Avadel Pharmaceuticals (NASDAQ:AVDL) Q4 2018 Earnings Conference Call March 15, 2019 8:30 AM ET
Greg Divis – CEO
Mike Kanan – CFO
Geoff Glass – Chairman
Conference Call Participants
Matt Kaplan – Ladenburg Thalmann
Francois Brisebois – Laidlaw
Good morning, ladies and gentlemen, thank you for standing by. And welcome to the Avadel Pharmaceuticals’ Fourth Quarter and Full-Year 2018 Financial Results Conference Call.
At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. It is now my pleasure to turn the call over to Mr. Mike Kanan, Chief Financial Officer of Avadel. You may begin.
Thank you and good morning to everybody and thank you again for joining us on our conference call. This morning we issued our fourth quarter and full-year financial results news release. The release can be accessed on our website at avadel.com. As a reminder, before we begin, the following presentation includes a number of matters that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements. These risks include risks that products in development stage may not achieve scientific objectives or milestones or meet stringent regulatory requirements, uncertainties regarding market acceptance of products and the impact of competitive products and pricing. These and other risks are described more fully in Avadel’s public filings under the Exchange Act, including the Form 10-K for the year ended December 31, 2017 which was filed on March 16, 2018. Except as required by law, Avadel undertakes no obligation to update or revise any forward-looking statements contained in this presentation to reflect new information, future events or otherwise.
After their prepared remarks, we will be opening the call for Q&A. On the call with me today is Greg Divis, our Interim Chief Executive Officer and Geoff Glass, Chairman of our Board of Directors. At this time, I will turn the call over to Greg Divis. Greg?
Thank you, Mike and good morning everyone. Before reviewing our fourth quarter and full-year 2018 results, I want to recap our recent developments including the announced leadership changes and corporate restructuring undertaken to simplify and focus Avadel’s business, preserve its financial health and strengthen our operational focus. I will briefly summarize the actions taken to date and provide an update on our current status. Although the restructuring was announced only a few weeks ago, we have made significant progress in taking the necessary and urgent actions that are required to ensure we position ourselves to realize the potential promise of FT218 and begin to rebuild shareholder value.
In January of this year, we announced changes to management and the Board of Directors and we then commenced a comprehensive assessment of all aspects of our existing businesses and strategy. Following that assessment on February 7, we announced our comprehensive restructuring plan with the clear priority of restoring our financial and operational health focusing our resources and full attention on the development of FT218 and preserving our liquidity to extend our financial runway into 2021.
The plan includes the following important steps. First, we’re undertaking a companywide cost reduction initiative including reducing our total headcount from more than 200 to approximately 50 by the end of 2019. Second, we will continue to focus on maximizing the performance and cash flow of the hospital products business. Although profitable it is facing increasing pressure from both new and existing generic entrants. As we have done in the past, we will continue to aggressively and profitably defend our position in each respective market while carefully managing expenses to ensure that the business continues to generate positive cash flow.
Third, we announced that we are exiting the NOCTIVA business. The product has significantly underperformed expectations to-date despite considerable investments. As a major driver of our cash burn in 2018, exiting this business quickly and cleanly is essential so that capital can be preserved.
Therefore Avadel Specialty Pharmaceuticals, LLC, the sole owner of the NOCTIVA asset has initiated proceedings to sell its assets through a Chapter 11 filing, fourth and most importantly for creating shareholder value, we will focus our cash resources and the cash flow generated by our hospital products business on maximizing the value of FT218. Consistent with this objective, we engage independent third-party experts to fully evaluate all aspects of the FT218 development program.
We expect them to identify opportunities to enhance our new drug application that we’ll ultimately submit to the FDA. The review is broad in scope and includes the REST-ON trial protocol, our clinical site engagement strategy, auxiliary PK studies, supply chain readiness and the total data package generated to-date. In addition, we are assessing how we can enhance our internal clinical trial expertise with a focus on positively impacting the REST-ON trial. As we disclosed in our February 7 announcement, 149 patients had been randomized in the study, 56% of the overall enrollment goal. As of today’s call, we have made additional progress toward our enrollment goal and going forward, we commit to provide enrollment progress updates on a quarterly basis in conjunction with our regularly scheduled earnings calls.
We also understand that the anticipated end date of the REST-ON trial is an important question that needs to be answered.
As we complete our diagnostic and follow-up action plans over the coming weeks, we will provide an estimated completion date for REST-ON enrollment by our next earnings call which is expected to take place in May.
I would now like to hand the call over to Mike Kanan, our CFO to discuss the financial implications of these actions as well as a brief review for fourth quarter and full-year 2018 financials. Mike?
Thank you, Greg. As Greg just explained, the restructuring actions we have initiated help to ensure that we have enough cash to fund operations into 2021. So how do we get there? Our assumptions, our cash runway are based on our current level of cash, the full-year run rate of anticipated cost reductions resulting from our recent restructuring actions which amount to $80 million to $90 million and a long range revenue projection for our hospital portfolio.
Our hospital products business is expected to generate positive cash flow in 2019 and we anticipate first quarter 2019 revenues for this business to be between $13 million and $15 million. However due to increased competition from products launched or expected to be launched in 2019 as well as anticipated market price actions, revenues for 2019 could be below $30 million. This possibility is incorporated into our cash runway guidance. Total operating expenses in 2019 which include SG&A and R&D are expected to be reduced from 2018’s levels of about $140 million by approximately $70 million to $75 million.
This is a significant reduction from 2018’s levels but it’s necessary to simplify our business and strengthen our financial health and operational focus. These actions when finished appropriately rightsizes the company for our current business model. Before handing the call back to Greg, I would like to touch on the financial highlights for our fourth quarter and full-year.
Revenues were $20.9 million and $103.3 million in the fourth quarter and full-year 2018 compared to $34.8 million and $173.2 million a year-ago respectively. These declines were driven by lower net selling prices across all of the company’s hospital products as a result of increased market competition. R&D was $6.1 million in the fourth quarter of 2018 compared to $11.3 million in the fourth quarter of 2017. For the full-year, R&D expense was $39.3 million compared to $33.4 million in 2017. These increases were primarily due to increased spend and the Phase 3 REST-ON clinical trial for FT218.
SG&A was $23.2 million in the fourth quarter of 2018 relatively unchanged from the fourth quarter of last year. The full-year 2018 SG&A was a little over $100 million compared to $58.9 million in 2017. This increase is primarily due to $47.6 million of sales and marketing costs associated with the 2018 launch of NOCTIVA partially offset by $8.7 million of cost savings related to the February 2018 divestiture of the company’s pediatric assets.
We expect SG&A to decline significantly in 2019 due to the announced restructuring and the exit of NOCTIVA. We expect to incur between $10 million and $15 million in one-time pre-tax charges primarily in the first half of 2019 for severance and other costs related to the restructuring. These one-time costs have been factored into our cash runway forecast.
And during the fourth quarter of 2018, we recorded an impairment charge of $66.1 million to write-off the remaining carrying value of the NOCTIVA intangible assets. We evaluated the long-term sales outlook for NOCTIVA and concluded that the associated cash flows did not support its carrying value.
Now with that, I’d like to turn the call back to Greg for a few additional comments, Greg?
Thank you, Mike. Next I want to update you on upcoming key milestones for the company. First as it relates to our UMD 4 pipeline product also known as AV001. I’m pleased to announce that we expect to submit our NDA to the FDA today
March 15. Should AV001 be approved and launched, we will be well positioned to leverage our current hospital market expertise and infrastructure and expect our fourth NDA to generate additional positive cash flow.
The current competitive landscape for AV001 is favorable with only one unapproved product on the market which we believe based on FDA stated guidance introduces unnecessary risks to the patients who might be candidates for this treatment, a risk that we believe should AV001 obtain approval can be addressed with our products. Now related to our corporate restructuring, the court recently approved the sale process for Avadel Specialty Pharmaceuticals, LLC’s assets which are solely related to NOCTIVA. We expect to know the outcome of the sales process and subsequent exit timeline for the remaining Avadel Specialty Pharmaceuticals team in April.
As Mike stated, we have taken rapid and dramatic actions to strengthen the financial health of the company while simplifying and focusing our entire company on the drivers that can begin to rebuild shareholder value. Now moving on to FT218, as previously stated we are deep into our third-party diagnostic and action plan for our 218 program. We will update the market as appropriate as we continue to progress the program including continued transparency on the status of our Phase 3 REST-ON trial.
With our focus on FT218, the company is committed to building upon our internal and external expertise and suite to drive the development and market readiness for this unique once-nightly option for patients and physicians. So before opening it up for Q&A, I will turn the call over to our Chairman, Geoff Glass. Geoff?
Thanks Greg. I want to assure investors that the board is very engaged and understands the urgent actions required to restore financial and operational health of the company. The Board of Management changes were made just a few months ago and since then our restructuring has been announced and implemented.
Furthermore, the company is providing a new level of transparency into the performance and expectations including REST-ON enrollments, a level of transparency we’ve committed to maintain. Let’s not lose sight of the human element in all of this.
As Greg and Mike mentioned, many of our team members are impacted by this restructuring. Many of them played no part in the decisions and actions that led the company here, yet all of them have conducted themselves professionally and in support of their functions in the company. And I want to express my personal thanks to each of them.
Lastly and most importantly to our physicians and patients, we’ve heard you loud and clear and we remain committed as a company to doing whatever we can to bring to market our once-nightly profit for those suffering from narcolepsy.
Thank you. And we can now open the line for questions. Operator?
[Operator Instructions] And your first question comes from Matt Kaplan with Ladenburg Thalmann.
Hi guys, good morning. Thanks for the detail on the call. Just help us understand a little bit more in terms of the guidance that you’re giving with respect to your current hospital products. You had about $19 million and $18 million revenues during the fourth quarter for that for that franchise and gave guidance for the first quarter. Where do you think you’ll see the largest hit in terms of competition. Is it with Vazculep or help us understand is it across the board that you’re guiding essentially potentially that in the second half — in the second three quarters of the year you only have roughly 59 on those products?
Yes, thanks Matt. Good morning. Thanks for your question. As you look at coming out of Q1 into the balance of the year, as I know you understand it’s very difficult to predict and forecast these products. But as we’ve exited 2018, there have been some substantial changes to the market and the largest impact relative to the go for business really centers around Vazculep, since mid to late December of last year, we have had three new approvals into the marketplace although they have not launched as our assumptions are that they will come to the market at some point in time.
And it’s really the impact of those three new competitors coupled with the continued launch of two additional products recently entering into the market that we believe will have the largest impact could potentially have the largest impact on this business. Clearly, as you’ve seen in Q1, it hasn’t yet to-date. But we also want to be transparent and make sure the market understands what is actually happening within this category.
Okay, that’s helpful. Thank you. And then staying in the hospital franchise, 001 congrats on getting that NDA filed today. Can you give us some sense in terms of the potential market size for that product and I know there was some chat earlier that this could actually be a differentiated product from the safety point of view or some other characteristics that could give it unique position in the marketplace. Is that still a possibility?
Again Matt, thanks. The market as we think about the market for AV001 today, we really look at it based on the current volume in the category of approximately a $30 million market and recognizing that there has been some history in the past of product shortages and whatnot. But as we look at it today, it’s $30 million is how we think about it. And yes during the course of this development, we have identified what we believe are real potential safety issues that are based on FDA stated guidance and that our product has addressed that issue again based on that safety guidance. And should it be approved, we believe we will have a product that will provide significant benefit to the patients who need this treatment.
Thank you. And then a question in terms of just the restructuring help us understand in terms of the savings or the reduction in expenses that you’re expecting from the exiting the NOCTIVA business from an SG&A point of view kind of going forward in 2019?
Hey Matt, it’s Mike Kanan. Thanks for the question. As we’ve stated, we expect $80 million to $90 million of full run rate savings once our restructuring actions are fully in place which as we said but before the end of 2019, we will have that all in place. So 2019 is sort of the implementation year, we have in 2018 we had about $140 million of sort of operating spend that’s between about $40 million in R&D and about $100 million in SG&A.
So if you were to remove $70 million to $75 million which is what we stated our 2019 cost reductions will be before the plan is fully implemented. We’re looking at about $65 million to $70 million operating expense rate for 2019 and then as we move into 2020 and 2021 as the programs are fully implemented, we would expect the operating expense number to be reduced even further from the $65 million to $70 million as we get into 2020 and 2021.
We fully recognize that with the hospital business that is declining as we expect, we need to rightsize our business for and preserve liquidity and we’re taking those actions aggressively to do that. So we think we’ve got the right restructuring plan in place at this point in time and we will start harvesting the cost savings, we’re starting to see that even in the first quarter here we’re almost through the first quarter and we will see some cost savings in the first quarter and those cost savings then translate directly to preserving cash which is the primary focus for us is to preserve cash, so that we can complete the clinical development of FT218.
Okay, that’s very helpful. Thanks Mike. And then last question just focusing on 218, I guess that’s where your central focus will be going forward with the opportunities there. Thanks for the update and understanding that the third-party hasn’t completed their analysis yet. But give us a sense in terms of more broadly what your thoughts are now for that program. You’ve stated that you’ve made some progress in terms of enrolling additional patients from the 56% of the goal. What could be kind of the moving parts here in terms of really expediting that program or getting it on the right track?
Yes, hi Matt, Greg. As we’ve gone through this diagnostic and have done some work and again as we enter on or before the next earnings call, we will provide a lot more insight as to when we expect the trial to conclude and again continue the transparency of updating progress against that trial on a regular ongoing quarterly basis.
The diagnostic is important primarily because we are really focusing the company on FT218. So we wanted to make sure that we took the opportunity to really look to uncover opportunities or if there were any major issues that we needed to be aware of with the primary objective of assuring that we have a comprehensive, approvable and commercially viable product in FT218.
And as we’ve gone through this stage of the diagnostic, I think it’s important to say that we have identified no major issues at this point in time. It is an orphan condition, it is a trial that has taken us longer than what we have expected. But at the same time, the conduct of the trial and the execution of the trial has been done well. And so we’ll provide more insight as we go but recognize the focus is really looking for opportunities to improve on that as we go forward both within the clinical trial of REST-ON and broadly across the entire development program.
Great. Thanks for the added detail and good luck going forward.
Your next question comes from Francois Brisebois with Laidlaw.
Hi guys, thanks for questions. Just a couple here, a lot was touched on. So you mentioned 149 patients was about 56%. I just want to make sure I heard well, so you’ll definitely have an update on the next earnings call which is in May but is there a chance of an update before and when you mentioned update. Is this purely the number of patients, it was 149, is that just the number of patients update or an update about the number of sites, the location of new sites, how those are enrolling and just to get more clarity on that?
Hi Franc, thanks Greg. Yes again the next update we intend to provide is at the next earnings call and then we’ll provide that update quarterly. I think the number that most folks have expressed an interest in is in the enrollment numbers, so we will certainly update that number specifically. And of course anything else that is relevant and germane to update on whether that’s new site or anything else that we think is important to share, we will certainly share that information as we go forward. And as we go into the next earnings call, we certainly will update you on our views as to when we expect the trial to be complete.
Okay great. And this might have been touched on for the AV001, $30 million market, there is only one product out there now, the NDA today. Just can you just remind us when you expect this to hit and is there other, there’s only one other product there. Are you hearing of any other products that could enter the market and obviously it seems like in the past they haven’t just taken that product off once you guys are approved. Are you guys expecting to take most of this $30 million or how should we think of that?
Yes, I think that sure should AV001 be improved. We would expect it to be a 2020 revenue event for us. It’s how we’re thinking about it today. We really have no insider knowledge in terms of what others may or may not be doing in the category but we’re moving forward. We believe we have the infrastructure and the strength in this channel which will this product will be distributed through the same channels, we’re in today and that will we think bode well for us and our ability to grab share and bring a successful product to the market that will benefit not only our shareholders and our company but the patients who currently don’t have a product in the market today with what we believe will be an improved safety profile.
Got it. That’s it for me. Thank you.
There are no further questions at this time. I will now hand the call back for closing remarks.
Thank you operator and thank you everyone for joining us on our call today. And have a great rest of the day and a great weekend. Thanks.
That concludes today’s conference. Thank you for your participation, you may now disconnect.