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Corium International (NASDAQ: CORI)
Q2 2018 Earnings Conference Call
May. 14, 2018 5:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, ladies and gentlemen, and welcome to the Corium International conference call for its second quarter of fiscal year 2018. [Operator instructions] As a reminder, this conference call will be recorded. I would now like to hand the conference over to Mr. Robert Breuil, chief financial officer. Sir, you may begin.
Robert Breuil -- Chief Financial Officer
Thank you, Skyler. Good afternoon, and welcome to our conference call for the second quarter of fiscal year 2018. As a reminder, we have a September 30 fiscal year end, and our second quarter ended March 31, 2018. Joining me today on the call is Peter Staple, our president and chief executive officer.
Peter will begin with an overview of developments in our business, and I will discuss our financial results for the quarter. Our comments will be followed by a Q&A session. During the course of today's call, we may make a number of forward-looking statements, including comments on our business and financing strategies; financial and operating performance and expectations; news and proceeds from our convertible debt offering; our cash position and our ability to fund our operations; operating costs and expenses; product pipeline; clinical trial and regulatory timing and associated resource requirements; regulatory status, strategies and timelines for our development programs and those of our partners; the achievement of clinical and commercial milestones; the prosecution and issuance and potential coverage of patent rights; the outlook for our products and those of our partners, our programs and potential partnerships; and the advancement of our technologies and our proprietary co-developed and partnered products and product candidates. These forward-looking statements are based on assumptions that are subject to risks and uncertainties that could cause our actual results to differ significantly from those suggested by these statements.
Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements. Please refer to our Form 10-K filed with the SEC on December 29, 2017, and our Form 10-Q, filed on February 12, 2018, for some of the important risk factors that could cause our actual results to differ materially from expectations, including any forward-looking statements made on this call. Except as required by law, we disclaim any obligation to publicly update or revise any forward-looking statements to account for or reflect events or circumstances that occur after this call. I will now turn the call over to our president and CEO, Peter Staple. Peter?
Peter Staple -- President and Chief Executive Officer
Thank you, Bubba, and good afternoon, everyone. We've made important advances on several fronts since our last conference call, and we've continued the positive execution on our strategy of leveraging our base business and technology to create high-value new products. I'm pleased to review those advances with you today.First, I'll cover our Corplex Donepezil development program, where we've made -- we continue to make significant progress. Our product candidate is an innovative once-weekly patch that delivers sustained and consistent levels of the drug, donepezil, over a seven-day wear period.
Donepezil is an acetylcholinesterase inhibitor, also known by the brand name Aricept, and is the most commonly prescribed treatment for Alzheimer's patients with over 10 million prescriptions per year in the U.S. alone while the overall class has over 13 million U.S. prescriptions. Donepezil is used to improve the cholinergic function of the brain and thereby slows down the progression of symptoms of the disease, and it is the well-established standard of therapy for Alzheimer's patients from early to late stages of the disease.
We believe there's a significant unmet need for new treatment that can provide less frequent dosing, improve adherence to donepezil therapy and improve GI tolerability.With the benefit of FDA guidance on the streamlined bioequivalence, or BE pathway, our Corplex Donepezil program has advanced at a rapid pace. In 2016, we reported the first human data on this transdermal candidate. Just a year later, we completed a very successful pilot bioequivalence trial and had a positive FDA meeting reviewing the results of that study.Based on subsequent feedback from the FDA, we announced in March that we've decided to proceed with our 505(b)(2) NDA filing using the results from that successful pilot study as the basis for demonstrating bioequivalence. In this trial, we established that our once-weekly Corplex Donepezil patch met the criteria for statistical bioequivalence to once-daily oral Aricept.
Our recent decision on the regulatory strategy means that we believe that we now have the key data required for registration of the product and do not need any additional bioequivalence results. We arrived at our decision to use the pilot data after careful consideration. It is important to note that at the agency's request, we provided the FDA with extensive information about the pilot study, including our PK report that included over 2,500 pages of data.We reviewed the full scope of discussions and correspondence with the FDA, including feedback from the agency staff on our pilot PK report. We consulted with our regulatory advisors, some of whom are with us in the FDA meetings.
And we also spoke with regulatory experts from our partnering process who are familiar with the product and the bioequivalence data. There was a very clear consensus on the following key points. First, that the FDA feedback on using the pilot data was positive and as positive as the FDA tends to be before an actual NDA submission. And second, that submitting the existing data from the pilot study, which the agency has already reviewed, is a more straightforward path than waiting to generate new data from an additional trial.Based on this decision, we do not plan to have the blood samples analyzed or generate PK data from subjects treated in our second bioequivalence trial.
This is the study that we referred to in the past as our pivotal study. Those samples will be kept under stable storage conditions at redundant sites so that they'll be available in case they are needed for analysis at a later date. With this strategy, as we've discussed previously, the projected timing for our NDA submission is now early in the first calendar quarter of 2019. The primary driver of the timing is a requirement to have 12-month stability data on the pad size used in the pilot trial.In addition to the key bioequivalence data, the ancillary studies for the donepezil patch are also well under way.
We have completed treatment in the skin irritation and sensitization and the nine-month animal dermal tox studies and are over halfway through treatment in the alternative site absorption and heat effect studies. These have progressed as planned and are on track as we move forward toward submission.I'd also like to provide an update on our intellectual property rights on the Corplex Donepezil candidate. As we've mentioned in the past, we have a number of patent applications pending in the U.S. and internationally relating to various aspects of the product, in addition to our patents on the Corplex technology platform.Today, we announced that we've received a notice of allowance from the USPTO for a foundational patent directly related to Corplex Donepezil, which we expect to list in the FDA Orange Book.
This is a composition-of-matter patent, covering the product and its unique design features that enable sustained and effective delivery of donepezil over seven days. The patent should issue in the next few weeks, and we expect its protection to extend until at least July of 2037.This new patent highlights the innovation and transdermal technology enabled by our Corplex platform, the technology that made it possible for us to overcome the challenge of delivering high daily doses of an insoluble, crystalline drug like donepezil across the skin for seven days where other companies have failed.As we have solved the series of technical challenges, we created new IP covering multiple aspects of successful drug delivery over extended wear periods. Beyond this first patent, we anticipate additional patent coverage related to further variations on the product design and composition, methods of delivery, methods of treatment and achievement of certain pharmacokinetic profiles.In developing the current formulation for Corplex Donepezil, our team created and tested approximately 150 different formulations in iterative steps in order to select the final formulation that optimizes sustained delivery, seven-day wearability and other features. As we tested all these formulations and different patch designs, we were able to assess what approaches might be tried by others and which might or might not work for effective delivery of donepezil.
We've been able to incorporate all this learning into our overall patenting strategy to protect our innovation.Another key development during the quarter was our convertible debt financing that we completed in March. This offering yielded gross proceeds of $120 million. The primary purpose of this financing was to replace our preexisting term loan with CRG, which had principal payments coming due this fiscal year, with a new instrument that has more favorable terms, including a much lower interest rate. After retiring the CRG term loan and covering transaction costs, we added about $62 million to our balance sheet, and we closed the most recent quarter with $94.2 million in cash.
This financing has put us in a stronger position to manage our business. And we are now funded past our anticipated PDUFA date for Corplex Donepezil.In the meantime, we're continuing our discussions on partnering the donepezil product both on a regional and multiregional basis. We have interests from multiple potential partners in several different territories and are focused on companies that we believe are best suited to maximize the value of the product and on a transaction that provides Corium with appropriate participation in its commercial success. Given our progress in development and our strong financial position, we now have increased flexibility to optimize the timing and nature of a potential transaction.Turning to our other pipeline R&D programs.
While we focus our clinical development, investment on Corplex Donepezil, we're pursuing the preclinical development and testing of other Corium-owned product candidates. As we've indicated, we expect to select our next candidate for further clinical development from among the candidates that we're evaluating in our formulation and feasibility testing. Our once-weekly Corplex Memantine product, which has already been in Phase I human testing, is one of those in the mix for review and is eligible for a bioequivalence pathway based on previous FDA feedback. Memantine is the second most commonly prescribed treatment for Alzheimer's patients after donepezil.
Beyond memantine, our experience and the know-how generated in the donepezil program have provided a platform for pursuing additional products that can enhance the clinical and commercial value proposition of existing drugs.In our partner-focused business, I'll provide brief updates on our programs primarily relating to Agile Therapeutics and Procter & Gamble.As we've discussed last December, the FDA issued a complete response letter on Agile's NDA for the Twirla contraceptive patch. Agile has reported that they have met with the FDA in a Type A meeting to discuss the Twirla NDA and the regulatory path forward for approval. Agile expects to be better able to determine the timeline for resubmission of the Twirla NDA after their receipt of the final minutes of their meeting with the FDA.With respect to the CMC questions in the complete response letter directed to adhesion testing methods, we and Agile have submitted information regarding these methods to the FDA prior to the CRL, which the FDA staff indicated that they had not yet reviewed before issuing the CRL in December. Working with Agile, we believe we have fully addressed these issues.Due to the uncertainty on Agile's regulatory process, we cannot predict the timing or probability of revenues related to the Twirla product, and we will defer to Agile, as the NDA holder, to provide updates on their regulatory status.In terms of our overall operations, we believe we have robust manufacturing processes and quality control systems in place.
We have responded fully to each of the questions that arose during our general facility inspection last fall. That inspection has been closed out, and our status as a manufacturer for commercial products is unchanged.Our relationship with Procter & Gamble continues to be an important one for both companies. For approximately 18 months, we've been manufacturing the Corplex-based Crest Whitestrips products on a 24-hour seven-days-per-week basis, and demand continues to be very strong. As part of our extended supply agreement with Procter & Gamble, we're making good progress in expanding our capacity.
The facility upgrades have been completed, and the new equipment has been delivered and is being prepared for operation. Based on our progress to date, we expect to have our additional productions capacity online this summer, which will then provide us greater ability to meet significant increases in demand from P&G.Before we turn to our financial results, let me provide a brief summary. We are making excellent progress in advancing our strategy. We're leveraging our technology and expertise in developing and manufacturing transdermals to create high-value novel products that address important patient needs.
Our donepezil program is validating this approach. We have expanded our intellectual property and increased our financial resources, and we continue our preclinical work on other products that provide meaningful benefits to patients and their families, further extending the reach of transdermal drug delivery.I'll now turn the call over to our CFO, Bubba Breuil, who will review our financial results.
Robert Breuil -- Chief Financial Officer
Thank you, Peter, and again, good afternoon, ladies and gentlemen. As a reminder, today, we will be discussing results for the second fiscal quarter and first six months of our 2018 fiscal year, both of which ended on March 31, 2018. Moving forward, I will simply use the word year to refer to our fiscal year, 2017 and 2018 to refer to our most recent and current fiscal years, and the quarter to refer to the second quarter of our fiscal 2018. First, I'd like to review the results of the quarter.
Today, we reported total revenues of $10.1 million for the quarter, compared with $7.3 million for the same period in 2017. Of that total, product revenues for the quarter were $6.7 million, compared with $4.7 million for the same period in 2017. The $2 million increase in product revenues was driven by a $1.4 million increase in our Clonidine revenues, a $0.2 million increase in our Fentanyl revenues, and a $0.4 million increase in our revenues from Crest Whitestrips. The increase in revenues from our generic products reflects the combined impact of unusually high demand this quarter versus unusually low demand for the same period in 2017.
While demand for Whitestrips has been increasing, further growth in our Whitestrips revenues has been constrained by our production capacity, which we expect to resolve with the addition of new capacity coming online this summer. We currently expect total product revenues for 2018 to be roughly 10% higher than those for 2017, driven by the unexpected increase in generic sale during the first half and the strong growth in demand for Procter & Gamble's Whitestrips. Contract, research and development revenues were $3.1 million for the quarter, compared with $2.4 million for the same period in 2017. The increase of $0.7 million was driven by a $0.6 million increase in revenues from our partnership with Agile Therapeutics and a $0.5 million increase in revenues from Procter & Gamble, partially offset by a $0.4 million decrease in revenues from a co-development program.
Further growth in contract R&D revenues for the remainder of 2018 had depended largely on Agile's continued scale of the validation activities for Twirla, which now appear to be largely on hold until after fiscal 2018. Accordingly, we currently expect full-year contract R&D revenues in 2018 to be roughly flat as compared to 2017. Cost of contract R&D revenues were $3.3 million for the quarter, compared with $2.8 million for the same period in 2017, primarily resulting from the corresponding changes in our contract R&D revenues that I described earlier. Research and development expenses for our proprietary programs were $12 million for the quarter, up from $7.5 million for the same period in 2017.
The increase of $4.5 million was primarily driven by a $4.1 million increase in funding for our lead Alzheimer's program, Corplex Donepezil, primarily related to clinical costs associated with the second bioequivalence study and the ongoing ancillary studies. Our investment in Corplex Donepezil clinical development peaked this quarter and will decline somewhat as we complete the treatment phases for all of the ancillary studies and prepare for NDA submission. General and administrative expenses for the quarter were $4.1 million, compared with $3 million for the same period in 2017, primarily due to an increase in outside legal and consulting expenses, most of which was related to the pursuit of alternative refinancing opportunities for our $45 million term loan with CRG. Net loss for the quarter was $18 million, or $0.50 per share based on 36.1 million weighted average common shares outstanding during the quarter.
This compares with a net loss of $11 million, or $0.42 per share based on 26.5 million weighted average common shares outstanding during the same period of 2017. As of March 31, 2018, there were 36.1 million shares of our common stock outstanding with the [Audio gap] weighted average shares outstanding primarily resulting from our public offerings in February and May of 2017. As a result, direct comparisons of per-share amount between periods may not be that useful to investors. We ended the quarter with cash and cash-equivalents of $94.2 million, compared to $45.2 million at December 31, 2017, a net increase of $49 million during the second quarter.
During the quarter, our convertible debt offering provided net proceeds of $62 million after operating expenses and the retirement of our term loan with CRG. Without this financing, we would have used $13 million of cash during the quarter. I'd like to now turn to the results for the six months ended March 31, 2018. Total revenues for the six months ended March 31, 2018, were $19.4 million, compared with $14.3 million for the same period in 2017.
Of that total, product revenues for the six months ended March 31, 2018, were $12.6 million, compared with $10.4 million for the same period in 2017. The $2.2 million increase in product revenues was driven by a $1.2 million increase in our generic product sales and a $1 million increase in sales of Crest Whitestrips to Procter & Gamble. Further growth from Whitestrips is dependent on our addition of a new production line that we expect to be operational this summer. As I mentioned earlier, the growth we saw in generic product revenues this quarter was unexpected, and future growth will likely be adversely impacted by the longer-term trend of increasing competition among generic-drug makers, as well as the overall decline in the Fentanyl market.
Contract, research, and development revenues were $6.3 million for the six months ended March 31, 2018, compared with $3.4 million for the same period in 2017. The $2.9 million increase in revenues was primarily a result of a $1.8 million increase in revenues from our Agile relationship, a $0.8 million increase in a partner generic program, and a $0.7 million increase in work for P&G, partially offset by a $0.3 million decrease in revenues from co-development programs. Costs of contract R&D revenues was $6.9 million for the six months ended March 31, 2018, compared with $4.9 million for the same period in 2017. The $2 million increase in the cost of contract R&D revenues was primarily driven by a $2 million increase in costs related to our support of the Twirla development program, a $0.8 million increase in costs for a partner generic program, and a $0.4 million increase in costs related to P&G, partially offset by a $1.2 million decrease in costs for a generic co-development program.
Research and development expenses for our proprietary programs were $22.2 million for the six months ended March 31, 2018, up from $13.5 million for the same period in 2017. The $8.7 million increase in R&D investment was primarily driven by a $7.9 million increase in third-party costs associated with our second BE study and the ongoing ancillary studies for our Corplex Donepezil program and a $0.6 million increase in preclinical feasibility work on our pipeline. General and administrative expenses for the six months ended March 31, 2018, were $7.4 million, up from $6 million from the same period 2017 for the same reasons I mentioned for the quarter's results. Net loss for the six months ended March 31, 2018, was $31.3 million, or $0.87 per share, compared with a net loss of $21.5 million, or $0.88 per share, during the same period in 2017.
Again, there was an increase in the number of shares between the two periods due primarily to our financing since February and May of 2017. Before I turn the call back over to Peter, I'd like to mention that accounting for convertible debt instruments is quite complex and can be counterintuitive. Our accounting treatment will be to book debt with an initial carrying value of only $71 million on our $120 million convertible notes, with the balance going into equity based on evaluation of the conversion feature. The equity component will be treated as debt discount and will be amortized back into debt over the life of the notes, which will result in an effective interest rate for accounting purposes of approximately 11%, even though the notes only bear a cash coupon of 5%.
Please note that the annual interest payments of $6 million on the $120 million convert will still be significantly less than the interest that we pay each year on the $45 million term loan that the convertible notes replace. I will now turn the call back over to Peter.
Peter Staple -- President and Chief Executive Officer
Thank you, Bubba. As we reviewed with you this afternoon, we're making important advances in our lead development program and continuing to build value. We've highlighted several key points. Our NDA strategy for Corplex Donepezil is now very clear, and we have the bioequivalence data that we need for filing.
Each of the ancillary studies and other activities for NDA submission is on track. Our IP portfolio continues to expand with the receipt of a Notice of Allowance on our first Corplex Donepezil U.S. patent. This and additional pending applications will support the commercial value of the product to 2037 and beyond.
And we have significantly strengthened our financial position. 2018 continues to be an exciting and productive year, and we're very much looking forward to reporting on our further progress, particularly as we advance toward our first NDA filing. Operator, we can now open the call for questions.
Questions and Answers:
Operator
[Operator instructions] Our first question comes from Oren Livnat with H.C. Wainwright. Your line is now open.
Oren Livnat -- H.C. Wainwright & Company -- Analyst
Hey, thanks for taking my questions. Can you hear me?
Peter Staple -- President and Chief Executive Officer
Yes. Hi, Oren.
Oren Livnat -- H.C. Wainwright & Company -- Analyst
Thanks. Hey, nice to talk to you. Great quarter. I actually have two questions on the donepezil program.
Congrats on the financing. You've specifically mentioned that you had some increased flexibility now in terms of the potential timing or nature of such a deal. And I'm just wondering, given how close you sort of indicated you might have been on one or more deals in the past, are you planning on taking that product significantly further down the road yourself now given the funding? And should we not hold our breath for a near-term deal? And I have a follow-up.
Peter Staple -- President and Chief Executive Officer
Oren, the intent wasn't to say that we're going to wait. We are in active discussions with prospective partners. The intent was to indicate that we have a lot of flexibility that increases our ability to negotiate the right deal for us. And as I emphasized, we want to make sure we have the right partner that's best-suited for commercializing the product.
So I wouldn't expect necessarily that it signals a delay, just that we're going to do the right deal with the right partner.
Oren Livnat -- H.C. Wainwright & Company -- Analyst
Sure. You are certainly more leveraged now. I guess, just the big, I guess fulcrum in any negotiation would be theoretically approval. So I guess, I wondered how much have you considered taking this all the way to the finish line yourself before bringing on approval to give yourself the ultimate leverage.
Peter Staple -- President and Chief Executive Officer
Well, Oren, as I mentioned, we do have funding to take us through the PDUFA date. That is not something we're currently planning on, but we do have that flexibility. So that's always an option to consider as we look at the partnering landscape.
Oren Livnat -- H.C. Wainwright & Company -- Analyst
All right. Thanks. And congrats on the new patent as well. That's a long exclusivity period.
But you did call out specifically a potential pending IP, among many approaches, the PK profile. And I was wondering how crucial you think a PK patent around your product is to protect it in a world where companies have gotten pretty good at engineering around, let's say, particular formulations or delivery methods. PK is a PK. So is that something that you look at as crucial?
Peter Staple -- President and Chief Executive Officer
I would say it's a positive. I would not say it's crucial because I think the patent that has already been allowed is – it is going to be very important for us. We do expect further patent allowances and issuances well. I think the pharmacokinetic profile is going to be a helpful piece, not necessarily in and of itself the most crucial because I think what we've got already is a significant piece of the pie.
Oren Livnat -- H.C. Wainwright & Company -- Analyst
And given where those are in prosecution, if they are already in patent prosecution, should we hope to see more IP allowed or issued before a potential PDUFA date if all goes well?
Peter Staple -- President and Chief Executive Officer
Yes.
Oren Livnat -- H.C. Wainwright & Company -- Analyst
Great. Thanks. Well, I'll get back in the queue. I don't want to be a hog.
Thanks so much.
Peter Staple -- President and Chief Executive Officer
Thanks, Oren.
Operator
[Operator instructions] Our next question comes from Serge Belanger with Needham. Your line is now open.
Serge Belanger -- Needham & Company -- Analyst
Hey, good afternoon. I also have a couple of questions on the donepezil patch. In terms of filing, can you just walk us through what we should expect between now and, I guess, 1Q '19? I know there's a couple ancillary studies ongoing. Are those worthy of seeing the results and press releases? I guess, what else should we expect between now and the final date?
Peter Staple -- President and Chief Executive Officer
We will be completing ancillary studies. We'll probably provide updates on when we've completed them. I don't know that they would be press release-worthy types of studies. We do plan to be at the AAIC conference in July in Chicago, and we expect to be presenting there.
We also are expecting a pre-NDA meeting with the FDA this summer, and that may be an opportunity to provide an update as well.
Serge Belanger -- Needham & Company -- Analyst
OK. And then in terms of partnerships, I think in the past, you had talked about getting additional clarity on the regulatory pathway in Europe and Japan. Have you held any other meetings? And how important are those to advancing partnership negotiations?
Peter Staple -- President and Chief Executive Officer
Yes, Serge. We -- so we've gotten input from two countries in Europe which are thought-leaders. And we have gotten feedback that the bioequivalence pathway is available there, similar to the U.S. In Japan, we've gotten preliminary feedback that an efficacy study of some sort is likely to be part of that picture.
And so that's something that we are taking a closer look at.
Serge Belanger -- Needham & Company -- Analyst
OK. On new cast programs, should we expect any news this summer or the next quarterly call?
Peter Staple -- President and Chief Executive Officer
I think that's a reasonable time frame to -- for us to be looking at. We expect to be able to describe programs that we believe are eligible to go into clinical development. And the next quarterly call is a reasonable expectation for that based on the way we're progressing at this time.
Serge Belanger -- Needham & Company -- Analyst
Great. Thanks for taking the questions.
Peter Staple -- President and Chief Executive Officer
Sure.
Operator
At this time, I'm showing no further questions. I'd like to turn the call back over to Peter for closing remarks.
Peter Staple -- President and Chief Executive Officer
Well, thank you, everyone, for joining us this afternoon. I'd like to thank our stockholders for your continuing and ongoing interest and support and our team here at Corium for their hard work, their innovation and positive contributions. We look forward to speaking with you again soon and reporting on our progress. For those of you who will be at the Jefferies conference in New York next month, we look forward to seeing you in person then.
Operator, would you please conclude the conference call?
Operator
[Operator signoff]
Duration: 34 minutes
Call Participants:
Robert Breuil -- Chief Financial Officer
Peter Staple -- President and Chief Executive Officer
Oren Livnat -- H.C. Wainwright & Company -- Analyst
Serge Belanger -- Needham & Company -- Analyst
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