Indivior PLC

LSE:INDV

Earnings Call Transcript 2018-Q1

[Operator]

Good day, and welcome to the Indivior First Quarter Results 2018 Conference Call. Today's conference is being recorded.At this time, I would like to turn the conference over to Mr. Shaun Thaxter, CEO. Please go ahead, sir.

[Shaun Thaxter, CEO & Executive Director]

Good morning, and good afternoon, everyone. I would like to welcome you to Indivior's first quarter results call.My name is Shaun Thaxter, CEO. And I'm joined today by Mark Crossley, our CFO; Christian Heidbreder, our Chief Scientific Officer; as well as Javier Rodriguez, our Chief Legal Officer. As always, we appreciate your time and interest in Indivior.When we last reported in February, we were pleased to provide an outlook for another year of solid profitable growth in the business in 2018 together with the imminent launch of SUBLOCADE, our new treatment paradigm for opioid use disorder. Today, I am pleased to confirm that our financial performance in the first quarter of 2018 leaves us on track to achieve our full year guidance and that our initial market reception to SUBLOCADE is very positive.I want to make 3 general comments about our performance and progress in the first quarter before handing it over to Mark to provide you with a few more details. After that, as usual, we will go to Q&A.My first comment is that our base SUBOXONE business continues to be relatively resilient in a marketplace that continues to grow at a solid pace. Even in the face of intensifying generic tablet competition and aggressive pricing from some branded competitors, our average share in the first quarter remained at 55%. And of course, we've continued to defend our intellectual property for this important product with the issuance and assertion of yet a third new patent, the '305 patent. This is an Orange Book-listed patent, which relates to certain polymer film compositions having a substantially uniform distribution of active drug. Secondly, while we're pleased with the SUBOXONE Film's performance because it fuels our company, we're very much focused on SUBLOCADE's success. It's essentially been 2 months since the launch in early March, but I'm pleased to report that initial physician and patient enthusiasm is strong and payer coverage levels are running solidly ahead of our expectations. SUBLOCADE has already been issued with a unique Q code for each dose by CMS, which will be in effect from the 1st of July. These codes are unique to SUBLOCADE and will help in the reimbursement process. So enthusiasm for this important new tool in the fight against the opioid crisis is very gratifying.Our new go-to-market model is up and running. However, as we've talked during the past year, there is added complexity with SUBLOCADE as the touch points in the patient journey have multiplied. This complexity has come with some expected teething challenges during the early stage of launch. This said, the team is addressing it with the usual operational rigor you have come to expect from Indivior, and I'm confident that the investments we've made to establish this new go-to-market model will prove to be a significant competitive advantage for our company. My third general comment is that our Q1 performance was consistent with our planning and with the expected second half weighting of 2018 performance that we outlined in February. As a result, I'm pleased to reconfirm our full year guidance of net revenue between $1.13 billion and $1.17 billion and net income of between $290 million and $320 million. Of course, this guidance is based on a number of factors, most important of which is no material change in market conditions. This guidance means we continue to look forward to a year of profitable growth with the midpoints implying 5% net revenue growth and 13% net income growth.Quickly turning to legal matters. You will know that the District Court ruled that Alvogen did not infringe our SUBOXONE Film patent, the '497 and the '514. We intend to appeal this ruling. You will also know, we have asserted 3 new Orange Book-listed patents related to the Film against the ANDA-filers and are awaiting responses. We continue to have confidence in our patent estate and our ability to continue to defend our intellectual property.Mark will now provide more insight into the financials.

[Mark Crossley, CFO & Executive Director]

Thank you, Shaun.I want to start off by highlighting that the market backdrop in our largest market, the United States, with 80% of net revenue, remains very healthy with continued underlying growth in the low double-digit range. In addition to the regulatory measures that have taken effect to expand treatment capacity, overall public awareness of the epidemic in the U.S. has continued to grow. The number of health care providers signing up to treat OUD, including physicians, nurse practitioners and physician assistants, has continued to increase in the first quarter. And thus far in the year, the number of sign-ups is outpacing 2017 levels. The dynamics we're experiencing in the U.S. market continued in the first quarter where positive market growth and low single-digit net price improvements were more than offset by competitive pressures, channel mix impacts as well as the one-off impact of higher destocking versus the base period. These dynamics in the U.S. are partially offset by the increase of the rest of world revenues, which continue to benefit from strength in the Australian and Canadian markets, as well as FX benefits in the period. As a result, our total Q1 net revenues declined 4% to $255 million. As Shaun mentioned, we anticipated this top line performance for the quarter and are expecting the growth dynamic to reverse in the second half of the year when SUBLOCADE uptake is expected to accelerate.Turning to SUBLOCADE. We had modest initial revenues in the quarter, primarily reflecting distributor stocking. While it remains early in the launch, when we look at the 2 months through April since SUBLOCADE has been available, it's fair to say that we're pleased with the initial physician and patient enthusiasm with which this exciting new treatment is being met. The volume of patients using our branded in-support hub services have been running above our expectations and outperforming industry analogues. While this is a positive development for helping manage the patient journey, including assisting with benefit investigation, ordering of the product and facilitating appointments, it is causing some normal logistical challenges. As we've previously pointed out, this is expected for a new go-to-market model required for SUBLOCADE. And we're making the necessary improvements, including additional representatives for our in-support hub in order to accommodate the higher volume and provide a seamless patient-physician experience.We're also pleased to report that the target payer coverage for SUBLOCADE is running ahead of our plans. Current coverage stands at over 75 million lives, including commitments from UnitedHealth, Humana and North Carolina Blue Cross Blue Shield. This equates to about 25% of total covered lives and leaves us confident that we are well on our way to have broad market access for SUBLOCADE by the end of the first year of launch. In addition, as Shaun mentioned earlier, this access is complemented by the fact we have received from the centers of Medicare and Medicaid services a unique temporary Q code that we expect will greatly simplify billing for Medicare and Medicaid patients. Codes are expected to be in effect July 1, and they will automatically roll over to permanent J-codes in due course at the end of the year. As we indicated in February, we'll begin sharing key uptake and adoption metrics for SUBLOCADE beginning with our half 1 2018 results at the end of July. Additionally, we've decided to break out net revenues from Q2 onwards in order to reduce modeling uncertainty for you and to allow you to correlate net revenues with the prescribing metrics.Now briefly looking down further into the P&L. Starting with the operating line, you'll see that we've reported a decline in adjusted operating income to $99 million in Q1. This was expected and principally reflects the sales, deleveraging along with increased launch in support investments for SUBLOCADE and RBP-7000, partially offset by lower R&D costs versus the base period. As we've discussed over the last year, the infrastructure investments we're making are critical to our long-term success and sustaining our competitive advantage. SUBLOCADE is the first and only once-monthly extended release buprenorphine on the market, and it is vital we get the patient-physician experience right to maximize our long-term prospects. Similarly, we believe the right thing to do is to invest behind RBP-7000, our once-monthly risperidone long-acting injection. We formed a new behavioral health unit to manage the product and have already filled key leadership roles. We're working hard on finalizing the commercial build-out so that we will be positioned to launch on track in Q4 if approved. As discussed at the full year results, these investments we are making in RBP-7000 organization are included in our full year net income guidance.Quickly turning to adjusted net income in the quarter. We saw a 3% decrease versus the prior year, primarily driven by the benefits from our lower financing costs as a result of the term loan replacements we executed at the end of 2017 as well as the lower tax rate, which came in at 17% for the quarter on an adjusted basis. For the full year, we continue to expect a high teens tax rate.Finally, turning to the balance sheet. You'll see from our press release that we continue to build our cash buffer. So at the end of March, our cash position stood at $895 million with net cash of $407 million. In terms of working capital performance, we saw a usage of cash versus the year-end. The increase in inventory reflects the ramp-up of SUBLOCADE, and we had an increase in WIP and finished goods. The decline in payables chiefly reflects the timing of payments at the quarter and related to government payers and destocking. We'll continue to deploy our cash on early-stage assets as they come available like the recent exclusive agreement with C4X Discovery. But otherwise, we continue to believe it's prudent to maintain a healthy cash balance for risk mitigation purposes.I'll turn it now back to Shaun.

[Shaun Thaxter, CEO & Executive Director]

Okay. Thank you, Mark.Wow. Given the progress we've made, I'm hopeful we're in the process of moving Indivior to the next level from a commercial point of view. As we begin our fourth year as a standalone company, I'm proud of what's been accomplished in a relatively short space of time. And I'd just like to remind everybody of some of the key milestones that we passed. First of all, we've maintained the resilience and profitability of our base SUBOXONE business, and we continue to invent and defend our intellectual property. Secondly, with SUBLOCADE's approval and launch, we are once again extending our global leadership position in addiction with what we believe is the breakthrough treatment for opioid use disorder. Shortly, we are hopeful that we will have created another growth avenue for Indivior with RBP-7000. If approved, we believe that RBP-7000 will be a successful new treatment that will address unmet patients' needs in schizophrenia. We're also continuing to build our pipeline of early-stage compounds based on the molecular pathways that have been identified as the most promising in potentially treating various substance use disorders. Development work is already underway with the Addex team on the lead molecule ADX71441 for which we have an exclusive license. You will also know that we recently signed an exclusive licensing agreement with C4X Discovery for the most advanced molecule focused on the orexin-1 receptor. Finally, we continue to strengthen our unique patient-focused and performance-driven culture, which is a key competitive advantage for Indivior.So that concludes our formal remarks, and we'd now be very pleased to answer any questions you may have.

[Operator]

[Operator Instructions] So we will take our first question from Max Herrmann of Stifel.

[Max Stephen Herrmann, Head of European Healthcare Equity Research & MD]

Three questions, if I may. Firstly, just wanted to understand how the treatment of SUBLOCADE as a medical benefit, in some cases, versus a prescription benefit might alter the way in which the product is reimbursed. Secondly, just on the financials, trying and get an update. You mentioned that there's been destocking in the market. I wondered whether you are now at normal stocking levels or whether you think those stocking levels are below or still above normal stocking. And then finally, just again, I was surprised in your first quarter numbers that your SG&A expense actually dipped on the fourth quarter given that you are in the ramp up on launch of SUBLOCADE. To get some more insight into the reasons behind that.

[Mark Crossley, CFO & Executive Director]

Okay. Max, this is Mark. Thanks for your questions. So starting with the medical benefit versus the RX, I think for us, that's a positive sort of development that's flowing through the medical side. Those costs associated with the disease space, entering emergency rooms and things of that nature, which are quite costly on the medical side of the plan, are now matched up very nicely with the cost of treatment. And so we like that those are going to be on the same side with probably about 80% -- 75%, 80% of the scripts running through that side. So we view that as a positive development when it comes from a reimbursement standpoint. And I think we see some of that in the access we have to date during the year with about 25% of lives covered. As we get to the financials with regards to the stocking, we are within the normal sort of range of stocking at this time. Not that there aren't occasionally 1 point or 2 of fluctuations within a quarter, but we think we're at -- in a good spot after the Q1 destocking that occurred. On the SG&A side, we are down versus Q4. I think some of the things to think about is within the company, we are normally phased kind of Q1 to Q4. There was some lumpiness, I would say, in costs in Q4 associated with one-off costs on setup for the launch with the hub and with some of the other services that are there. And then just to recall that we also are awaiting our OPDP approval, which will launch many of our formal commercial efforts on the marketing side, the preparation of materials, online marketing, et cetera, et cetera. And that right now, the clinical liaisons are working off of the PI. So that's led to some of that phasing that you may not have expected as you did your modeling.

[Max Stephen Herrmann, Head of European Healthcare Equity Research & MD]

Okay. Just following up on the medical benefit. Am I right in understanding that you would -- that would often just be included in the doctor's visit so there wouldn't be a kind of additional copay, it would be the same payments, so there's no incremental for having SUBLOCADE injected as well as the visit?

[Mark Crossley, CFO & Executive Director]

I think the way to think about the medicine itself is it would be injected at a doctor's office visit, but it would be covered under kind of a medical coinsurance. But as you know from our discussions at fiscal year-end, you have a copay card that will take that cost for most patients down to about $5. So we don't see that as a barrier with that program in place, and that program with such a high number of patients coming through the hub is also facilitated through that hub and makes it very seamless to the patient with an easy application of the copay.

[Operator]

We will now take our next question from Mr. Graham Parry of Bank of America Merrill Lynch.

[Graham Glyn Charles Parry]

So just the first one on SUBLOCADE. If you could actually give us a sales number and how much of that was stocking and whether you'd give us that number again in second quarter. And can you give us some more detail around what the teething problems actually are that you referred to so that your process are getting through and the way you think as you head into 2Q? Secondly, your thoughts on the new FDA draft guidelines that for 505(b)(2) filings for long-acting buprenorphine product depots referencing SUBLOCADE with just PK variability data. It looks like that's lowering the bar for the sort of copycat-type competition. So can you just give us a feel for the extent, which you think there's a risk of cheaper competition to SUBLOCADE before patent expiry? Thirdly, on cost saving. You discussed SG&A. If you could just help us understand R&D phasing through the year. Does bringing in the orexin-1 antagonist affect your phasing of R&D cost through the course of the year? And then finally, if you could quantify this destocking number in the U.S. market in the quarter as well, that would be very helpful.

[Shaun Thaxter, CEO & Executive Director]

Okay. Well, the easy ones to knock on the head is the FDA has not lowered the bar for competitor entry, but I'll leave Christian to explain that further about that and try and take the questions in sequence. So first of all, you asked about SUBLOCADE. We haven't given any net revenue numbers. And I think that we'd been very clear that, that wasn't something we weren't going to be doing at the first quarter, but equally have said that we'll share SUBLOCADE net revenue at the half year. So that's clear. We're very pleased with the level of interest from doctors and the numbers of patients starting the process with our hub for getting the SUBLOCADE product. And we're also very encouraged with the feedback from those doctors and patients who have actually experienced the product. So I think those are the 2 key things that we really need to focus on because if we know those things are going well, then the process in the middle is an efficiency process, how quickly can we get from the requesting the product to having the product delivered. So we've seen a very high utilization of our patient hub, which, again, we're very pleased about because that provides a sort of concierge search -- service to the patient and the doctor so that the administrative processing burden is shifted out of the doctor's office and into our hub. The utilization of that has been higher than anticipated. So that did create a little bit of a backlog and some capacity issues in the first few weeks, which have now all been taken care of, and we've put some extra capacity in there to manage the demand going forward. So I think everything is very much in line with our expectation across all of those measures. And we remain as upbeat and positive about all of that as we have previously communicated.

[Mark Crossley, CFO & Executive Director]

So maybe I'll handle the R&D costs and the destocking before we hand over to Christian to talk through kind of the 505(b)(2) pathway. So on the R&D, as we talked at the fiscal year-end, the phasing of that activity will be phased towards the back half of the year. We've got the Phase IV commitments coming from -- they're coming out of the approval. We've got our disease-based investments that we talked about, emergency room study and the fentanyl study. And we've got these early-stage assets that have come into the pipeline, and most of that activity is kind of end of Q2 into Q4. And most of the supply work that falls within R&D from an accounting standpoint is also in Q2 associated with RBP-7000. So that phasing was expected in our planning cycle. And I think we've laid that out at the fiscal year-end that, that phasing would be kind of in the latter 3 quarters but even more in the back half. When it comes to the destocking, I think it's safe to say that we're kind of down about 1/2 to 3/4 of a week of coverage or so and that equates to somewhere around 4 points or so of growth. And so then I think if you look through kind of the rest of our discussion on the net revenue, you can kind of back into the underlying in the U.S. at somewhere around minus 3%, minus 4%.

[Christian Heidbreder, Chief Scientific Officer]

[indiscernible] comments on the draft guidance that the FDA has articulated recently. This is completely in line with the previous guidance from the agency with respect to ANDA and 505(b)(2) pathways, which is also completely consistent with the guidelines that we had received during the development of SUBLOCADE. If you read very carefully the draft guidance, then you see that the FDA has clearly outlined that the proposed depot buprenorphine must be shown to be similar to SUBLOCADE with respect to several key parameters. So what FDA has done now is to take SUBLOCADE as the benchmark. And needless to say, if you go through the details of the parameters that must be matched, the hurdle is very high. I will not go into a lot of details, but the FDA is really focusing on key parameters of the unique profile of SUBLOCADE on top of the PK profiles. You also need now to take into account the accumulation of the multiple doses and that the estimated time to complete clearance of the drug after the steady state has been reached. So all these key parameters go far beyond the normal bioequivalent standard for generic drugs. And we truly believe that the unique profile of SUBLOCADE and the very tight variability profile following SUBLOCADE administration will be very difficult for a competitor to achieve. On top of that, may I remind you that we also have 8 Orange Book-listed patents that will -- 6 -- excuse me, 6 patents that will further increase the hurdle to any competitor depot buprenorphine.

[Operator]

We will now take our next question from Paul Cuddon of Numis.

[Paul Cuddon, Director for Healthcare Equity Research]

Just a few questions from me. I was just wondering if you could elaborate on the SUBLOCADE rollouts by territory. I think you were initially focusing on areas of higher prescribers, early adopters and late [indiscernible] going to get reinsurance -- I'm sorry, reimbursement and coverage. So if you could run us through the geographic rollout, that'd be great. And the federal briefing on the 4th of June, what do we expect to come out of that? Is that sort of decision day on the appeal? And finally, on the Atrigel and like that's gets into both the bioequivalence and the launch of schizophrenia where you've talked about 76% of patients having recurrent oral supplementation. So is there sort of month-long relief also going to be a key feature for RBP-7000?

[Shaun Thaxter, CEO & Executive Director]

Okay. So the first question was on the SUBLOCADE rollout by territory. I mean, we do have national coverage in all territories. So we have prioritized, as you've suggested, very thoughtfully the decisions who think are most likely to embrace the technology first, overlapped with where we think the early payout coverage will come from and other parameters to try and ensure that we get an early uptick. As we've already said, the demand on our hub services has been very pleasing and exceeded our initial expectations very well, so we're very encouraged there.

[Javier Rodriguez, Chief Legal Officer]

So in terms of your question on the federal appeal, we don't have a hearing date scheduled yet. So that's pending. Where we are in the process is we are in briefing. And in June, our initial brief on those appeals will be due.

[Paul Cuddon, Director for Healthcare Equity Research]

Okay. And then finally, on the positioning of RBP-7000 with Atrigel and sort of the broader sort of market use of oral medication on top of the long acting.

[Mark Crossley, CFO & Executive Director]

I think you're spot on, Paul. I mean, the profile that Atrigel provides with the active will be a key differentiator as we go to market with that product.

[Operator]

We will now take our next question from Nick Keher of RBC.

[Nicholas Keher, Analyst]

A lot has been asked already, but just on SUBLOCADE, on the rollout. To be quite -- I know this is early days but if it's anecdotal, could you provide the input on perhaps what type of patients that the product is being used for by the physicians now they've got it in their hands? So are they going for the patients that have failed therapy previously, new patients, stabilized patients, et cetera? And then I'll also be interested to hear if you could give us an idea of if these patients who might have been on film being switched over? Or are we seeing some sort of -- yes, are we seeing share taken from perhaps other products in the market as well?

[Shaun Thaxter, CEO & Executive Director]

Yes. I think, as you rightly said at the start, it's too early to really draw any firm conclusions on any trends. Clearly, SUBLOCADE is indicated to be given on patients who've already been initiated on other forms of buprenorphine, be it a tablet or the film. And clearly, doctors are forming in line with that. So the feedback that we're getting is that patients are doing well on it. We know that those of you who will -- who were at ASAM probably picked up the buzz among the doctors who tried the product and sort of anecdotally reporting that they're pleased with the results, and so are their patients. So it's really hard to overinterpret a very small amount of data so early in the process. As much as we would love to be able to sort of lay it all out there, I mean, it's just too soon. We just don't have that much hard data to go on, but we will be very pleased to share what we have at the half year.

[Operator]

We will now take our next question from Nick Nieland of Citi.

[Nick Peter Russell Nieland, Vice President and Analyst]

It's Nick Nieland. I've just got a couple questions, please. The first one is, do you expect the launch of RBP-7000 to be a similarly slow rollout like SUBLOCADE? Or do you think the prescribers will adopt this medication quicker given their familiarity with injectable antipsychotics? I.e., will it be a bit more of a substitution? And then do you have anything further you can report on your negotiations with any of the ANDA filers on a potential for a settlement on SUBOXONE Film?

[Shaun Thaxter, CEO & Executive Director]

Okay. So with the RBP-7000, we're actually launching into a very different type of market, so it's difficult to draw a comparison. I think you're absolutely right to say surely this is a physician population. They're comfortable with the concept of the technology. They're already utilizing it to a high degree and an ever-increasing degree. And therefore, they must be familiar with the distribution system. So some of those things that other doctors in addiction space are learning, these guys know how to do. So absolutely. What I think is going to be different about the schizophrenia category, of course, that we're not the leader in schizophrenia. And we don't have those very strong long-term trusted adviser relationships that are such a strong driver of our success in the addiction field. So it will be a slow build for different reasons. And I think that's all perfectly sort of logical. And the -- just remind me of the second question.

[Nick Peter Russell Nieland, Vice President and Analyst]

Just about whether you want [indiscernible]

[Shaun Thaxter, CEO & Executive Director]

Yes. There's nothing to add on the ANDA filers. I mean, we've always said very consistently, we believe in our ability to generate and defend IP. I think our track record speaks for itself there. And at the same time, we're always ready to talk at the settlement where we believe that the settlement terms reflect the strength of our position and are the right thing to do for shareholders. So we've got no news on that front other than the fact that our position remains. The door is always open. But unless someone comes through the door, we'll continue to assert our patents and defend our intellectual property with great vigor.

[Operator]

We will now take our next question from Stuart Goldberg of Kettle Hill Capital.

[Stuart Goldberg]

Mark, I missed the question earlier about the destocking. You said it was about 4 points of growth. I was wondering if there was anything else in there that led to a first quarter decline in discounting to your current base on the Film. And then I have a question on SUBLOCADE.

[Mark Crossley, CFO & Executive Director]

Yes, Stuart. I think you're right in the recall with regards to the impact of the destocking. It is about 4 points, somewhere between about 1/2 and 3/4 of a week of on-hand. With regards to the balance of the dynamics, what we're seeing is a bit of continued tactical rebating that we've talked about. This is all about maintaining formulary as well as this Managed Medicaid mix that really picked up in the back half of last year where we're seeing that channel is growing in kind of the high teens at 18%, 18.5% or so versus the base business, the CMC, that's growing in mid-single digit. So that's having that negative mix impact on the business. We're excited that people are getting -- is getting access to treatment, which is very key. It's just coming in an area where the rebates are a bit higher based on the dynamics with the government. So that's causing that other mix that's getting us to the underlying growth in the U.S. that we talked about earlier that's in the 4% -- minus 4% range.

[Stuart Goldberg]

Okay. And then when you were talking about the SUBLOCADE hub, is that more of an issue that you didn't have it ready? Or is it a demand issue? I mean, a little bit more if you could and a clarification on the hub and what went -- what was going wrong there.

[Shaun Thaxter, CEO & Executive Director]

Yes. It's not so much that anything is going wrong. I mean, we had it organized and were and remain well prepared, I think. When we sort of used the term hub, it's really the whole process, the doctor's office sort of learning the processes of using the hub. We put field reimbursement specialists on the ground to go around and help doctors' offices, but of course, there's only so many they can get to in a day. We did have overutilization of the hub, which we see as a very positive thing because it means that doctors trust Indivior and the services that we provide to help make things as smooth as possible for patients. And that's what they've relied on over the years, to help provide the best evidence-based treatments that they can. So they're good problems to have. It's problems with a small p. But nevertheless, a need to continue to improve and develop it. And we've looked at every type of technology that's -- have this type of distribution and hub services, and we are advised that just the sort of friction that we're experiencing is very normal and customary. Just about everybody who's run this process has experienced these types of challenges. And it's important not to get them out of context. I think we've always been transparent and said, look, we knew that it would take a few months to -- for all this to settle in, and it's all within our sort of normal range of expectation. So overall, we're very encouraged.

[Operator]

That will conclude...

[Mark Crossley, CFO & Executive Director]

[indiscernible]

[Operator]

Apologies. That will conclude today's Q&A session. I would now like to turn the call back to Mr. Thaxter for any additional or closing remarks.

[Shaun Thaxter, CEO & Executive Director]

Yes. Well, I'd just like to thank everybody for their continued interest and support. And we will look forward to seeing you in our one-to-ones at our conferences and, of course, at the half year. So thank you very much for being on our call today.

[Operator]

Thank you, ladies and gentlemen. That concludes today's call. You may now disconnect.