GW Pharmaceuticals Shs Sponsored American Deposit Share Repr 12 Shs (GWPH) Q4 2018 Earnings Conference Call Transcript

Finally, on this call, Scott Giacobello, Chief Financial Officer, will review our financial results. Let me now hand the call to Julian for his update. Julian?

Julian Gangolli -- President, North America

Thank you, Justin. I wanted to begin by expressing how pleased we are to see the stronger level of support for Epidiolex in these first few months of commercial availability. We always believed that Epidiolex had the potential to become an important new treatment option within the epilepsy field and we are encouraged by the fact that early into the launch, we are seeing Epidiolex demand coming from both major academic epilepsy centers as well as private practice epilepsy clinics. Sales organization has to date interacted with about 70% of the target universe of 5,000 physicians.

In addition, 100% of all Level 3 and 4 epilepsy centers have been called on by our sales organization. These interactions have also been supported by an extensive series of educational broadcasts and speaker programs to support the launch with over 600 physicians attending these educational events. We have also hosted approximately 160 local events with patient advocacy organizations as they represent an important channel of communication and sharing within these patient communities.

Turning to demand. Just to remind everyone on the call, the commercial launch date for Epidiolex was November 1st of last year. Through the first two months of launch to December, over 4,500 Epidiolex new patient enrollment forms were received. In the same two-month period, over the 500 physicians, out of our target audience of 5,000 physicians generated dispensed prescriptions. We are highly encouraged by this level of new patient enrollment and prescriber activity in just the first two months.

In light of the short selling period from November 1st to December 31, we thought it would be helpful to provide investors with some color on activity in January in order to shine some light on initial trends beyond the two-month time period. Prescription growth in January 2019 over December 2018 was approximately 150%. We are encouraged by this month-on-month growth but we'd like to point to two important factors that have contributed to the strong growth in January.

The first is that the extent of demand in the first month of launch namely, November Limited our hubs ability to process new patient enrollments in a timely fashion, that coupled with the standard new to market block that some payers used to regulate and control new product introductions, created a bolus of commercial patients eligible for reimbursement in the January timeframe. In addition, many of the states, only made their coverage determination known in January of this year, again, causing another bolus of Medicaid patients to get prescriptions filled in January.

Building on the payer discussion, I'd like to update investors on our payor initiatives. Over the last 18 months, we have shared with you that one of our major priorities has been engaging with payors. As I mentioned earlier, both in the commercial and Medicaid channels, it is not unusual for plants or states to institute a new to market block before they make a coverage determination. This could make the process of getting prescriptions dispensed onerous during this time period.

We are very encouraged however that many payers early into the launch have understood the value proposition for Epidiolex and have made a coverage determination for the product. Turning first to the commercial payers, building on our early win in November with Express Scripts which placed Epidiolex as a preferred brand on their national formulary, we have seen a number of the major payors in December and January make favorable coverage determinations. If we look at all commercial lives covered in the United States, 80% of lives now have a coverage determination with 60% of all lives with either no PA or PA to label.

Turning to State Fee for Service Medicaid as of the end of January, 99% of states covered lives have made a coverage determination, with over 50% of them with either open access or a simple PA to label. And in Managed Medicaid, again as of the end of January, 90% of lives have a coverage determination, 10% are uncovered and some 30% with a PA to label. The balance have coverage, but many require a second requirement be met, such as a failure on another AED or some other requirement. Overall, we are happy thus far with our payor coverage and our goal for 2019 is to work on reducing the PA burden for the physician and work with those payors that have not made a coverage decision or where improvements can be made.

I did want to briefly touch on our distribution model enhancements. We launched Epidiolex in November with a closed in network set of providers, including a hub vendor, the triage's new patient enrollments to one of our five specialty pharmacies. As I mentioned earlier, due to the meaningful demand generated in the first month, it became clear that we needed to improve efficiency, both at the hub and the speed with which the specialty pharmacies needed to move through the PA process.

During the November, early December time frame, it was taking somewhat greater than four weeks in some cases to fill product. We instituted a number of enhancements, including significantly improving the hubs triage efficiency and also opening up a number of other specialty pharmacy sites including some 40 institutional based specialty pharmacies, i.e. SPs that reside within a key academic medical center, and in addition, we have opened up a number of CVS and Walgreen community-based specialty pharmacies, bringing our distribution network to about 130. The impact of these enhancements has been significant, with many dispensing locations now being close to key epilepsy centers, which is a major benefit for patients, caregivers and physicians.

In addition, the overall effect of these changes has been to meaningfully reduce the time it takes from presentation of the prescription to dispense or what is known as time to fill. We believe this retail light model will serve the needs of physicians, patients and caregivers over the coming years.

Looking qualitatively at the prescriber base feedback, we see that clinicians are focused on their young LGS and Dravet syndrome patients first. They have also indicated that due to the complex nature of the disease, and the number of concomitant drugs, they are likely to titrate Epidiolex with the label guidelines, titrating to 10 milligrams per kilogram and observing the efficacy effect before titrating up to higher doses. So these early months are also titration prescriptions which is informed as you model early revenue.

We are now actively migrating the approximately 900 expanded access and open label extension patients to commercial product. This transition is expected to be complete by end of the second quarter for most of these patients. I know that many of you have done physician course to gain a sense for early interest. We've been running our own waves of primary research since launch with over 200 healthcare providers or HCPs to assess their initial perspectives. What we found was that HCPs exhibited high awareness of Epidiolex FDA approval and recent commercial introduction. HCP characterized existing LGS and Dravet patients as being highly refractory and few are adequately controlled that's making the vast majority immediate candidates for Epidiolex.

55% of these respondents indicated that they already prescribed Epidiolex with 92% expecting to increase their prescribing in the next three months. 89% have been asked by patients or caregivers about Epidiolex specifically with 79% having being asked about Epidiolex on a weekly basis. I hope these observations are consistent with what you have heard in similar surveys. Our marketing and medical information teams continue to be very active in the marketplace, delivering an extensive array of resources and materials to support the sales team as they educate healthcare providers, caregivers and patients. Our medical information team hosts a dedicated in-house support center for both caregivers and HCPs with the objective of providing high quality, consistent and comprehensive information in an empathetic and caring manner. This resource is being widely utilized.

Finally and perhaps, most importantly we've been heartened by the number of spontaneous reports that we have received both from physicians and caregivers as to the meaningful difference, Epidiolex is making in patients' lives and the reduction in seizures that these particular patients are experiencing. Overall, I am encouraged by the high level of interest from physicians and patients, encouraged by the number of very important commercial and state payors that have made early and favorable coverage determinations and that our world-class US Epidiolex commercial team is executing the launch plan effectively. The metrics we share today are we believe positive and support our belief of a successful launch year for Epidiolex here in the US. In Europe, we are also making significant progress.

Let me now ask Chris Tovey, GW's COO, to provide an update on Europe commercialization. Chris?

Chris Tovey -- Chief Operating Officer

Thank you, Julian. In Europe, we look forward to the CHMP opinion in the next quarter. It is one quarter later than previously communicated for two reasons; first, we've been keen to update the file to include the results from the second positive Dravet trial reported to the awards the end of last year, which we believe will be very supportive and important for label discussions. Second, we've taken administrative steps related to Brexit, which has necessitated the transfer of the file from our UK affiliate to a Continental European affiliate. Subject to a positive CHMP recommendation, formal EU approval would occur two months after that opinion.

Turning to commercialization now, I wanted to start by reinforcing that we strongly believe that European commercialization will benefit from sharing a common brand name Epidiolex with the US market. One small point to note though is that the European brand name while sounding exactly the same as the US name is spelt slightly differently with letter of Y in place of the second letter I in the US brand name(ph)methodnics .

Moving on to preparations, we're now in the final stages of the Epidiolex European medical and commercial build out and are planning for launches in the five major European markets starting in 2019 with exact timing dependence on securing appropriate pricing and reimbursement. We are now trained sales force for the early launch markets of France and Germany. Additionally, EU country launches are expected to start in 2020 and our commercial leadership team is currently focused on completing necessary pricing and reimbursement pre-launch activities, which should been encouraged by strong engagement from the respective reimbursement authorities.

The extensive medical and pre-commercial activities required to deliver a successful European launch also continue and we're actively connecting with the key physician communities we plan to serve. We completed national advisory boards in all the major markets and we will continue to have a significant presence and data exposure at key national and International Congresses throughout this year to reinforce the successful activities over the last 18 months.

Based on recent primary research in the EU five countries, awareness is high among specialists and typically, they have patients in their clinics on a weekly basis asking for CBD. In addition, this market research, also showed that spontaneous awareness of Epidiolex was similar in the EU five countries compared with that recorded during the US pre-launch period. The GW European commercial organization is deploying a hub-and-spoke model for the initial EU five launch phase, comprising a centralized and very experienced GW team, working closely with a high quality country based contract customer-facing organization, and across the five major markets we plan a total of 17 sales professionals and 17 MSLs, a model that reflects the concentrated prescribing base in Europe, and the high science approach we plan.

Looking now at manufacturing, which also falls under my responsibility. Our commercial manufacturing supply chain is running very smoothly. We are confident that our capacity is more than sufficient to make sure launch requirements in both the US and Europe and our manufacturing expansion plans are on track to service what we expect to be robust, long-term demand.

Thank you and let me hand the call to Volker for his update.

Volker Knappertz -- Chief Medical Officer

Thank you, Chris and good day, everyone. I'm pleased to report to you today that all three core elements of our pipeline are progressing well. These are Epidiolex and its life cycle management, development of Sativex for the US market and our clinical pipeline programs with the time of primary focus on CBD.

Regarding Epidiolex lifecycle management, we are working on important clinical developments, as well as formulation enhancements. On the clinical front, we are currently focusing our efforts on tuberous sclerosis complex or TSC and Dravet syndrome. TSC affects approximately 50,000 individuals in the United States and 1 million individuals worldwide both children and adults. Epileptic seizures are the most common clinical manifestation of TSC affecting more than 70% of patients. Comorbidities include cognitive impairment, autism spectrum disorder and neuro behavioral disorders.

The results from the TSC field trial are expected in the second quarter of this year. In this trial, we are testing doses of 25 milligrams per kilogram per day and 50 milligrams per kilogram per day, which chosen based on open label experience in TSC patients from the expanded access program. These doses are higher than those tested in the Dravet and LGS trials and will provide useful additional information on both efficacy and safety at these different dose levels.

The primary endpoint of this trial is the change in frequency of seizures associated with TSC during the treatment period compared to baseline. This primary endpoint shared some similarities to that of the LGS and Dravet pivotal studies. But it also includes TSC associated seizures, which consist of focal but it also includes TSC associated seizures, which consist of focal seizures with and without impairment of consciousness or awareness, focal onset seizures with secondary generalized convulsive seizures and to generalize seizures that are accountable. In the previous Epidiolex epilepsy development program, several of these seizure types were responsive to Epidiolex. Subject to positive results, we expect to file a supplemental new drug application for the TSC indication in the fourth quarter of 2019.

Shifting to Rett syndrome, we have opened the IND for pivotal placebo-controlled trial in 252 patients and expect this to commence in the second quarter of 2019. Regarding Epidiolex formulation enhancements, we have developed a capsule formulation and an improved oral solution, both of which have promising intellectual property protection potential. Phase 1 work on both these formulations is under way and we believe that these initiatives will be valuable elements of our life cycle management strategy for Epidiolex. Beyond Epidiolex, Sativex represents an exciting late stage pipeline opportunity for GW.

We believe that the most rapid path to FDA approval for Sativex is for an indication of spasticity in multiple sclerosis. That reminds you that Sativex is currently approved in over 25 countries outside the United States in this indication. In December 2018, we held a highly constructive meeting with the neurology division of the FDA and believe that we now have a good understanding of the optimal regulatory pathway for this product in the US. This centers on conducting an additional pivotal clinical trial to buttress the wealth of existing clinical trial data. We expect to commence this trial toward the end of this year.

Importantly, Sativex also represents an exciting opportunity in the US beyond MS spasticity where CBD/THC botanical product is scientifically appropriate. But with over 10 placebo-controlled trials of Sativex completed in other indications, we believe there are numerous follow-on indications to explore. As an example of the breadth of opportunities that Sativex may present, you may have read recent media coverage regarding an investigator-led study that has recently commenced in the United Kingdom to evaluate Sativex for the treatment of patients experiencing symptoms of agitation or aggression associated with their dementia.

As many of you appreciate this can often be one of the most challenging aspects of the illness, both for the person with dementia and those caring for them. This study will evaluate whether it's feasible and safe to treat agitation in people with Alzheimer's disease with this medication. There has been no new dementia treatments in over 15 years and it is a vital that we develop and understand the contribution cannabinoids can make in improving the symptoms and lives of people, as well as their caregivers.

Regarding cannabidivarin or CBDV, we are pursuing development of this molecule in the field of autism spectrum related disorder. This program includes a Company-sponsored open-label study in autism, which we expect will include approximately 30 patients, an investigator-led 100 patient placebo-controlled trial in autism spectrum disorder to commence in the first half of 2019 and an open label study in Rett syndrome with seizures, which is due to commence in the first half of 2019, as well.

Finally, we expect to actively advance our IV CBD formulation in a condition called neonatal hypoxic-ischemic encephalopathy or NHIE by commencing a Phase 2 clinical trial in the second half of 2019. We also continue to evaluate the promising data from both the glioblastoma and schizophrenia Phase 2 studies with a view to advance these programs and we'll update you on our next steps during the course of this year. Thank you. And I look forward to updating you regarding our progress over the course of 2019.

And let me now hand the call to Scott Giacobello to provide the financial review.

Scott Giacobello -- Chief Financial Officer

Thank you, Volker and good afternoon. I'll now provide some high level comments on GW's financial results for the three months ended December 31st, 2018. Our results are presented in accordance with US Generally Accepted Accounting Principles in US dollars. As previously communicated, we changed our year-end from September 30th to a calendar year-end. As a result, we will file the requisite transition report on Form 10-KT shortly with the SEC and this filing will include a more detailed discussion of our results.

Starting with revenue. Total revenue for the quarter was $6.7 million, an increase of $2.7 million from the prior-year quarter. This increase is due primarily to Epidiolex net sales of $4.7 million in the quarter, following the November launch. Moving to R&D spend, total research and development expense for the quarter was in line with the previous quarter at $29.1 million. This result represents a decrease of $7.1 million from $36.2 million in the prior-year quarter. This decrease is mainly due to costs related to the scale up of Epidiolex growing and inventory build, which were expense that incurred in the prior-year quarter. Following approval, these costs are now capitalized in inventory.

Turning to SG&A. Selling, general and administrative expenses increased to $49.1 million in the quarter from $25.2 million in the prior-year quarter. This substantial increase is primarily the result of the build out of our commercial operations in both the US and Europe and costs related to the November launch of Epidiolex in the US. The current quarter spend represents a slight decrease from the previous quarter spend of $52.7 million, due to one-off US launch expenses incurred in the previous quarter. This has all resulted in a net loss for the quarter of $71.9 million compared to $61.8 million in the prior-year quarter.

Moving to cash flow. Net cash provided by financing activities was $324.5 million in the quarter, reflecting the equity financing completed in October. Capital expenditure for the quarter was $18.8 million, reflecting continued investments in the expansion of our cannabinoid production facilities. Net cash used in operating activities for the quarter amounted to $74.5 million compared to $51.6 million for the prior-year quarter due mainly to the increase in SG&A costs previously discussed. The resulting net increase in cash and cash equivalents for the quarter amounted to $236.6 million. At December 31st, we held closing cash of $591.5 million.

Turning to guidance. Operating expenses for the quarter ended December 31st, 2018 were $80 million. We expect operating expenses for the year ended December 31st, 2019 in the range of $395 million to $425 million, reflecting the ramp up of the Epidiolex launch in the US, launch preparations in Europe and continued investments in our R&D portfolio. We also anticipate capital expenditure in the range of $30 million to $40 million, related mainly to manufacturing expansion.

Thank you. And I'll now hand the call back to Justin.

Justin Gover -- Chief Executive Officer

Thank you, Scott. In closing, early indications give us confidence that the Epidiolex launch is on track to show strong and consistent growth. I remind you, though, that it is very early days and we have much to learn in the coming quarters in order to establish a clearer picture of the sales trajectory. Looking ahead, through 2019, we look forward, not only to continued commercial execution, but also to maximizing the Epidiolex opportunity by expanding into areas such as TSC and Rett syndrome, launching in Europe, enhancing formulations and continuing to broaden exclusivity protection.

We continue to believe that our Orange Book-listed patents and other approaches to the lifecycle management offer the very real prospect for exclusivity to extend beyond the orphan protection period. With the expected commencement of the US Phase 3 clinical program for Sativex, a product for which we already have a wealth of data, we believe that GW is already demonstrating that our platform has real value and that Epidiolex should be the first of many novel cannabinoid medicines for GW to commercialize.