasal snorting. There was two components to the FDA’s letter to us in May. Component number one was the relevance issue, the second point was that they didn’t feel that the first study was sufficient to demonstrate what was sufficient for labeling.

We don’t consider those to be mutually exclusive statements, although in the FDA’s letter they were mutually exclusive, which is why we need to get clarification on the relevance issue first, and then we expect that following that if it is favorable to proceed forward, then we will have to redesign and rerun a liking study.

Vernon Bernardino – MLV & Company

At this point then do you think that should you get approval, there will be any differences versus products out there regarding the labeling?

Robert B. Jones

Differences from the oxycodone product?

Vernon Bernardino – MLV & Company

From other products out there?

Robert B. Jones

Well, there has only been four abuse deterrent opioid products that has been approved by the FDA. The three other products are extended release. So their labeling is different from that standpoint. The only other immediate release product out there is our AVERSION oxycodone product, and we would expect similar labeling, similar attributes in the labeling. Our hope is that stronger results with our nasal snorting data than we had with the oxycodone product, as well as hopefully better laboratory extraction studies for the IV deterrent component, which again we didn’t get labeling as strong as we would have liked in the oxycodone label.

Vernon Bernardino – MLV & Company

Okay, and then one more question, and I will get back in the queue, so yes, you mentioned that it is the only immediate release product, but any plans for testing other doses of that you have a wider range of availability?

Robert B. Jones

Are you referring to the oxycodone product?

Vernon Bernardino – MLV & Company

Yes.

Robert B. Jones

Yes. Actually that has been a point of discussion that we have certainly had with potential partners. It was a point of discussion that we had with Pfizer when Pfizer had the product. Pfizer demonstrated a willingness not to invest in any further R&D behind the oxycodone product, but that now is, certainly open since we have control of the product back.

Vernon Bernardino – MLV & Company

Okay. Thanks Bob and Steve for patiently taking my questions.

Robert B. Jones

Thank you, Vernon.

Operator

And we will move along to our next question from James Zimmerman with Wells Fargo Advisors.

James Zimmerman – Wells Fargo Advisors

Greetings, it is good to hear what is going on in West Virginia, and your efforts to try to broaden the modeling of the states, can you talk more about the combination and introduction, can I guess, as you said that is a much larger part of the whole market for NEXAFED and is it something that in order for you to introduce you would need a partner for or continue to do it at the same level that you are working on the current product?

Robert B. Jones

Yes, so our overall plans with the NEXAFED franchise and I think things are developing interestingly here and quite honestly they are developing pretty much the way we thought they would. This would be a bit of a domino effect. When we launched the product we talked about a revolution – revolution is taking some time to develop here, and West Virginia is just, part of the dominoes that keep toppling and we are hopeful that the West Virginia model can extend out into additional states and start toppling state-by-state.

And, really the prime issue here is showing real world results. These laboratory studies are nice. They are a good way to get started, but we have always maintained as the FDA has maintained on opioids, laboratory studies can only take us so far. It is really what happens in the real world, and what we are seeing now is we are seeing real positive, real world results.

We have two counties now in the state of Tennessee that are really NEXAFED only counts. All the stores in those counties are carrying NEXAFED as their only single ingredient product. Their meth lab seizures are down approximately 88% to 90% in those two counties. So when you take that model out to other people, and I think West Virginia has been the state – statewide that has really jumped on this, and stood up and said, we want to be a meth-resistant state and that has spanned everything from the state legislature at one point trying to encourage in [Indiscernible] pharmacies through legislation to be meth-resistant only stores, and as you can see that didn’t play out, but what it did is it captured the imagination of the public and the lawmakers in that state.

We are really standing up to demand that their pharmacies become compliant in this revolution. It is really exciting to see it happen. We are starting to see the improvements in the meth side in West Virginia and as that state really becomes a success, we think it will roll out. But as we suspected all along is that meth problem isn’t simply going to go away if the 30 mg product becomes ubiquitous, or universal in the marketplace.

The meth cooks are going to move to the next favorite choice and those favorite choices are starting to become apparent in some of these jurisdictions and that is where the opportunity is.

So what we see is when we launched the product in the fall, we have seen a lot of our existing NEXAFED client base is very interested in picking up this specific combination product. So, we think that is good. We will continue to market our NEXAFED franchise ourselves, and what we are ultimately doing is starting to wake people up. We are changing the status quo. We are becoming a disruptive technology in this marketplace, and I think the true sign of that is the Consumer Healthcare Products Association.

When we first started this they didn’t want to believe it. They didn’t think that these products would be effective, and they even got to the point where they were I will politely say they were spreading some misinformation, particularly about our product, but their most recent communication that I have seen out of the Consumer Healthcare Products Association is such that their client companies, so these are the big pharma companies are now all looking at this, or working or have been working on meth-resistant products.

The meth-resistant products is becoming noted by everybody in the industry, and for those who are sitting on the sidelines, I think there is opportunities for them for partnerships with companies like us that can advance our agenda can advance their agenda, and most importantly advance the agenda for the law enforcement and the consumers in the states to keep pseudoephedrine a viable OTC non-prescription nasal decongestant, which is the best one we have on the market, but try to keep it out of the hands of the meth cooks.

James Zimmerman – Wells Fargo Advisors

Thank you. Could you also comment again further on the I heard you say the manufacturer of the oxycodone product has done some kind of formulation change, can you describe that in more detail?

Robert B. Jones

Yes. Not a formulation change. The formulation is ours. So, any changes to the formulation we control. It is the equipment – it is for the equipment train, or the order of the equipment in which the drug is processed on, and keep in mind that the manufacturing facility where this is was organically a King Pharmaceutical manufacturing facility that then transitioned into Pfizer’s hands, and Pfizer acquired the facility and then ultimately Pfizer sold it off to a third party contract manufacturer.

So that is beneficial for us obviously because we can walk right into the same plant and use the same plant and the same equipment. It is just that they made some changes in the way that their equipment is set up, and that is a slightly different processing – train or processing pathway for the formulation for those same ingredients, and when you make changes like that sometimes you have to revalidate the manufacturing process.

I can tell you that the process we will be moving to was already validated by Pfizer on one of the two strains of the product. But we know it is not a significant issue. It is just basically walking through the testing and the reports and any validation that we do, the product that comes out at the end assuming that it meets specifications that becomes a commercially saleable products. So it is not – it is not a burdensome investment on our part and it is certainly a process that has already been successful once.

James Zimmerman – Wells Fargo Advisors

That is very helpful. Thank you. Are you able to give any more color to your ongoing discussions for partnerships on the oxycodone area, or have you said pretty much what you want to say already?

Robert B. Jones

Yes, I think it is a pretty standard process. Obviously, we don’t want to get to far out over our skis and make announcements, but, it has been a pretty standard process. We have used some outside advisers on this. We have, generated an internal list and we actually had a number of people, who weren’t on our list, but had contacted us and expressed an interest. So they went on the list. There is a due diligence process that you go through when people get access to other company staff, as well as our bulk of our documents to review things like our market research and we actually have some pricing research that was Pfizer up – we own it now, but it was commissioned and done for Pfizer. So, it’s helping people to inform peoples to what the opportunity here is. It’s been a good process and I think, we continue to move forward with that and like I said we’re moving toward with great haste to try to meet our very aggressive objectives of getting the product back on the market sooner rather than later.

James Zimmerman – Wells Fargo Advisors

Thank you very much.

Operator

And we will take a follow up question from Vernon Bernardino with MLV & Company.

Vernon Bernardino – MLV & Company

Thanks for taking my follow-up question. It’s been a while since I looked at I guess the characteristics and the dynamics regarding the pharmacies, and you said, 9,200 mostly are Rite Aid, is there anything particular about why it’s mostly Rite Aid?

Peter A. Clemens

Just because Rite Aid has lot of stores. Our pharmacy system in the United States trends from the biggest of the big which is CVS and Walgreens, down through which they operate I believe approximately 8,000 stores each, I think then you drop down to somebody like Wal-Mart. I think Wal-Mart system is operating in a neighborhood of I believe it’s about 7,000 pharmacies and then you drop down to Rite Aid and that rounds up to the top four of the pharmacies. So, we roughly estimate about 65,000 pharmacy outlet so you can see that a bulk of our pharmacy outputs are controlled by four major corporations.

And then, obviously it trickles down all the way to what we call the independence which will be a single pharmacy, maybe two or three pharmacies operated by a single owner. So, it’s a broad spectrum when we did launch NEXAFED, we knew that the quick, the quick hitters, the quick decision makers were going to be the independence that has certainly proven out and proven to be the case, those were the initial dominos that we started toppling as I mentioned that strategy and as we built that momentum and we built the public perceptions and political desire started to manifest and take shape. What we’ve seen is more and more chains that are taking notes, stepping up to the plate and making more slower wide decisions. Certainly, Rite Aid is the biggest one that we’ve had to make a corporate commitment, the stock meth-resistant products nationwide and then they also have their target stores that they really focus on. You can compare that to somebody like CVS. CVS we understand only really carries meth-resistant products in West Virginia and certain border stores at this point. So, we’ll need a little more nudge to expand the product offerings.

Wal-Mart, we understand hasn’t made an corporate commitment at this point in time, although the bulk of their West Virginia stores we understand are carrying NEXAFED and then, we have not heard a public statement out of Walgreen on this issue. Again, a lot of West Virginia Walgreen stores are carrying NEXAFED in the news this morning actually I saw was that Kroger is dealing with this issue. They reported to have 40 stores in West Virginia and actually counted right before the ball that over 20 of their 40 stores are stocking NEXAFED. So, it’s a matter of whether the stores are doing it on their own which is some of the cases or whether they’re making a corporate commitment. And we take a meter why, if the corporation wants to stand up, great, but what we find is the pharmacist will step up and make changes in their stores where they get up, and need it.

Vernon Bernardino – MLV & Company

So, one follow-up then, so regarding the – approximately 23,000 stores that CVS, Walgreens and Wal-Mart have, they perhaps are taking away the attitude because there is overlapping territories or what would be the required effort I guess to penetrate those, because obviously my neighborhood sometimes it stores only a mile odd?

Robert B. Jones

Agreed. We can fight this war stored at store and that’s a bit like hand-to-hand combat and we certainly appreciate that or if a chain steps up and I’ll get the example for Fruit Pharmacy that’s about a 30 store chain in West Virginia, they stood up at corporate office and said, we will sell nothing but not resistant products and they pulled everything else out of the store. J&J their product back effectively and took out their store brand and that a pretty bold move when proof, the owner of that chain has made it very clear that she expected to take a loss in profitability because of that, she expected to take a loss in sales because of that. And the data that she has put out bears that in fact, so corporately there is a lot of motivations and there is a lot to go into the business decision. It’s clearly beneficial for us, obviously, it’s one of these big change which stand up and say, this is what we’re going to do nationwide.

To this point, we’ve different levels of commitments with these big change, it’s a difficult decision and there is lot of factors that have to go into it, but I think again as we continue to show that we’re having the real world positive effects that NEXAFED can offer to the communities, I think the communities, these are going to stand up and make a good solid point to these chain stores that they need to get one.

Vernon Bernardino – MLV & Company

Perfect, thanks again for taking my follow-up question.

Robert B. Jones

Sure. Operator?

Operator

And that’s all the time that we have for questions, I’ll turn back over to Bob Jones for any closing or following remarks.

Robert B. Jones

I think there is one call from Tom Marks.

Operator

We do have Thomas Marks, we’ll put him on.

Robert B. Jones

Go ahead Tom.

Thomas Marks

As in your 8K about Purdue in an agreement on a patent interference, and does Purdue do anything in the immediate release?

Robert B. Jones

Well, in terms of do they do things in immediate release, I guess my short answer Tom is, yes, they at least in the past and I’m not real current on their immediate release product obviously Purdue Pharma best known for products like (MS codone) and oxycodone are two biggest extended release opioids in the marketplace. They did historically market companion immediate release, products without abuse deterrents comps so they have been in the immediate release space, I don’t know whether those products are still offered by them or not, they’re very small. Sellers obviously they had no advantages over the generic products.

In terms of abuse deterrents, our understanding is that they are working on some immediate release abuse deterrent products that’s our thinking, they’re not a public company so it’s often to get intelligence there.

Thomas Marks

And what about this agreement on the patent?

Robert B. Jones

This patent had to do with an extended release formulation and did not touch on immediate release products at all.

Thomas Marks

Okay, thank you.

Robert B. Jones

Okay, operator.

Operator

At this time, we really have no further time for questions, I’d would like to turn things back over to Bob Jones for any additional or closing remarks.

Robert B. Jones

Thank you, operator. Thank you everyone of joining us, we look forward to keeping you updated on the progress we make with the FDA, our clinical studies and partnering and marketing. Thanks a lot, bye, bye.

Operator

That concludes today’s conference call; we thank you for your participation.