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Saturday, 17 August 2013

ULURU's CEO Discusses Q2 2013 Results - Earnings Call Transcript

Executives

Kerry Gray - President and CEO

Analysts

J.J. Hart - Analyst

Charles Gramy - Analyst

ULURU Inc. (ULUR.PK) Q2 2013 Results Earnings Call August 15, 2013 9:00 AM ET

Operator

Good morning. And welcome to the ULURU Second Quarter Conference Call. All lines will be muted during the presentation portions of the call with an opportunity for questions-and-answers at the end.

At this time, I would like to introduce your host, Kerry Gray, President and CEO. Thank you and enjoy your conference. You may proceed, Mr. Gray.

Kerry Gray

Thank you. Good morning and thank you for joining the earnings call. Let me start by reading the Safe Harbor language. This conference call will contain certain statements that are forward-looking within the meaning of Section 27A of the Securities Act of 1933 as amended, including but not limited to statements made relating to the future product and financial performance of ULURU Inc., expected business development, projections of product sales, plans and strategic relationships, technical advances and our commercialization of Altrazeal.

When used in this conference call, the words may, targets, goal, could, should, would, believe, feel, expect, confident, anticipate, estimate, intend, plan, potential and other similar expressions maybe indicative of forward-looking statements.

These statements by their nature involve substantial risks and uncertainties, some of which are beyond the company’s control. The company cautions that various factors, industry trends and the food and drug administration regulations could cause actual results to or outcomes to differ materially from those expressed in any forward-looking statements of the company.

Any forward-looking statements presenting as the date in which these statements are made, and the company undertakes no obligations to update any forward-looking statement or statements.

These statements are subject to numerous risks and uncertainties, including but not limited to the risk factors detailed in the company’s annual report on Form 10-K for the year ended December 31, 2012, and other reports filed by us with the Securities and Exchange Commission.

That being said, let me now start -- let me just give a brief introduction. Over the past 12 months, the character of the company has totally changed. A significant portion of the company’s resources is now diverted to production related activities, including the documentation associated with complying with our quality system.

The logistics associated with rolling out -- Altrazeal out into many international markets is not trivial. There is extensive internal paperwork and approvals required for all foreign language components.

Where possible, we are trying to anticipate the product rollout by getting dropped, cartons and lidding materials produced to review by our international partner. Currently, we are producing Altrazeal for launch in four countries, which we anticipate shipping by the end of August beginning of September.

In conjunction with our European partners, we continue to make solid progress. Now that summer vacation in Europe is concluding, we anticipate that we will be shortly updating you on further progress.

Despite all of the increased workload that production has given, we have maintained a constant headcount during the past nine months. We will continue with this headcount until our quality systems demand an increase in employee to comply with the requirements of the increased volumes.

Let me briefly discuss the financial statements. As stated in our press release of the delay in the shipment of our orders to Czech Republic, Slovakia, South Africa and Portugal, which reduced our revenue below our prior projection.

Our expenses continued to be below prior year, despite the increase in activities within the company. The cash expenses incurred in the second quarter were slightly above $500,000. It is planned to maintain our expenses at these levels to the balance of 2013 with the exception of special item such as potential clinical trial expense.

Over the balance of the year, we will be committing a small amount of capital expenditure to improve the production process for Altrazeal. Otherwise, we don’t anticipate any major changes to our financial statements for the balance of this year with the exception of increases in product revenue.

Let me move on to a very important issue that is our ISO audit. I am very pleased to report that this week we successfully completed our ISO 9001 and ISO 13485 audits. There were no non-compliance findings by the BSI auditor who is unidentified body.

For an organization of our size, I believe this is an outstanding result and reflects the quality of the individuals within the company. Compliance with ISO 13485 is essential for maintaining the CE Mark.

Given the number of issues within the medical devices in Europe, going forward it is anticipated that regulations will become more stringent and that ordering will be more demanding and unannounced orders will occur. As an organization, we are committed to maintaining the highest compliance standards and compliance with the regulations in our quality system.

Let me now move on to, update you on some activities in the United States. During the next 60 days we intend to initiate a clinical study within the United States with a highly influential clinician to provide additional credibility to support marketing activities for Altrazeal worldwide.

This study will be designed to show accelerated healings and pharmacoeconomic benefits compared to current standard of care. It is anticipated that in the not too distant future there will be a major change to the reimbursement program for wound care in the United States where it will be no longer fee-for-service which promotes the use of highly expensive ineffective treatments such as hyperbaric oxygen, but rather it will be capitative fee structure where cost effective products become the standard of care. We are very well-positioned to compete in that market and we are preparing to be able to take advantage of the opportunities this will present in the United States.

Having an additional randomized clinical study to support Altrazeal will further distance us from the competition. This with our ongoing European study should provide us with all the necessary control clinical data we require to differentiate Altrazeal from all of our competitors.

Now, I’d like to move on and discuss Europe. Our activities in Europe continue at a high paced, although the vacation periods tend to slow things down a little in June, July and August.

The activities are basically fourfold, launching Altrazeal in new markets, expanding the market and distribution partnership (inaudible), developing additional clinical support for Altrazeal and concluding clinical studies.

As we have reported, we are in the final stages of launching Altrazeal in Portugal, Czech Republic, Slovakia and South Africa. Shortly, we should be announcing additional market where we plan launching Altrazeal this year. It is accurate to say that the interest in Altrazeal is much broader than we had anticipated and in markets where we had thought pricing would have been an issue.

By year end we are looking forward to receive clinical results that we believe will clearly demonstrate the cost effectiveness and clinical benefits of Altrazeal, which are currently being conducted in Europe.

Let me now move to strategic relationships. There are significant activities regarding the expansion of Altrazeal marketing partnership network and also extending the areas where we are looking to launch Altrazeal.

Over the part 90 days, activities have increased or commenced in the Indian subcontinent, Southeast Asia, Korea, Latin America, Eastern Europe and the Commonwealth of Independent States.

I look forward to sharing with you our progress in this area in the near future. In addition, work has commenced on partner activities in muco-adhesive film technology. There are some near-term opportunities that have been pursued in this area.

Let me now move on to discuss our production. Now that our production is ongoing on the quarterly basis, we have assist ways in which we can reduce our production costs. Given the fluffy, light-weight and need to handle a powder carefully, not to change its transformation characteristics, conventional feeling systems are inappropriate to fill this material. Despite adverse issue that we modified volumetric fill up, a contract manufacturer has experienced some difficulties filling over that.

A weight-based system has been identified which will substantially increase accuracy and filling speed and reduce material waste. This system should be operative by year end. We are now in the process of identifying economic order qualities with carton, lidding and blister material. We are projecting significant cost savings from this project.

Also we are in the process of changing manufacturer of our bulk powder as our previous manufacturer no longer manufacture pharmaceutical grade materials, but it’s focused more in the area of serials and (inaudible) utilization of fruits.

As it’s anticipated by mid 2014, our cost of bulk powder will be reduced by approximately 60%. By implementing the above programs the cost of the finished product should be reduced by 40% by this time next year.

Let me now discuss the strategic meeting that will take place next week. In conjunction with the business from our European partners, we intend to discuss the strategic direction of the Altrazeal franchise. We are now in the position to focus on new product development for Altrazeal.

There are many possibilities including antimicrobial, growth factors, collagen and the [breeding] agents. To maximize the global opportunity we intend receiving input from both U.S. and European wound retail experts. Products that are widely used in Europe are not so commonly used in United States and vice versa.

One opportunity that will be evaluating there is a possibility to utilize Altrazeal with antimicrobial solutions to reduce antibiotic use. This is becoming a major issue worldwide given the increase in resistance to antibiotics.

The ability to remove antibiotic used in wound care will be a very positive development and a significant cost saving for the medical system. Initial work with those factors indicates we could have a highly cost effective approach compared with current treatments for the delivery of biological active compounds. This could place us at major competitive advantage as current approaches would be 10 to 25 times more expensive than our approach.

Given the versatility of Altrazeal and the many potential product opportunities, it is important that any new development be carefully prioritized.

Let me move on now to publications. Currently, we are working with three groups to publish both clinical and pre-clinical work that is being conducted on Altrazeal. Extensive work was previously conducted with the University of Texas Southwestern Medical Center. This work is now being evaluated for publication.

We are working with the Wound Care practice in Australia to present with the outstanding clinical data in Copenhagen to assist in the publication of this outstanding data in -- which includes 10 extremely difficult patients to treat.

In addition, we are assisting our European partners and make clinical advices, publishing clinical data obtained both in Europe and the United States, as well as a paper on bacterial inhibition which was reported in the second quarter. A paper on skin graft donor side has been accepted to publication and a paper on most control negative pressure will shortly be submitted for publication. Publications peer-reviewed journal led significant creditability to Altrazeal and increase awareness levels.

I’d now like to move on to discuss the number of activities we have ongoing, one is restructuring our balance sheet. We currently working on restructuring a number of our past financing to simplify our capital structure and reduce potential shareholder dilution. It is anticipated that will be in a position to announce this restructuring shortly.

We continue to evaluate ways in which we confirmed the operations with as minimal dilution as possible. This is a high priority with in the company. I’m very pleased with the amount of transactions that we ended into last June. It has provided us the necessary funding on the timely basis and relative to alternative structures has resulted in the significantly less dilution.

This financing together with a strategic investment made by Melmed Holdings have proved to be very positive for the company. If we would have used conventional pipe transactions, we would have to have given discounts of 30% to 40% with the 100% warrant coverage when our stock was only $0.27. This quarter resulted in dramatically more dilution.

I’d now like to move onto an area where we haven’t experienced the success I would have liked in managing investor relations. Frankly, we’re struggling in the area of investor relations. Despite this struggle, there has been significant appreciation in our market capitalization during the second quarter.

We are focused on attracting a medium-to-long term holders to invest in the company. Finding such investments -- investors is more difficult than investor to gamble in substance and stocks which trade massive volumes based on newsletters and other social media communications. We have may progress which should become more apparent in September.

This will take the form of more traditional approach including securing investment banking grade, market research from the company. Our objective is to get the market capitalization of the company to a level where we can attract small microcap institutional investors and our current market cap, even a small institution isn’t capable of participating because to make a meaningful investments, would necessitate accounting in excess of 10% holder which they wish to avoid.

This has been a very difficult process. So it was shifting through many potential alternatives, many of which are not entirely scrupulous. The progress of the business, the result we have achieved and the excitement we have in the near term has enabled us to attract higher caliber groups to take an interest in the company. I will divulge necessary time to this activity to maximize exposure to the correct investor audience.

I would now like to address investor questions that have come to my attention. The major question I see in here revolves around the appreciation in our market capitalization. I believe that I have just now addressed that situation. There are a number of diligent investors who do due diligence on our activity and keep abreast of the competition and follow product information releases from our competitors.

Recently, I became aware of a question regarding living skin equivalent products. There are many such products and approaches in this area. I believe there are greater than 20 to 25 products with Dermagraft and Apligraf being the dominant players.

Each products are highly expensive costing between $500 and $2,500 per application depending upon the size of the wound. Currently, the reimbursement system in the U.S. not only pay for these products but pay physicians a sizable fee to apply the product.

Like all categories in wound care, there are many similar products that are not differentiated. I repeatedly see small companies that are launching a new collagen product, a new silver product and these living skin equivalents. There are greater than 20 products in all of these categories which is also the case for other treatments such as alginate wounds, hydrogel and other approaches.

Consequently, a company has to convince the doctor that his silver or collagen is better than the competitor’s silver or collagen. This is a very difficult sale, particularly when the competitor may have 10 to 15 times the sales power of the smaller company. Altrazeal, on the other hand, is unique. Nobody has a similar approach and there cannot be a similar approach based upon our patent position until 2029. This provides us with a major advantage as we move forward.

Also with a number of the expensive approaches, with cost capitation looming, where a doctor will receive a fixed fee of say $2,500 to $4,000 to heal a patient, the doctor will be then focused on the most cost-effective treatment because that is how he is going to maximize his competition, which we believe will be a major benefit for Altrazeal. Utilizing 100% of his compensation on one visit does not appear likely going forward.

In summary, we continue to execute our business plans. With so much activity ongoing, it is very important that both ULURU and our partners maintain focus on systematically expanding the launch of Altrazeal.

We’re confronted with many opportunities which must be carefully prioritized. Great progress has been made on numerous fronts in the first half of 2013. We are significantly stronger company than we were 12 months ago, with the quality system in place and working which will enable us to keep pace with the ever expanding international demand for Altrazeal.

We’re focused on execution, being able to support our global activities from the clinical, marketing, production and logistics viewpoint. I’m confident that we’re positioned to do this at the required level. The second half of 2013 is shaping us to being a period of very high activity. I look forward to updating you on our progress.

Thank you. I’ll now answer any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of [J.J. Hart]. You may proceed.

J.J. Hart - Analyst

Good morning.

Kerry Gray

Good morning.

J.J. Hart - Analyst

Could you provide an update on their results, please?

Kerry Gray

The update is that the product is on the market. I get very little feedback as I would anticipate given the company we’re dealing with. I would expect that we will be hearing further information probably in the next 60 days.

J.J. Hart - Analyst

Great. Thank you.

Operator

Thank you. There are currently no additional questions waiting from the phone lines.

Kerry Gray

Well, thank you very much. I believe that we’ve made some significant progress. I’m totally convinced that it will take not too much of the time now before we’re going to be able to see some pretty exciting results coming from the company. And we’re totally committed to delivering this for our shareholders. Thank you very much. Sorry?

Operator

We do have a question from [Charles Gramy].

Kerry Gray

Yeah.

Charles Gramy - Analyst

Mr. Kerry, my compliments on your -- the strategic accomplishments that have been very impressive over the last six months to a year. My question though is a little bit more about as opposed to the strategic -- the more nuts and bolts of production. You mentioned that there was a small problem with the fill of some of the packages for delivery. Are we actually at a point where we are seeing orders and actually shipping in many of these markets? I know you mentioned five of the markets were actually delayed for shipment.

Kerry Gray

Yeah. We’re in the process of manufacturing right now. We’re not at right now producing it at the speed we would like in terms of -- we would like to get this process to producing 30-35 packs per minute.

We’re not at that level yet, but we do have as I mentioned -- we have identified the way in which we can get to that level by the end of the fourth quarter this year and that will be just changing our filling system. But we’ve now manufactured -- we’ll have manufactured by the end of this month nine batches of the product over the last 12 months. We’re supplying and fulfilling orders now.

Charles Gramy - Analyst

Thank you.

Operator

Thank you. There are no additional questions.

Kerry Gray

Thank you very much.

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Tuesday, 13 August 2013

Simcere Pharmaceutical's CEO Discusses Q2 2013 Results - Earnings Call Transcript

Executives

Jinsheng Ren – Chairman & Founder

Hongquan Liu – Chief Executive Officer

Yushan Wan – Acting Chief Financial Officer

Jie Liu D’Elia – Vice President, Business Development and Investor Relations

Analysts

Alex Liu – Brean Capital

Simcere Pharmaceutical Group (SCR) Q2 2013 Earnings Call August 13, 2013 8:00 AM ET

Operator

Hello everyone, and thank you for standing by for Simcere’s Q2 2013 Earnings Conference Call. (Operator instructions.) Today’s conference is being recorded. If you have any objections you may disconnect at this time. I would now like to turn the meeting over to your host for today’s conference, Dr. Jie Liu D’Elia, Simcere’s Vice President of Business Development and Investor Relations. Thank you, please go ahead.

Jie Liu D’Elia

Thank you and welcome to Simcere Pharmaceutical Group’s Q2 2013 Earnings Conference Call. Our Q2 2013 results were released earlier today and are available on the company’s website as well as on all newswire services. In addition, an archived webcast of this conference call will be available in the Investor Relations section of our website at www.simcere.com.

Joining us for today’s call are Mr. Jinsheng Ren, our Chairman; Mr. Hongquan Liu, our Executive Director and Chief Executive Officer; and Mr. Yushan Wan, our Acting Chief Financial Officer.

Before we continue, please note that the discussion today will contain forward-looking statements made under the Safe Harbor Provision of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. Simcere does not undertake any obligation to update any forward-looking statement except as required under applicable law.

I will now turn the call over to Simcere’s CEO, Mr. Hongquan Liu.

Hongquan Liu

Good morning, everyone, and welcome to Simcere’s Q2 2013 Earnings Call. With government policies impacting drug prices and restricting the use of antibiotics, our overall sales performance was less than ideal this quarter. Furthermore, as the market environment continues to change, we expect that the second half of this year will remain challenging.

Turning to our sales, impacted by factors such as government pricing policy and issues relating to the tendering process, sales of Bicun in Q2 2013 were RMB 124 million, a decrease of 18.5%. In the second half of this year, to moderate the further decline in Bicun sales, we plan to adjust the organizational structure of our sales team, increase marketing activities and adopt a more regional-focused sales approach.

Ongoing government restrictions on the use of antibiotics combined with China’s essential drug policy continued to impact sales of Anxin, Anqi, and Zailin which decreased 15.3%, 41.2%, and 30.7% respectively compared with the same period of last year. Faced with these challenges in the second half of this year we will devote more resources to key markets and hospitals while leveraging our optimized sales team and promotional activities to promote sales.

Sales of Endu, our oncology drug, were RMB 88.32 million in Q2 2013, representing a year-on-year increase of 32.3%. Our other oncology products, such as Sinofuan, [Giapaili], and Lowvo increased 9.8%, 192.0% and 15.3% compared to the same period of last year respectively. Sales of Jiebaishu remained stable.

In the second half of this year we will take advantage of the opportunities presented as the central government and provincial authorities adjust the drug reimbursement list. Our goal is to accelerate entry of our oncology drugs in to the provincial RDL as well as the reimbursement list of the new rural cooperative medical system which should help to boost sales.

Sales of our new product IREMOD were RMB 7.6 million in Q2 2013, representing growth of 22.4% year-over-year. This is not as fast as we expected, so looking forward we will optimize our sales team, focus on key hospitals, expand our product promotion, work to increase the effectiveness of our marketing activities and continue to work on IREMOD’s entry into the NRDL and provincial RDLs.

Now, turning to manufacturing, in Q2 2013 Simcere manufacturing facilities received the new GMP certification issued by the CFDA. I’m pleased to report that all of Simcere’s manufacturing facilities have now received the new GMP certification and the preparation of the relocation of Simcere’s Dongyuan facility is proceeding as planned.

In terms of R&D, we initiated the Phase II clinical trial for [Ederevon] (inaudible) combination in June this year. Also in June we entered into collaboration with BMS on development of subcutaneous formulation of Orencia for the treatment of rheumatoid arthritis. We have submitted a clinical trial application for Orencia which has been effected by the CFDA.

And on June 17, 2013, we entered into a share transfer agreement to sell Simcere’s approximately 99.99% equity interest in Jilin Boda Pharmaceutical Company to Zhuhai Rongding Equity Investment Partnership.

In the second half of 2013 we will focus on the opportunities presented by RDL adjustments and strive to have more drugs effected into the NRDL, provincial RDLs, and the essential drugs list. We will rationalize our current drug portfolio and R&D pipeline, optimize resource allocation, and improve the professional promotional capability of our sales team; and we will strictly control expenses and improve cost efficiencies in order to increase our profitability.

Thank you very much, and with that I will turn the call over to our acting CFO, Mr. Wan. I look forward to joining you for the Q&A session that follows.

Yushan Wan

Thank you, Mr. Liu. Now let me give you the financial overview for Q2 2013.

As announced on June 17, 2013, Simcere entered into a share transfer agreement with Zhuhai Rongding Equity Investment Partnership L.P. to sell the company’s approximately 99.99% equity interest in Jilin Boda Pharmaceutical Company for a total cash consideration of RMB 400 million. The assets and the liabilities associated with the sale are classified as “held for sale.”

Boda’s earnings results are listed under discontinued operations and Simcere’s earnings results are listed separately under continuing operations and discontinued operations. For Q2 2013, Boda’s total revenue was RMB 29.6 million compared to RMB 31.2 million for the same period in 2012. Boda’s net income for Q2 2013 was RMB 14.5 million compared to RMB 7.6 million for the same period in 2012.

Now moving to Simcere’s financials, for Q2 2013 total revenue was RMB 483 million compared to RMB 498 million for the same period in 2012, representing a decrease of 3%. Gross margin for Q2 2013 was 83.1% compared to 84.5% for the same period in 2012. The decrease was mainly due to a drop in sales of products with higher gross margins as a percentage of total sales.

Research and development expenses for Q2 2013 totaled RMB 45.15 million which represented a decrease of 16.5% from RMB 54.06 million for the same period in 2012. The decline was primarily due to us having completed the development of the company’s influenza vaccine products and its transition to commercial manufacturing. As a percentage of total revenue, research and development expenses decreased to 9.3% for Q2 2013 from 10.9% for the same period in 2012.

Sales, marketing and distribution expenses for Q2 2013 were RMB 280.0 million which represented a decrease of 0.8% from RMB 282.7 million for the same period in 2012. As a percentage of total revenue, sales, marketing and distribution expenses for Q2 2013 were 58.0% compared with 56.7% for the same period in 2012. The slight increase was due to an increase in marketing expenses.

General and administrative expenses were RMB 65.31 million for Q2 2013, an increase of 27.1% from RMB 51.38 million for the same period in 2012. The increase was primarily due to fees incurred during the company’s going-private process and an increase in share-based compensation expenses. As a percentage of total revenue, general and administrative expenses increased to 13.5% for Q2 2013 from 10.3% for the same period in 2012.

Income from operations was RMB 10.71 million for Q2 2013, representing a decrease of 67.5% from RMB 33.00 million for the same period in 2012. This decline was primarily due to a slight decrease in revenue and gross margin.

Investment loss was RMB 11.27 million for Q2 2013 compared to a loss of RMB 2.38 million for the same period in 2012. The investment loss was primarily due to an operational loss from the Simcere MSD joint venture in Q2 2013.

Interest expenses for Q2 2013 were RMB 10.96 million compared to RMB 18.39 million in the same period in 2012. The decrease was primarily due to reduced accounts receivables by adjusting commercial policies and increasing net operating cash flow.

Income tax benefit for Q2 2013 was RMB 10.31 million compared to an income tax benefit of RMB 0.50 million for the same period in 2012. The income tax benefit for Q2 was due to the reversal of unrecognized tax benefits and related accrued cumulative interest as a result of a lapse of the statute of limitations in accordance to the PRC Tax Administration and Collection Law.

Net income attributable to Simcere was RMB 8.23 million for Q2 2013, representing a decrease of 57.6% from RMB 19.39 million for the same period in 2012. Net margin, which represents net income attributable to Simcere divided by total revenue, was 1.7% for Q2 2013 compared to 3.9% for the same period in 2012.

As of June 30, 2013, the company had cash and restricted cash of RMB 643 million compared to RMB 201 million in 2012. The increase in cash was primarily due to the return of share transfer related to Shanghai Celgen for a cash consideration of RMB 244 million and improving net operating cash flow by adjusting our commercial policy.

Thank you very much for your attention. I would like now to open the call for questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, the question-and-answer session of this conference call will start in a moment. (Operator instructions.) Your first question comes from the line of Alex Liu at Brean Capital. Please ask your question.

Alex Liu – Brean Capital

Hi, good evening. Thanks for taking the questions. My first question is could you please give more color on your sale of Jilin Boda? What is the intention of selling the company and what is largely behind the deal?

Jiu Liu D’Elia

Yes, Mr. Liu will address the question relating to the rationale of sale relating to Jilin Boda.

Hongquan Liu

Jilin Boda has only one product which is an Iguratimod product, and Simcere, one of Simcere’s key products is Iguratimod as well. So when we acquired Jilin Boda several years ago there was only a handful, very few companies that actually manufactured and sold Iguratimod. So it was our strategic decision at the time to acquire Jilin Boda and then to acquire the Jilin Boda’s Iguratimod, which is priced at a lower pricing point than Simcere’s Iguratimod.

So at the time our strategy was to promote Jilin Boda’s Iguratimod in the second tier and third tier cities and even some rural areas while we focused Simcere’s products at the top-tier market at the higher pricing points. Now, several years later, there have been many generic Iguratimod products in the market, so now from a strategic perspective because the Jilin Boda’s Iguratimod pricing continues to deteriorate we decided to focus our resources on just Simcere’s Iguratimod, and then also focus on development of the second generation of Iguratimod which is why we made our decision to sell Jilin Boda.

Alex Liu – Brean Capital

Okay, thank you.

Operator

Thank you. (Operator instructions.) You have a follow-up question from the line of Alex Liu with Brean Capital. Please ask your question.

Alex Liu – Brean Capital

[Asks question in Chinese.]

Jiu Liu D’Elia

So let me translate Alex’s question. The question is regarding the privatization process of Simcere and he’s asking what Simcere’s process is in terms of going private. And then also once the company is privatized what will be Simcere’s strategic focus in the next several years.

Now, Mr. Liu has transferred the question to Mr. Jinsheng Ren, our Chairman, to address.

Jinsheng Ren

Thank you very much for your question, and as you know we proposed going private, we proposed the privatization of Simcere in March this year. And this going private process is ongoing as of now. Right now we don’t have any information to disclose, and if we do have information that must be disclosed according to applicable law we will certainly share that with you at an appropriate time. Thank you.

Alex Liu – Brean Capital

Thank you.

Operator

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I will now hand the call back over to Mr. Hongquan Liu for closing remarks. Thank you.

Hongquan Liu

Thank you very much for attending Simcere’s earnings call. Please do not hesitate to be in touch with us if you have any further questions. Thank you.

Operator

Thank you. Ladies and gentlemen, thank you for your participation in today’s conference. You may now disconnect. Good day.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

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Vision-Sciences' CEO Discusses F1Q 2014 Results - Earnings Call Transcript

Executives

Lisa Wilson - Director, IR

Howard Zauberman - Interim CEO

John Vittoria - Interim VP, Finance

Analysts

Irwin Gomberg - Irwin Investments (ph)

Nat Prentice - Altium Wealth Management

Vision-Sciences, Inc. (VSCI) F1Q 2014 Earnings Call August 13, 2013 8:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to Vision-Sciences’ Fiscal First Quarter, 2014 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 be given at that time. (Operator instructions) As a reminder, today's conference call is being recorded.

I’d now like to turn the conference over to your host Ms. Lisa Wilson, Investor Relations for Vision-Sciences. Please go ahead.

Lisa Wilson

Good morning, and thank you for joining Vision-Sciences’ financial results conference call for the first quarter of fiscal year 2014. Today’s call will include remarks from Howard Zauberman, Interim Chief Executive Officer; and John Vittoria, Interim Vice President of Finance and Principal Financial and Accounting Officer. They will be joined by the Company’s Chairman, Lewis C. Pell, for the question-and-answer period.

A number of forward-looking statements will be made during this presentation. Forward-looking statements are any statements that are not historical facts. These forward-looking statements are based on Vision-Sciences’ current expectations and are subject to a variety of risks and uncertainties that could cause the Company’s actual results to differ materially from the statements contained in this presentation. There is no assurance that any future results or events discussed in these statements will be achieved. Any forward-looking statements represent the company’s views only as of today and should not be relied upon as representing our views as of any subsequent date. For the benefit of those who maybe listening to the replay, this call was held and recorded on August 13, 2013.

With that, I would like to turn the call over to Howard Zauberman.

Howard Zauberman

Thanks, Lisa and good morning everyone. In the first quarter of 2014, we achieved modest top-line growth and reduced our net loss. This is the first step towards resetting Vision-Sciences’ foundation and building a long-term plan that rewards shareholders, which I will be discussing in greater detail later on the call.

But first I would like to introduce John Vittoria, our Interim VP of Finance. John joined Vision-Sciences as Interim VP of Finance in June, 2013. Prior to joining the company John was VP of Finance and Accounting at Biodel, a biopharmaceutical company and before that he held several senior level positions at both manufacturing and distribution companies.

With that, I’ll turn the call over to John to review the financial results.

John Vittoria

Thanks, Howard and good morning everyone. For the first quarter of fiscal 2014, our net sales were up 8% to $3.7 million as compared to $3.4 million in the first quarter of fiscal 2013. Medical segment sales were up 21%, the increase was primarily due to a 76% increase in sales to urology market as compared to the prior year quarter, largely driven by shipments of our flexible ureteroscopes to Stryker and a 68% increase in EndoSheath sales. These increases were partially offset by decrease in sales in the ENT, pulmonology and spine categories of 19%.

Gross profit increased by 18% to $1.1 million in the first quarter of fiscal 2014, as compared to $900,000 in Q1 of fiscal 2013. Gross margins for the 2014 quarter increased 300 basis points to 30% as compared to 27% in the first quarter of fiscal 2013. The improvement is attributable to implementation of certain cost cutting measures, as well as favorable manufacturing absorption from higher production volume in the 2014 quarter.

SG&A expenses were up 12% to $3.1 million in the first quarter of fiscal 2014. The $300,000 increase was primarily due to higher stock-based compensation charge and the recognition of one-time service charge related to the departure of our former CEO.

As a percentage of net sales, SG&A was 84% for the first quarter of fiscal 2014, as compared to 80% for the same period last year. Excluding the one-time service charge, SG&A as a percentage of sales would have been 78%.

Research and development expenses decreased by $100,000 or 14% in the first quarter of fiscal 2014. As a percentage of net sales research decreased to 11% as compared to 14% for the same period last year.

Operating losses increased by $100,000 to $2.4 million during the first quarter of fiscal 2014, as compared to $2.3 million during the first quarter of fiscal 2013. The increase was primarily attributable to the aforementioned stock-based compensation and severance charges totaling approximately $400,000.

At June 30, 2013, cash and cash equivalents were $1.3 million and working capital was $7.1 million. This compares to cash and cash equivalents of $800,000 and working capital of $7 million at March 31, 2013. We also had 1 million of capital available under a $20 million convertible debt with Mr. Lewis C. Pell, our Chairman.

We expect that our cash and cash equivalents at June 30, 2013, together with the $1 million of capital available under the convertible debt and a new capital commitment of $5 million under an agreement dated June 20, 2013 with Mr. Pell should be sufficient to fund our operations through at least July 1, 2014.

With that, I turn the call back over to Howard.

Howard Zauberman

Thanks, John. When I joined the company in May, Vision-Sciences was clearly not meeting its full potential. Despite the strong value proposition of the EndoSheath technology, which allows doctors to perform an endoscopic procedure within a sterile sheath environment, revenues were below expectations. As a result, we have initiated a comprehensive strategic assessment of the business in which we will identify key product and process areas that require improvement, and key drivers that will position us for long-term success. We will establish plans in each area with short-term goals and important near-term objectives.

The results of this ongoing assessment will enable us to adjust our business strategy and operational plan, which we believe will lead to increased value for our shareholders. We’ve already begun this process in our operations and quality areas, and recently initiated a new product innovation effort as well.

Vision-Sciences is comprised of talented professionals, many of whom have a long history and tenure with the company. To augment this team, we have been filling gaps with executives with strong finance, healthcare and medical device experience.

As I mentioned, John Vittoria joined us in June as our Interim VP of Finance. I am also pleased to welcome Jerry Zukowsky, as VP of Operations and R&D. Jerry has over 20 years of leadership experience in medical device industry. Prior to joining the company, he was Director of Operations at AngioDynamics. Previously, Jerry held the role of VP of R&D at NAMIC, a division of Pfizer and subsequently Boston Scientific. He is certified in the Lean process and Six Sigma, and one of his responsibilities will be to work with our team to improve quality and reduce costs.

We also welcomed John Wlassich, as Director of Advanced Technologies. He has over 20 years experience in product and process development with a strong track record of delivering advanced technology products to the marketplace. Prior to joining the company, John was VP of Engineering at Nomir Medical Technologies and had been responsible for key operations at Gillette in both their Boston and Berlin facilities. John holds a PhD from MIT in electromechanical engineering.

We are excited by the new members of our team who have joined the existing leadership at Vision-Sciences. We also realigned the Company’s direct sales efforts, and asked everyone in the field to refocus their efforts to get out there and sell. They are now focused on the areas and customers where we have historically been successful, and which, we enjoy strong brand recognition and product royalty.

New sales targets have been identified based on a similar profile of customers who have bought our products in the past. As a result, the sales force is now spending significantly more time on office-based practices and ambulatory surgery facilities.

Our focus will remain on ENT and TNE in the office setting and critical care pulmonology in the ICU setting. We believe that it makes good sense to pay attention to our key customer base as our top-20 direct sales customers are all in the ENT market. Our credibility and recognition are growing in pulmonology in the critical care setting and in TNE, but today our brand recognition is strongest among ENT physicians.

We’re already seeing evidence of sales improvement from this reemphasis on our core customers. Our sales pipeline is being rebuilt and looks good at this stage and I’m confident our team can deliver on their commitment and accountability to our company. Our goal is to rebuild credibility with customers that want to buy our products and to better serve them by initiating programs to improve quality, drive down costs and advanced product innovation.

With respect to our partnership with Stryker Endoscopy, we’re pleased with their ongoing progress. Their strong presence in hospitals ensures that our brand remains visible even while our sales force is focused on our specific target markets. Stryker appears to be satisfied with the performance of our EndoSheath system and we expect their sales success to continue throughout this fiscal year.

Overall, I believe we are on the right track. During the quarter, we launched the 7000 Series Vision System video processor platform worldwide and all of our territory managers now have access to it for demonstrations. It is the first endoscopy platform to include video, audio, archiving and workflow enhancements in a single standalone unit. Key features of the 7000 System included high resolution imaging and multiple video playback options. We are selling this improved model alongside the prior version, so physicians can choose the level of technology to fit their needs and budget.

We benefit from strong support from our Board of Directors and our key investors, who together remain committed to the success of this business. We also have a very strong team at Vision-Sciences. They are reinvigorated and excited about the positive changes that we are working to effect and I want to thank them all for their dedication and hard work. We believe we could turn this company around and create an exciting growth business.

With that operator, please open the calls for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Irwin Gomberg of Irwin Investments (ph). Please go ahead.

Irwin Gomberg - Irwin Investments

Could you update us on SpineView and also on those sales this quarter?

Howard Zauberman

This is Howard Zauberman. We are not expecting any revenue from SpineView over the reminder of this fiscal year. Our understanding is SpineView is currently doing customer preference evaluations of their product. We have provided them product to do those evaluations and those studies are underway.

Irwin Gomberg - Irwin Investments

Wouldn’t the technology ramp much quicker if they were kind of a larger spine company?

Howard Zauberman

I really can’t comment on SpineView and their success. I am sure they are working very hard to prove their technology and perhaps you should direct your question directly to them.

Operator

(Operator Instructions) Our next question comes from Nat Prentice of Altium Wealth Management. Please go ahead.

Nat Prentice - Altium Wealth Management

I wondered to what degree you’ve seen anything coming out of the medical community that would support the EndoSheath as moving towards a standard of care.

John Vittoria

Yes, the changes domestically, the changes in the healthcare policy over the past few years should be stimulants for the success of our business. I think that’s true in twofold. One is infections. Patients who comeback now and in the future comeback to hospitals, acute care facilities with postoperative infections on the expense and the cost of the responsibility of that acute care facility. And so anything that can reduce re-infection or infection during procedures ought to be valued highly by the acute care facility.

So, of course the EndoSheath technology plays right into that by providing a sterile environment for doing endoscopic procedures. We are the only company that provides that system to acute care facilities or through our Stryker relationship of our product. So that should be a real benefit for us.

The other is cost reduction and as you know there is a lot of pressure on acute care and healthcare system in general to reduce costs and our product enables, because of our shorter clearing process, instead of having an extensive reprocessing and cleaning process for standard endoscopes, our sterile sheaths allow for a very short and quick turnaround time. That too should reduce costs, enable better throughput on endoscopy suites and should be a real benefit. So, I think those two drivers now more than ever should enable our company to be successful and of course we need to execute on those.

Howard Zauberman

We have a new system. If a hospital makes a mistake for example it’s punitive where they have to pay for the mistake. In the past, if they made a mistake, they would rebuild. Now they can’t do that. So if there is an outbreak of sterility problems, the hospital is at risk and that’s a good point for us too.

Operator

And with no further questions at this time, I would now turn the conference back over to Mr. Howard Zauberman for any closing remarks.

Howard Zauberman

Thank you. This quarter we began the process of turning the company around. It’s not going to happen overnight, but I firmly believe we can get the company back on the growth trajectory and reestablish our position as an innovator and a leader in endoscopy. Thank you for your ongoing support.

Operator

Ladies and gentlemen, this does conclude today’s conference. You may now disconnect and have a wonderful day.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

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WuXi PharmaTech (Cayman) Management Discusses Q2 2013 Results - Earnings Call Transcript

WuXi PharmaTech (Cayman) (WX)

Q2 2013 Earnings Call

August 13, 2013 8:00 am ET

Executives

Ronald Aldridge - Director of Investor Relations

Ge Li - Co-Founder, Chairman, Chief Executive Officer, Member of Compensation Committee and Member of Strategy & Finance Committee

Edward Hu - Chief Financial Officer and Chief Operating Officer

Analysts

David H. Windley - Jefferies LLC, Research Division

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

Wei Du - Goldman Sachs Group Inc., Research Division

Ye Yin - Oppenheimer & Co. Inc., Research Division

John Kreger - William Blair & Company L.L.C., Research Division

Jack Hu - Deutsche Bank AG, Research Division

Iris Wang - Crédit Suisse AG, Research Division

Isabella Zhao - Morgan Stanley, Research Division

Serena Shao - BofA Merrill Lynch, Research Division

Operator

Thank you for standing by, and welcome to the WuXi PharmaTech Second Quarter 2013 Earnings Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, 13th of August 2013.

I would like to turn the call over to your first speaker today, Ron Aldridge, Director of IR. Please go ahead, Mr. Ron Aldridge.

Ronald Aldridge

Thank you, Derrick, and good morning or good evening to everyone participating in our second quarter 2013 earnings conference call. Hosting this call today is Dr. Ge Li, Chairman and Chief Executive Officer. Joining him is Edward Hu, our Chief Operating Officer and Chief Financial Officer.

During today's presentation and question-and-answer session, we will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical facts but instead are predictions about future events. Although we believe that our predictions are reasonable, future events are inherently uncertain, and our forward-looking statements may turn out to be incorrect. Information on many of the risks relating to our forward-looking statements can be found in our filings with the SEC. Our forward-looking statements speak only as of the date on which they are made, and we assume no obligation to update any forward-looking statements, except as required by law.

Also, in discussing our financials, we will use certain non-GAAP measures, which exclude share-based compensation expenses and amortization and deferred tax impact of acquired intangible assets. We believe these non-GAAP operating measures are useful for understanding and assessing underlying business performance and operating trends. Reconciliations of our GAAP to non-GAAP second quarter and first half 2013 results of operations are found in today's earnings release, which has been posted to our website and in the appendix to this presentation. [Operator Instructions]

And now, it's my pleasure to introduce Dr. Ge Li to review our second quarter 2013 performance and to discuss our third quarter and full year 2013 business outlook. Dr. Li?

Ge Li

Thank you, Ron, and good evening or good morning, everyone.

Slide 4 please. I'm happy to report that WuXi had a good second quarter. We had a solid revenue growth of 9.2%. Leading this performance was 18.6% revenue growth in China Lab Services driven by integrated drug discovery and development service and the ramp-up of biologics and the tox services.

U.S. Lab Service had a small year-over-year revenue decline due to a difficult comparison with record revenue in the second quarter of 2012. Manufacturing Service had an excellent quarter. Strong process development and the recent manufacturing revenues largely made up for decline of Commercial Manufacturing revenues year-over-year. We are pleased to see our margins are stabilized. Our gross margins and the operating margin this quarter on both GAAP and non-GAAP basis were comparable to margins during the past year. These stable margins were achieved despite continuing labor inflation, R&D appreciation and the investment in new business.

One important factor for us to achieve stable margins is that we have institute company-wide Lean Sigma programs to improve our operational efficiency, increase productivity and eliminate waste. In addition, business mix is helping as newer business ramp up their revenues and improved their profitability by achieving scale of operations.

We've also had a strong non-operating income in the second quarter, mainly from large mark-to-market gains on foreign exchange forward contracts, which are fairly unpredictable on a quarterly basis, subject to fluctuation of currency exchange rate between the U.S. dollar and RMB.

Foreign exchange gains on forward contracts are intended to partially offset the margin pressure from RMB appreciation. So it is nice that, this quarter, we achieved large foreign exchange gains in a period of time with RMB appreciation, while keeping our margins stable as our hedging strategy worked efficiently and effectively. We also had a relatively low tax rate in the quarter from a one-time tax benefit that we'll discuss later in the presentation.

Due to these factors, we exceeded our revenue guidance for the quarter and have also exceeded our diluted EPS guidance.

Slide 5, please. We will expect continued growth revenue and earnings growth throughout our company. Biologics service and small molecule Manufacturing Service have exciting opportunities ahead of us. Biologics is a unique opportunity for WuXi because of our strong management team, integrated biologics drug discovery development capabilities, state-of-the-art facilities and the regulatory requirements that incentivize companies [indiscernible] Chinese partners if they want to -- speed up developing biologics for the China market.

In small molecule manufacturing, research and manufacturing continued to achieve strong double-digit growth. Commercial manufacturing has turned the corner, with revenue gains from new products, roughly offsetting the revenue loss from single products. And we have now increased our pipeline of Phase III products [indiscernible] to become commercial manufacturing opportunities from the previously announced 7 to 9 products now.

In clinical services, we and our partner PRA took an important step forward this quarter by hiring Dr. James Pusey to be the President and the General Manager of the WuXiPRA joint venture.

As a result of our strong second quarter performance and a good outlook for the second half of 2013, we are increasingly -- we are increasing our full year guidance for both revenue and diluted EPS. We now expect to achieve full year revenues in the range of $572 million to $578 million, full year GAAP EPS of $1.38 to $1.44 and a full year non-GAAP EPS of $1.61 to $1.67.

And now, Ed will discuss our second quarter in more detail. Ed, please.

Edward Hu

Thank you, Dr. Li. Turn to Slide 6, please.

Here you can see our second quarter performance versus our guidance. We exceeded top end of our second revenue guidance by $2.3 million and the top end of diluted EPS guidance by $0.06. Better than expected revenue growth came mainly from biologics, manufacturing and medicinal chemistry business, with most of the rest of the company performing in line with our expectations.

Our better-than-expected EPS growth came from the strong revenue growth in gross[ph] margins and gain from foreign exchange forward contracts and some tax benefit.

Turn to Slide 7, please. Here you can see that our total company revenue growth was driven by China-based Lab Services, particularly from integrated drug discovery and development services and the ramp-up of biologics services and toxicology services. Our Manufacturing Services delivered a strong quarter in the face of a difficult comparison with the second quarter of 2012, which was a record quarter. Strong revenue growth in Process Chemistry and research and manufacturing made up for the decline of Commercial Manufacturing revenue relative to the second quarter of 2012, when commercial products contributed a significant portion of the revenues. Our growing manufacturing product pipeline will drive steady growth in commercial manufacturing revenue in the coming years.

Our U.S.-based Lab Service underperformed this quarter. The lack of large product wins and delay in new project start-up slowed down the revenue growth in the quarter. We expect the second half will be -- will perform better.

Turn to Slide 8, please. Here you can see the quarterly sequence of revenues. We are growing nicely from a trough in last year caused by a slowdown of our Manufacturing Services revenues. China Lab Services continued to have a strong quarter-over-quarter sequential growth, apart from the first quarter, which is typically lower. We expect sequential quarter growth in China Lab Services to continue throughout the year, and we expect a particularly strong fourth quarter based on our conversation with our customers and our business outlook.

U.S. Lab Service revenue has been flat for almost a year due to fewer large project wins, particularly in biologic testing. We expect sequential revenue growth in this business in the second half of the year.

Manufacturing Services revenue has historically been quite lumpy, but we believe this business has achieved the scale that will allow us and our revenue to grow much more steadily going forward as our commercial product portfolio grows.

Turn to Slide 9, please. Looking at our GAAP P&L. We achieved a gross profit increase -- 5% revenue increase as a result of productivity and our operating efficiency improvement that more than offset the labor cost inflation and RMB appreciation.

Operating income grow 8.1%, as we invested in sales and marketing operations and increased R&D expenses to develop new service capabilities. Our 45.5% diluted EPS growth this quarter was due to revenue and profit growth and non-operational incomes. We had $1.6 million of realized gains and $3 million of mark-to-market gains from foreign-exchange forward contracts this quarter. In comparison, in the second quarter of 2012, we had $2.3 million of mark-to-market losses from foreign-exchange forward contracts. The lower effective tax rate in this quarter resulted from full[ph] one-time tax benefit, a $1.1 million refund of 2012 income tax [indiscernible] Chinese legal entities that provides Process Chemistry R&D services, which enjoyed our tax harder year [ph] and a $1.2 million tax benefit from a sup[ph] deduction of R&D expenses that allowed us to deduct 150% of certain 2012 R&D expenses. This is a part of a tax incentive program the Chinese government provides to stimulate companies to invest in R&D and innovate.

Turn to Slide 10, please. Our quarterly GAAP P&L shows record profit, operating income, stable gross margins and operating margin.

On Slide 11, our non-GAAP P&L is similar to GAAP, with about 42% diluted EPS growth for the reasons as we discussed on Slide 9.

Turn to Slide 12, please. Here, we show the quarterly progression. We have achieved record non-GAAP gross profit and operating income with a stable margin trend.

Slide 13, please. So this slide shows that our company revenue base is well balanced and diversified. In addition, these businesses support each other as seamless platform of integrated services from synthetic chemistry at the beginning of a drug discovery program to Phase III clinical testing and commercial manufacturing at any of the drug development. The fastest-growing part of the company is drug development, which has grown from 11% to 16% of the total company revenue in the past 12 months. Medicinal chemistry and other discovery services are also growing about the company average. We will look at each of the business in more detail later in the presentation.

Turn to Slide 14, please. The analysis of year-over-year growth in our second quarter diluted EPS shows somehow the same factors we discussed in the previous quarter. Business growth almost entirely from volume growth is a key driver of our EPS performance and contributed $0.14 to the second quarter 2013 EPS growth.

Mark-to-market gains on foreign exchange forward contracts account for $0.07 of the EPS growth relative to the second quarter of 2012. We had unrealized gains of $3 million in the second quarter of 2013 was unrealized of[ph] $2.3 million in the second quarter of 2012. Other foreign exchange impacts, such as RMB appreciation against the U.S. dollar as well as factors such as labor inflation and investment in new business, continued to have negative impact on EPS.

Turn to Slide 15, please. Our balance sheet remains very strong, with about $300 million cash and about $65 million short-term and long-term bank loans. Our operating cash flow has been strong and steady, with about $40 million cash generated in the second quarter and about $79 million cash generated in the first half of the year. Our capital expenditures have been more variable simply because of timing of purchases. Capital expenditures totaled about $15 million in the first half of 2013, but it will increase considerably in the second half as we have planned. Our full year guidance for total CapEx is still about $60 million.

Turn to Slide 16, please. Our strong second quarter will benefit our full year, and we are increasing our full year 2013 revenue and diluted EPS guidance. We forecast our full year revenue to be in the range of $572 million to $578 million or 14% to 16% year-over-year growth. China Lab Service is expected to grow 16% to 17%. Manufacturing Service, including the ramp-up of biologics manufacturing in the second half of 2013, will grow about 20% to 24%. And U.S. Lab Services will grow low-single digits.

We expect margin trends in the first half of the year to continue in the second half and our guidance to continue to be for full year 2013 gross margin and operating margin, both GAAP and non-GAAP, to be comparable to those in 2012.

And we forecast GAAP EPS in the range of $1.38 to $1.44 or 16% to 21% year-over-year growth and our non-GAAP EPS in the range of $1.61 to $1.67 or 15% to 19% year-over-year growth. Again, we expect the full year CapEx spending to be about $60 million.

Turn to Slide 17, please. I think it's important to take a moment to put this year's performance in context. As you can see from this chart, our strong revenue and diluted EPS growth in 2013 are not one-time events, but a continuation of years of growth built on the historic business model that we are executing successfully, that is building an open-access integrated R&D service platform to serve the global life science industry discover and develop therapeutic products more cost effectively and efficiently.

Turn to Slide 18, please. Here, we give out our preview[ph] for the third quarter. We expect to generate $143 million to $145 million in revenue in the third quarter. And GAAP EPS is expected to be in the range of $0.32 to $0.34, and non-GAAP EPS is expected to be in the range of $0.38 to $0.40.

Now Dr. Li will discuss the performance and strategies in our major business. Dr. Li?

Ge Li

Thank you, Ed. Slide 19, please. Our Synthetic chemistry business continued to achieve single-digit revenue growth from increased volume despite modest pricing pressure and an increasingly competitive environment. Several recent customer wins will drive good sequential growth in the second half of 2013 though[ph] large pharmaceutical companies remain our primary customers, biotech companies are increasingly using our chemistry services.

Despite pricing pressure, we have stable margins in this business, in part, from our new chemistry facility in Wuhan. Wuhan offers a pricing alternative for our customers and now represent about 20% of total synthetic chemistry business. Synthetic chemistry is 1 area where we have been particularly successful in improving our operational efficiency through implementing Six Lean Sigma programs. We have been able to increase the success rate of chemical reactions and reduce material consumption. We are measuring productivity with such metrics as compounds produced per employee and the steps taken to produce compound per employee et cetera in the way we have seen substantial improvement in these areas after training. We think we can maintain single-digit growth in synthetic chemistry beyond 2013.

Slide 20, please. Medicinal chemistry and other discovery services now represent more than 1/4 of the company's revenues and growing at mid-teens rate. We have now 34 lead optimization projects ongoing, mainly with multi-national companies and they are progressing well. We delivered 2 preclinical drug candidates to our customers in the second quarter, and we expect to deliver about 9 additional drug candidates in the second half of this year.

Among other discovery services, biology is growing very rapidly and achieving good customer satisfaction, particularly in support of medicinal chemistry products.

Slide 20 -- 21, please. Despite worldwide toxicology market that has seen little to no growth and the substantial pricing declines in the past 5 years, our tox business is performing very well. It is expected to grow about 40% year-over-year this year and driven by the quality and the value we deliver. Our Suzhou site capacity utilization rate is close to 70% now. Our number of active customers has increased to 48 from 32 a year ago, with healthy mix of large and small Chinese and the multi-national pharmaceutical and biotech companies. About 70% of our studies are now GLP, which speaks to the quality of our services. Many of our studies packages are used by bio clients require R&Ds with the U.S. FDA, European and Australian regulatory agencies, as well as China FDA.

Slide 22, please. Our biologics business performed very well in the second quarter, exceeding our expectation as we gained business from both international and the domestic pharmaceutical companies. We expect revenues to ramp up continuously in the second half of this year and in years to come. With the strong performance, we expect this business to break even probably by the end of this year, about 1 year earlier than our previous expectation. Our project backlog has continued to grow from a $40 million reported last quarter to $53 million now, and we expect further growth in the second half of the year from new contracts. The highlight of the second quarter was our signing an agreement with Ambrx and the Zhejiang Medicine Co. to develop the antibody drug conjugate, ARX788, for treating Her2-positive breast cancer patients.

Other projects are progressing well, such as our joint venture with MedImmune to develop MEDI5117 for rheumatoid arthritis and other autoimmune disorders for the China market. 5 multi-national companies are emerging as our anchor[ph] clients now with the focus of developing innovative biologics products for China market and worldwide. We have completed construction of the drug product fill/finish facility in Wuxi city and is currently being validated. We also have installed 2 2,000-liter bioreactors to produce Phase II and Phase III clinical trial materials starting the second half of this year.

Slide 23, please. Our clinical JV, WuXiPRA, began operation in April and achieved a key milestone with the appointment of Dr. James Pusey as the President and General Manager. Dr. Pusey has 25 year of experience in medicine and the biopharmaceutical industry, including previously served as the founding CEO and President of a major clinical CRO. He also had executive roles at 2 major multi-national pharmaceutical companies, and he was a practicing physician at 4 other hospitals. Under Dr. Pusey's leadership, we expect WuXiPRA to become the clinical service provider of choice in China, a pharmaceutical market that is growing at a mid to high teens annually and will become the second largest in the world within the next few years.

Slide 24, please. Our small molecule manufacturing business was an another source of over performance in the second quarter. Manufacturing service is growing at a high-teens pace this year, driven by our capability in Process Chemistry and the research and manufacturing. We are particularly excited about our growing pipeline of products and the potential products in commercial manufacturing. We are now manufacturing advanced to intermediate for 6 commercial products, 9 Phase III products [indiscernible] could become a long-term commercial manufacturing program for us. 2 of the 9 also particularly have large revenue potential for the company. 3 of commercial -- or Phase III products have been identified by the FDA as breakthrough products, and then a fourth is receiving fast-track FDA review. This again shows the innovative nature of the products that will help our customers to bring to the market.

Slide 25, please. Our U.S. Lab Service business was one of our few areas of disappointment in the second quarter. Revenue were down 3% year-over-year in the second quarter and flat for the first half. A number of factors were responsible: Fewer new business wins, project delays and difficult comparisons with the first half of 2012, when revenue grew 17% on the strength of 2 one-time projects. We expect a low-single digit growth for the full year in the -- however in the longer term, we expect solid growth from the testing business, as the industry is growing pipeline of biologics products, particularly therapeutic antibodies.

Slide 26, please. So to conclude, we outperformed in the second quarter and expect this outperformance to continue throughout the year, which will reflect an increased guidance. Our outperformance was a combination of operational performance, such as higher revenue in biologics and the manufacturing and the cost control and the non-operational items. We believe that all of our business are growth business and that the best future growth opportunities are in integrated drug discovery service, small molecule drug development and manufacturing, biologics service and the clinical services. Again, we're just excited about going to work each day as the knowledge that we're building a broad integrated platform of R&D service have not only provides convenience to our more than 1,000 clients, but also help them realize their dream of being a drug discoverer and developer.

Thank you for your attention. And now, we'll be happy to answer your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Dave Windley from Jefferies.

David H. Windley - Jefferies LLC, Research Division

I was wanting to dig into customer mix a little bit. You've mentioned in prior quarters some growing demand, growing interest from Chinese domestic customers. And I wondered if you'd comment on maybe where that level is in the company today, how much of your revenue are you deriving from domestic customers and perhaps help us understand which of your business units are seeing most of that demand?

Ge Li

David, thanks for the question. We're seeing continued growth of demand from our domestic customers. But percentage-wise, the revenue is still small. So right now, it's about 5%. And we think, within the next 12 months, it's more likely to grow to 10%.

David H. Windley - Jefferies LLC, Research Division

Okay. And is that in synthetic chemistry, in medicinal chemistry or is it in some of the newer businesses like tox?

Ge Li

Well, actually, across the board, and mostly in medicinal chemistry and the preclinical services.

David H. Windley - Jefferies LLC, Research Division

Okay. And then, a similar question. On biologics, it sounds like you're making really good progress there. Are your customers in biologics a new customer base? Are you essentially cross selling those services into your traditional large pharma core customers?

Ge Li

Actually, both. [indiscernible] increasingly the existing customers and also within new customers.

Edward Hu

Like Ambrx, which is...

David H. Windley - Jefferies LLC, Research Division

I'm sorry. I missed the name there? Like?

Edward Hu

Ambrx.

Operator

Your next question comes from the line of Tycho Peterson from JPMorgan.

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

I wanted to maybe just ask a question on the toxicology business. We've heard from some of the other shareholders[ph] about trends picking up a little bit. Can you maybe just talk about the leading indicators for your tox business to the extent that things are turning a little bit here? Obviously, you've talked about your targets with the new capacity. But can you maybe just talk about whether some of the underlying trends are picking up a bit?

Ge Li

Yes. Tycho, I think that we are steadily growing our tox business as more and more kind of fully integrated R&D packages come into our business. So -- and we have product[ph] good balance of projects from both international clients and the domestic Chinese clients.

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

Okay. I mean, are you able to talk about how, say, like things have trended in the last couple of months? I mean, I think one of your competitors was fairly specific about things picking up in July. And I'm just wondering whether you've seen any sort of near-term inflection here or...

Edward Hu

I don't think there's a huge inflection point yet, but we're seeing a pretty steady growth from both international and domestic customer base.

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

Okay. And then, on Synthetic Chemistry, do you see pricing turning at all? I mean, you talked about it being -- seeing modest declines there. At what point do you think maybe pricing in Synthetic Chemistry starts to stabilize a bit?

Ge Li

I think that we're getting there. So as we indicated, we only saw modest pricing pressure. And also, our Wuhan facility is becoming very productive, and we offer pricing alternatives for our customers.

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

Okay. And then, last one just the outlook for the U.S. lab business. I mean, you commented that was a bit disappointing and has been for a bit. Can you maybe just talk on how you're thinking about that business going forward?

Edward Hu

I think that, in the first half of the year, we have been winning less large projects. I'm not sure whether those similar project has cyclicality, when biochem studies for Phase III programs, $0.5 million each project, and those projects are quite cyclical. But we have clearly a growing pipeline for the second half and into 2014 now.

Operator

Your next question comes from the line of Wei Du from Goldman Sachs.

Wei Du - Goldman Sachs Group Inc., Research Division

Ed, I actually noticed you seem to have some seasonality on the gross margin, especially -- I don't know. I hope my number is right. When I break down the Laboratory Service, often, to show 4Q seemed to be relatively higher. I'm not sure whether that's because random case or it's a trend? I think, second, when I look at the manufacturer service revenue, I think you also -- when we look at your numbers this quarter, it is about 29%. Last quarter, it was 31%. Can we -- This is really a housekeeping item. Can we assume the margin is about that level? Could you give us a little bit more color? I guess especially I want to ask about the biological service, I guess you lumped everything pretty much in the laboratory service in China. And I wonder whether we're seeing the margin improvement, especially sequentially. I think you probably already explained is because the change in service mix. So basically, can I assume the biological service actually offers a relatively higher margin?

Edward Hu

Biologics -- let's step back a little bit. For China Lab Service, actually, the margin typically is highest in the fourth quarter because there were -- the fourth quarter is typically also the highest revenue quarter as many of our customers want to finish their project before the end of the year. So we're always rushing and working very hard to achieve. So historically, we always achieved very strong fourth quarter as the complementing margin also a bit higher than the first 3 quarters. Well, the biologics business, currently still probably runs below the company average and gross margin, but it's ramping up.

Operator

Your next question comes from the line of Ingrid Yin from Oppenheimer.

Ye Yin - Oppenheimer & Co. Inc., Research Division

My question is about the utilization rate of the manufacturing business. Now you have 9 Phase III products in the pipeline. Will you be running into capacity problems at some point next year?

Ge Li

I think our current capacity will support us throughout the next year.

Ye Yin - Oppenheimer & Co. Inc., Research Division

Okay. And then, next year and beyond, you will think about capacity...

Ge Li

Yes, we probably will add capacity, yes.

Ye Yin - Oppenheimer & Co. Inc., Research Division

Okay. Great. And also, if we look at your growth of the 5 different segments, Synthetic Chemistry, which probably has the lowest margin, is going down in terms of percentage of sales; and development is growing at high-double digits. So the service product mix is very favorable for margins. Just wonder if there's potential margin expansion opportunities going forward?

Edward Hu

Ingrid, I think we still are facing the macroeconomics, like the labor cost and RMB appreciation, that trend still stays there. So we are working very hard and through operating improvement and also ramping up the new business and to maintain our margins. I won't be able to comment on the specific sub sector of the margins.

Ye Yin - Oppenheimer & Co. Inc., Research Division

Okay. So can you comment a little on the competitive situation in Synthetic, Medicinal and U.S. Lab and Tox business? I know you don't really have a competitor for the biologics business?

Ge Li

Well, actually, medicinal chemistry and integrated service are our strengths. So we have a very strong management team, and we have a very deep knowledge and understanding of the drug discovery and development. So again, we see consistent wins of discovery products.

Ye Yin - Oppenheimer & Co. Inc., Research Division

Okay. How about Synthetic Chemistry? I mean, are you competing just with local companies, or you're starting to see there are more international players like Indian CROs that are starting to compete for business?

Ge Li

We actually compete globally, and we -- well, in general, our win rate is about 30% of the RFPs for synthetic chemistry. And honestly, with the establishment of the Wuhan facility, our win rate actually is trending up.

Operator

Your next question comes from the line of John Kreger from William Blair.

John Kreger - William Blair & Company L.L.C., Research Division

Do you have any early thoughts that you could pass along on 2014? I'm curious if you got any visibility from your key clients about, kind of, project size and whether or not that could improve revenue growth going into next year? And do you think '14 could perhaps be a year where margins start to improve a bit?

Ge Li

Well, again, we are in constant dialogue with our customers. But it's still too early for 2014. But we do believe the trend now for R&D service outsourcing is now reversed. I think it will continue to grow. So again, actually, we're seeing more and more small individual companies and individuals are using our platform. So it goes with our vision to enable anyone, any company to discover and develop drugs.

Edward Hu

Across our businesses, even though it was showed clearly. But at the trends there, manufacturing business clearly is going to grow. Biologics are ramping up quite nicely, and U.S. operation will improve next year and medicinal chemistry is continuing to grow. So I think in the growth part [ph] you'll see a few impact.

John Kreger - William Blair & Company L.L.C., Research Division

And would you say you're feeling better or worse about the margin outlook given some of the headwinds like wage inflation and currency appreciation?

Edward Hu

It's probably a direction that we're getting better.

Ge Li

Yes. Partially, we don't think RMB will continue to appreciate in the future years. So...

John Kreger - William Blair & Company L.L.C., Research Division

Great. And then, one last question. Could you perhaps elaborate a bit on where you stand with your clinical joint venture with PRA? Are you out competing and signing large clinical programs at this point? Or is that something that you'd be looking to ramp up next year?

Ge Li

Yes. Well, definitely, we look forward to ramping up the business, and we also -- I think with our partners, PRA [indiscernible] aggressively invest in this area, as the China pharmaceutical market continues to grow to mid to high teens. And in the last quarter, we brought Dr. James Pusey on-board. He's a very experienced clinical CRO veteran. So we do believe we have very good chance to become a partner of choice for the clinical service in China.

Operator

Your next question comes from the line of Jack Hu from Deutsche Bank.

Jack Hu - Deutsche Bank AG, Research Division

My question is actually on your Lean Sigma. Can you give us some color what exactly you have done on this initiative and then quantify the impact of margin improvement or margin stabilization? And then, lastly, how sustainable should we expect?

Ge Li

We have across the company-wide Lean Sigma initiatives. So like for example, looking into detail of the process and to improve the efficiency. Again, I -- personally, I do believe that there's always room to improve, so I do feel this is sustainable.

Operator

Our next question comes from the line of Iris Wang from Crédit Suisse.

Iris Wang - Crédit Suisse AG, Research Division

My question was also about the WuXiPRA. So what's your feel about the competition landscape of -- about the clinical services in China because from our perspective we see that increasing number of player are getting into this market. Do you have any concern about the pressure on the pricing? And what is the differentiating factors of the WuXiPRA compared to other clinical service providers in China?

Ge Li

Again, it's not uncommon because to see our competitors in a very high market because for us, I believe the quality of science will differentiate us from others.

Edward Hu

I believe that WuXiPRA is a combined strength of both companies. PRA with the 35 years experience win growth[ph] and WuXi has a strong experience running China operations and also all the laboratory support to focus on[ph] studies.

Iris Wang - Crédit Suisse AG, Research Division

I have a follow-up question on that. I just would like to know more about your advantage[ph] if you have any strengths in the hospital coverage or the any -- cost advantaging the, for example, the monitoring services or the data processing. So what exactly it is?

Ge Li

Again, the market will continue to grow rapidly. And I think we have many clients they want me introduce their products for China. So again, clinical business requires a very high level of confidence, credibility and trust. I think, as Ed just mentioned, with 35 years of experience -- clinical experience -- global experience of PRA and 13 plus years of China operation -- CRO experience of WuXi, we do believe that we have a good advantage. So again, I think WuXiPRA is aiming to offer global-standard, high-quality CRO clinical service in China.

Operator

Your next question comes from the line of Bin Li from Morgan Stanley.

Isabella Zhao - Morgan Stanley, Research Division

And I'm Isabella asking questions in behalf of Bin Li. Actually, most of my questions has been answered. I just want to follow up with WuXiPRA. What's your sales revenue outlook for the -- for this JV, and when are we going to see any top line contribution from this JV?

Edward Hu

Actually, the WuXiPRA -- it will be a separate company. So the SG&A won't be consolidated into WuXi's P&L. So it's reported as equity income or loss line in our P&L. So going forward, we won't be able to disclose the revenues of WuXiPRA. But arguably, right now, the joint venture is just up and running. It probably would take some time to ramp up. And particularly, at the larger clinical studies, if we'd win the project today, it will take 6 to 12 months to get started because clinical trial approval process in China is very long. But it has a great pipeline ahead starting from next year.

Isabella Zhao - Morgan Stanley, Research Division

And also, 1 last housekeeping question. For the foreign exchange forward contracts gain, are we going to expect any more gains in the second half?

Edward Hu

We're continuing going to see gains -- realized gains of the forward-exchange contracts because those contracts will enter into last year it's all[ph] the money. Unrealized gains are also subject to the exchange rates at quarter end when we close the quarter. So if the RMB stops to appreciate and then we probably won't expect to see any mark-to-market gain or losses. If RMB continue to appreciate, then we'll continually going to see mark-to-market gains.

Operator

Your next question comes from the line of Serena Shao from Bank of America.

Serena Shao - BofA Merrill Lynch, Research Division

Actually, most of my questions have been answered. I just have a very quick question on your toxicity capacity utilization. How -- what percentage of the current capacity has been utilized?

Edward Hu

Actually, we talked about it in the slide. Currently, our total toxicology facility utilization is around 70%.

Operator

[Operator Instructions] Our next question comes from the line of Dave Windley from Jefferies.

David H. Windley - Jefferies LLC, Research Division

I wanted to ask about CapEx. There was an earlier question about manufacturing capacity, I believe. And I guess I'm just curious more broadly across the business, as you look beyond 2013, do you believe your CapEx levels are sustainable at the current level? Or would you expect any, kind of, step-function increases in CapEx for buildings or other capacity?

Ge Li

David, we do expect the CapEx around the current level with some fluctuations. I will say, aggressively, we probably will go around like $70 million to $75 million, but not really more than that.

David H. Windley - Jefferies LLC, Research Division

Okay. That's helpful. And then, your slides mentioned, 2 -- I think there were 2,000 liter bioreactors that you've added in the biologics manufacturing. And I wondered if those were installed specifically for 1 client or compound in particular, or are you just putting in general capacity to be sold to multiple clients for culturing?

Edward Hu

Yes. Those bioreactors are actually going to be used -- can be used for manufacturer most of[indiscernible] anybody products. But we have -- we do have 1 kind in mind, we need to start a manufacture for the Phase II, Phase III clinical supply starting in the second half of this year. This is a pretty significant campaign [indiscernible] better but the facility itself is actually multifunctional and can be used for any products.

David H. Windley - Jefferies LLC, Research Division

Okay. And I believe you said those are in validation. So everything is on track to start this [indiscernible] campaign for this client and the revenue from that is included in your guidance for the second half. Is that correct?

Edward Hu

Yes.

Operator

[Operator Instructions]

Edward Hu

Operator, we probably can conclude this conference call.

Operator

There are no further questions at this time. I will now hand the call over to the speaker.

Ronald Aldridge

We'd like to thank you very much for calling in, and we appreciate your attention and your thoughtful questions. We look forward to speaking to you again in November to go over our third quarter results. Thanks very much.

Ge Li

Thank you.

Edward Hu

Thank you.

Operator

That does conclude our conference for today. Thank you for participating. You may all disconnect.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

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AcelRx Pharmaceuticals' CEO Discusses Q2 2013 Results - Earnings Call Transcript

Executives

Richard King - President and Chief Executive Officer

Jim Welch - Vice President and Chief Financial Officer

Analysts

Louise Chen - Guggenheim

Randall Stanicky - Canaccord Genuity

Mario Corso - Mizuho

David Amsellem - Piper Jaffray

AcelRx Pharmaceuticals, Inc. (ACRX) Q2 2013 Earnings Conference Call August 12, 2013 4:30 PM ET

Operator

Welcome to the AcelRx Pharmaceuticals’ Second Quarter 2013 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following management’s prepared remarks, we will hold a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded today, August 12, 2013.

I would now like to turn the call over to Jim Welch, Vice President and Chief Financial Officer. Please go ahead.

Jim Welch - Vice President and Chief Financial Officer

Thank you, Denise. Good afternoon and welcome to today’s call. This is Jim Welch. Joining me on the call today is Richard King, AcelRx’s President and CEO.

Earlier today, AcelRx issued its second quarter 2013 financial results, which we will discuss in more detail on this call. In addition, we would like to provide you with a corporate update and a review of our clinical program for Zalviso, which was previously known as ARX-01, or the Sufentanil NanoTab patient-controlled analgesia, or PCA system that has been evaluated for the treatment of moderate-to-severe acute pain in the hospital. The financial results press release has been posted on our website at www.acelrx.com. Also a replay of this conference call will be available later today on the Investor page of our website.

Please keep in mind that the risks and uncertainties involved in the company’s business may affect the matters referred to in forward-looking statements made by management during today’s call. As a result, the company’s performance may differ from those expressed in or indicated by such forward-looking statements, which are qualified in their entirety by the cautionary statements contained in this press release and the company’s Securities and Exchange Commission filing.

At this point, I will turn this call over to Richard King for a company overview.

Richard King - President and Chief Executive Officer

Thank you, Jim and welcome everyone to this afternoon’s call. AcelRx has come a long way over the course of the first half of 2013 and expects to continue to transform itself in the remainder of this year and into next year. In May, we successfully completed our third planned Phase 3 trial for our lead product candidate, Zalviso. We look forward to positive top line results for this trial conducted in adult orthopedic surgery patients following either total hip or total knee replacement surgeries. With positive results from all three of our Phase 3 clinical trials for Zalviso, the preparation of our new drug application, or NDA, is in high gear. We plan to submit our NDA filing by the end of the third quarter 2013 for Zalviso with proposed indication for the treatment of moderate-to-severe acute pain in the hospital setting.

Presentation of the results from the Zalviso safety program at major medical meeting has begun and will continue through 2013 and into 2014 as we educate anesthesiologists, surgeons, nurses, and other relevant hospital staff on the clinical profile of Zalviso. Some of the key medical meetings we plan to it on attending include the America’s Society of Anesthesiology Annual Meeting in San Francisco in October, the European Federation of IASP Chapters also in October, and the American Association of Hip and Knee Surgeons Meeting in Dallas in November. The process of preparing for commercial readiness is underway at AcelRx.

In July, we completed a public offering of approximately 4.4 million shares of common stock. The total gross proceeds of this offering were approximately $50.9 million with estimated net proceeds to AcelRx of $47.9 million after deducting underwriting discounts and expenses. AcelRx intends to use the net proceeds from this offering to fund potential regulatory approval of Zalviso both in the United States and Europe to continue preparations of potential commercial launch of Zalviso in the United States and for working capital and other general corporate purposes.

Let me review a few of the important results from the recently completed Phase 3 orthopedic study. Utilizing our randomized double-blind placebo-controlled design, this pivotal Phase 3 study included 419 adult patients were treated at 34 U.S. sites in the intent to treat population for treatment of moderate-to-severe acute pain immediately following major orthopedic surgery. Patients were treated for a minimum of 48 hours and up to 72 hours and were randomized 3 to 1, with 315 total patients randomized to Sufentanil treatment and 104 total patients to placebo treatments. Those treatments were delivered by the patient as needed using the Zalviso system. Patients in both groups could receive up to 2 milligrams of morphine intravenously per hour as a rescue medication. The primary purpose of this rescue medication being to enable placebo-treated patients to stay in the study. Pain scores were recorded just prior to the delivery of rescue medication and were collected and the scores imputed forward to minimize the impact of this rescue opioid on efficacy evaluations.

As with our other Phase 3 studies, there was no upper age limit on age or weight in the treatment of patients in the study, a design employed to provide the regulatory agencies with data on the use of Zalviso in a real life population undergoing synergy. The oldest patient treated was 90 years of age and the heaviest had a BMI of 62 kilograms per meter squared. Historically, older patients are more susceptible to the adverse events caused by opioids and heavier patients tend to have greater risk of obstructive apnea, which is often worsened by opioids. 215 or 68.3% of the Zalviso treated patients completed the 48-hour study period compared to 43 or 41.3% of the placebo-treated patients. Primary reasons for drop-out in the Sufentanil and placebo-treated groups were adverse events at 7% and 6.7% respectively and lack of efficacy 14.3% and 48.1% respectively.

The FDA requested primary endpoint of some pain intensity difference of baseline known as SPID-48 was met with a SPID score of plus 76.1 for Sufentanil-treated patients and minus 11.5 for placebo-treated patients. The difference in SPID-48 between the two groups be highly statistically significant with a p-value of less than 0.001. SPID separated between Sufentanil and placebo-treated patients for the first hour and was also highly significant both at 24 and 72-hour time points in addition to the 48-hour time points. In this study, treatment emergent adverse events were generally mild-to-moderate in nature and similar for the majority of adverse events between Sufentanil and placebo-treated patients. Adverse events of nausea, vomiting, dizziness, and itching were the only adverse effects, that’s statistically separated between Sufentanil and placebo-treated patients. Nausea, vomiting, and itching are common in postoperative patients and can be managed effectively with anti-emetic and anti-histamine treatments.

The orthopedic study was the last of three successful Phase 3 trials conducted by AcelRx to support U.S. and ex-U.S. regulatory review of Zalviso. In November 2012, AcelRx announced positive results for a Phase 3 open-label active comparative study evaluating the efficacy and safety of Zalviso compared to IV PCA with morphine in the management of moderate-to-severe acute pain after surgery. In March 2013, we also announced top line results from a randomized double-blind, placebo-controlled pivotal Phase 3 study evaluating the ability of Zalviso to control moderate-to-severe acute pain after major abdominal surgery compared to placebo.

Results from these studies demonstrated by Zalviso met the primary endpoints in both cases. Additional analyses also demonstrated that Zalviso was statistically superior to IV PCA morphine for a patient global assessment with pain control and that nurses managing patients in the study, and the patients themselves reported that they had significantly greater overall satisfaction with the NanoTab system compared to IV PCA morphine and significantly greater overall ease-of-care with the NanoTab system compared to IV PCA morphine using a validated assessment questionnaire. AcelRx believes that the results from the Phase 3 program meet the requirements defined by the FDA to submit an NDA for the management of moderate-to-severe pain in the hospital setting.

In early May 2013, AcelRx presented five posters related to clinical and pharmacokinetic data from the Phase 3 Zalviso clinical program as well as data from design and human factor studies relating to Zalviso delivery system at the American Society of Regional Anesthesia and Pain Medicine, or ASRA Annual Meeting in Boston. In one of these posters, new analyses from the active comparative Phase 3 trial comparing Zalviso to intravenous patient-controlled analgesia, or IV PCA with morphine demonstrated that Zalviso had a significantly faster reduction in pain intensity compared to IV PCA morphine with a p-value less than 0.01. In addition, fewer patients experienced oxygen de-saturation events below 95% in the Zalviso treated group compared to the IV PCA morphine treated group whether p value equal to 0.028. Overall adverse events were similar between groups and also generally mild-to-moderate in nature in both groups.

Zalviso was designed to provide patient the ability to control the own moderate several pain in the hospital setting. Patient control of pain has historically been demonstrated to provide better satisfaction of the patients and nurse controlled management of a patient’s pain. Using the Zalviso system, Sufentanil in our proprietary NanoTab sublingual formulation is delivered through the Zalviso non-invasive preprogrammed dedicated delivery device.

We chose Sufentanil due to its high therapeutic index. It’s highly lipophilic, also loving nature, which results in rapid brain penetration and its potency which allows microgram dosing. As Sufentanil NanoTabs are formulated the timely pills, but rapidly adhere to the sublingual mucosa when placed under the tongue and dissolve within five minutes or so after dosing.

We designed the dedicated device that the patient uses to deliver NanoTabs to avoid misprogramming errors during setup that can cause possible harm to patients from drugs such as morphine and hydromorphone both of which are commonly used IV PCA. Patients are able to ambulate easily after surgery with Zalviso because the device is tethered to the patient’s bed unlike the current standard IV PCA where the pole mounted infusion pump is physically connected to the patients by IV tubing.

The nurse has controlled access to setup Zalviso through a radio frequency identification key and the patient controls access to their own system through a radio frequency identification thumb tag that prevents people other than the patient from using Zalviso. Post-operative pain treatment is a large attractive market that exceeds $5 billion in annual sales. It continues to grow based on estimates of the U.S., Japan and the five largest EU countries combined.

In the U.S., we believe there are over 12 million surgeries per year where moderate-to-severe post-operative pain occurs at approximately 95% of these patients will be candidates for treatment with Zalviso. Within this post-surgical population about two-thirds of the population, are admitted as in-patients to the hospital where we will be attempting to replace IV PCA as the current standard of care of managing post-operative pain.

In addition about one-third of that population is ambulatory, meaning they’re in the hospital for less than 23 hours where IV PCA system is too cumbersome to setup, but are simple to use, non-invasive patient-controlled analgesia systems such as Zalviso maybe highly appropriate. Our market research also indicates that there are in excess of 7 million hospital inpatients with moderate-to-severe pain, that’s – sorry, and that over two-thirds of its patient group maybe candidates for treatment with Zalviso. This group would include patients in hospital with a variety of clinical conditions that result in moderate-to-severe pain such as diverticulitis, burns or sickle cell disease patients among others.

Outside the U.S. in countries that have advanced healthcare systems, we believe there are three to four times as many patients undergoing surgical procedures that results in moderate-to-severe pain each year and for who Zalviso could provide effective and well-tolerated post-surgical management.

On April 24, 2013, AcelRx reported top-line data showing the primary endpoint was achieved in a placebo-controlled dose finding Phase 2 clinical trial of ARX-04 for acute pain. This trial randomized 101 patients following bunionectomy surgery in a 2:2:1 ratio to 30 micrograms Sufentanil – 20 micrograms Sufentanil of placebo treatment. Results demonstrated that patients receiving 30 micrograms of Sufentanil NanoTab doses administered by a healthcare professional, no more frequently than ones per hour had significantly greater pain reduction as measured by some pain intensity difference of the baseline during the 12-hour trial period than placebo-treated patients with a p-value equal to 0.003.

The clinical study and associated research activities of ARX-04 are funded by a grant from the U.S. Army Medical Research and Material Command or USAMRMC. This product is designed to address the need for a rapid acting, strong analgesic where IV access is not available or possible. This title product could provide short-term treatment of moderate-to-severe pain for wounded soldiers on the battlefield, for victims of roadside traffic accidents and for patients in medically supervised settings such as with emergency room or for short stay ambulatory surgery patients. According to the CDC data, there are more than 45 million injury related emergency departments visits and 43 million ambulatory surgery procedures per year in the US.

With that overview, let me turn the call back over to Jim, who will review our financial results for second quarter of 2013.

Jim Welch - Vice President and Chief Financial Officer

Thank you, Richard and good afternoon everyone. AcelRx reported a net loss in the second quarter of 2013 of $17.4 million or $0.47 per share compared with a net loss of $7.2 million or $0.35 per share for the second quarter of 2012. Common shares used in calculating the basic and diluted earnings per share were 37.3 million in the second quarter of 2013 and compared to 20.6 million in the period one year ago. During the second quarter of 2013 AcelRx recognized revenue of $407,000 compared to $224,000 in the second quarter of 2012.

The revenue resulted from reimbursement for the work completed under the research grant from USAMRMC for the development of ARX-04, a Sufentanil NanoTab for the treatment of moderate-to-severe acute pain, research and development or R&D expenses for this quarter ended June 30, 2013 totaled $6.1 million compared to $5.4 million in the quarter ended June 30, 2012 and compared to $9.3 million for the preceding quarter ended March 31, 2013. The increase over the quarter ended June 30, 2012 was primarily due to expenses associated with the Phase 3 clinical studies of Zalviso.

The decrease in R&D from the first quarter of 2013 reflects lower Zalviso Phase 3 costs as we completed Zalviso Phase 3 program. General and administrative expenses were $2.1 million in the second quarter of 2013 compared with $1.8 million for the second quarter of 2012. The increase was related to increased market research activity. Other income and expense includes a $9.3 million non-cash charge in the second quarter of 2013 resulting from the liability accounting related to warrant issued in connection with the piped financing completed in June of 2012.

The primary determinant of this charge is an increase in the share price during the second quarter of 2013 and is resulting impact on the Black-Scholes valuation of these warrants. If, the $9.3 million non-cash charge in the second quarter is excluded from the GAAP earnings per share calculation. Our second quarter 2013 net loss per share would be adjusted down to a loss of $0.22 per share. As of June 30, 2013 AcelRx had cash and cash equivalents and investments of $36.8 million compared to $59.8 million at December 31, 2012 and $48.2 million at the end of the quarter ended March 31, 2013.

Our net cash burn for the second quarter of 2013 was $11.4 million. The cash balance does not include the proceeds of the recent financing where we raised approximately $48 million in net proceeds. Now, I would like to provide you with some guidance of our financial expectations for the rest of 13. AcelRx records reimbursement receipts from the $5.6 million USAMRMC grant to fund development of ARX-04 as revenue. We have received $4.8 million from this grant through the second – to the end of the second quarter of 2013 and expect to record the remaining $800,000 during the rest of the life of the grant, which terminates on January 31, 2014.

We anticipate that research and development expenses in the second half of 2013 will be lower than the $9.3 million and the $6.1 million reported in the first and second quarters of 2013 respectively. Due to lower clinical development expenses associated with Zalviso and the ARX-04 program. These decreases in R&D will be partially offset by the preparation of an NDA for Zalviso expected to be submitted to the FDA by the end of the third quarter of 2013.

Additionally, AcelRx anticipates modest increases in 2013 in general and administrative expense due to costs associated with commercial preparations for the launch of Zalviso in the U.S. and expansion of its corporate infrastructure to support commercial launch. Total operating expenses in – for 2013 are anticipated to be only modestly higher than the 32.1 million recorded in 2012.

Other income and expense in future periods is expected to include non-cash charges that result from the liability accounting lead to the warrants we issued in connection with the PIPE financing completed in the second quarter of 2012. Since the primary determinant of this charge is share price change during the quarter and its effect on the Black-Scholes valuation of these warrants, the impact in future periods is very difficult to predict and is not included in our guidance.

AcelRx believes its cash and cash equivalents and investments include funding from the recently completed public financing are sufficient to fund operations figure at least the end of 2014 and actually well into 2015. We expect to use our cash and our cash will decrease over the second half of 2013 to the first half – when compared to the first half of the year as expenditures primarily R&D in clinical activity have been completed in many of our final payments to the contract research organizations have been made.

With that, I will turn the call back over to Richard at this time.

Richard King - President and Chief Executive Officer

Thanks, Jim. Before we answer your questions, I’d like to summarize our major goals and potential milestones looking at over the coming months. The value of our NanoTab system and the management of acute moderate-to-severe pain in the hospital is beginning to emerge. Zalviso, we believe is a product, which not only manages moderate-to-severe pain effectively over 48 to 72 hours, but can provide early pain control to better level than an IV delivered pain medication.

Zalviso has demonstrated superior patient global assessment of method of pain control compared to IV PCA with morphine, nurse and patient satisfaction, and ease-of-care during use are also enhanced with Zalviso. Due to its intrinsic design, Zalviso eliminates the risk of programming errors and since it frees the patient from an IV connection to an infusion pump, it can enable patients to ambulate more easily. The side effect profile relates the study drug. We have observed in the placebo-controlled Phase 3 clinical trials is similar to placebo-treated patients except the itching, which is the only adverse event considered related to study drug that is higher in Zalviso-treated patients than in placebo-treated patients. In addition, in a single head-to-head study with IV PCA with morphine, Zalviso demonstrated a reduced incidence of oxygen desaturation events in comparison to IV PCA morphine.

Now that we have all of our Phase 3 data, we plan to submit our new drug application to the FDA by the end of the third quarter of 2013 for the indication of moderate-to-severe pain management in the hospital setting. Our filing in the EU will be sometime after the U.S. submission. We are in the process of presenting full data from all Phase 3 studies of Zalviso at major medical meetings in 2013 and 2014 with the goal of raising awareness for product physicians, surgeons, nurses and pharmacists both in the U.S. and in Europe. We are beginning to build our commercial capabilities and plan to establish our marketing team in the second half of this year and our sales management team in 2014. We have planned to put active sales force in place in the first quarter of 2015 and planned to bring on board medical science liaisons in the first half of 2014 to be deployed for educational purposes in the hospital.

We continue to engage in discussions with potential partners regarding the U.S. commercial rights for Zalviso – ex-U.S. commercial rights for Zalviso sorry, of business objectives for AcelRx remains and ex-U.S. licensing agreement with a partner skilled in commercializing products in the hospital environment outside of the U.S. The coming months will be busy at AcelRx with the analysis of additional clinical results, the preparation of filing of our NDA, planning and building infrastructure to support the commercial introduction of Zalviso in the U.S. and ex-U.S. partnering discussions.

With that, I would like to open the call for questions. Denise, I wonder if we can invite the first question please.

Question-and-Answer Session

Operator

Certainly. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) Our first question will come from Louise Chen of Guggenheim. Please go ahead.

Louise Chen - Guggenheim

Hi, thanks for taking the questions. I had a few. The first question I had was on your SG&A spend, just curious how we should model that in 2014 and 2015 and if you don’t want to give specifics maybe you could just sort of give us generally what we need to think about adding on in that timeframe? Second question I have was on your label for ARX-01, just wondering if you think you maybe able to include the head-to-head data and also favorable labeling for the two at-risk groups older and heavy patients, just wondering about that? And then lastly, just curious in terms of early adopters for your products, would Kaiser be possibly one of those types of organizations given that it’s also investor in the company so just kind of curious there? Thank you.

Richard King

Okay, thanks Louise. Maybe Jim, you might want to talk first about SG&A and the one commentary I’ll give to start the ball rolling, the big bolus of headcount will come in January ‘15 as we add or we anticipate to be sales force of about 65 people. So, clearly SG&A will ramp significantly at that moment. But Jim, do you want to give any other commentary?

Jim Welch

What I would add is what you’ll see is starting here in the second half of this year. You will see a – I’ll say is a drifting up in the SG&A expenses as we start to kick off on various market research activities and commercial preparation activities. As Richard identified a little bit earlier in terms of the hiring of people in terms of marketing the MS sales and so forth, those will occur over the course of 2014 and so you’ll see a accelerated increase on the expenses and then as Richard just said, the real bolus will come in the first quarter of 2015 as we bring on the sales force, which we estimate to be about 65 people is what’s necessary and that will be brought in over the course of a few months in 2015. We are at this point in time not giving any specific guidance on outfitting or out that far, but if you look at the expenditures that should kind of give you the shape of which – where we expect things to happen.

Richard King

And your second question, Louise, in relation to label and I don’t anticipate that head-to-head study as a single study will be included in the label although, some of the data from that study particularly the safety related information are likely will be referred to in the label. And certainly the information as it relates to older and heavier patients, it’s unclear at the stage whether it will be called out specifically in the label itself, but certainly the fact that the information is available in the study data that will be forming the basis of approval to placebo-controlled study specifically. There will be a lot of information related to the use of Sufentanil in older and heavier patients.

Lastly in terms of early adopters, yes, certainly hospital systems with significant patient volume that manage both post-operative patients and certainly admit patients in the hospital with broader disease states that require management and support the pain. I think it will be early adopters and we haven’t called out any specific group at this stage. I don’t think we’re in a position yet to be able to do that. But over the course of the next year, we certainly imagine and anticipate that will lead to defining very specifically to early targets for Zalviso will be and then making sure that we had a sales force that is aligned to go and talk to and speak with those early-stage adopters.

Louise Chen - Guggenheim Partners

Thank you.

Operator

The next question will come from Randall Stanicky of Canaccord Genuity. Please go ahead.

Randall Stanicky - Canaccord Genuity

Okay, great. Thanks guys. There has been a lot of focus – most of the focus has been on the U.S. opportunity appropriately. Richard or Jim, can you just help us think about the ex-U.S. opportunity and then a couple of questions on that. Number one, how do we think about, what you are targeting is it Europe, is it global more broadly and then as you think about the potential peak or potential opportunity, how does that compared to the U.S. and then finally with respect to a partner was that something that if you don’t see the right terms, you could just hold off on and we could see that coming well post NDA submission or even post approval and then – that would be need to file for Europe on your own, thanks.

Richard King

Okay, great questions. So, the ex-U.S. opportunity first and foremost in the context of the U.S. opportunity, procedures, hospital procedures and painful hospital procedures are a reality worldwide, it doesn’t matter which country you’re in. There is a significant procedural volume is done in Europe for example where in the U.S., we have about 12 million or so procedures resulting in moderate-to-severe pain on an annual basis for about 300 million people in the U.S.

In Europe, we estimate is about 18 million to 19 million procedures resulting in moderate to severe pain from the 500 million European total population volume. So I’ll give you some sense that it does scale based on populations number one. Certainly in markets which are quite westernized. As you go more towards Asian markets, and towards South American markets, it doesn’t quite scale in the same linear fashion to population. But there remain substantial opportunity for products like Zalviso beyond the realms of US and Europe. We do tend to split. And when we think about the world, our primary goal right now and focus is a European partner. And that’s clearly the market that’s well established. It’s definable in a significant way and we are looking down that road.

The global partnership of this product I do believe it has relevance on a global basis. In many countries outside of Europe and US, the way in which postoperative pain for example is managed is still on the basis of the patients, picking their hand in the air when they’re in pain and the nurse giving push opioids, because this acquisition of the IV PCA technology was too expensive. Where we think the acquisition of the Zalviso technology will be within the reach of many less well-funded healthcare systems around the world. So, I would say that we see opportunity on a global level. In terms of the partner shift, Randall it’s a great question. Certainly completing the recent financing that we did allows us to be comfortable waiting for the right partner with the right terms to present itself. And I think the further that we carry the product down the regulatory pathway will open up that particular opportunity for other partners to play here. But we’re working to find the right partner with the right profile the right capability to commercialized products, primarily in Europe and if we can do that sooner rather later than we absolutely will do so. But certainly this recent finding and gives us some options to that.

Randall Stanicky - Canaccord Genuity

Great color. Thanks, guys.

Richard King

Okay, thank you.

Operator

The next question will come from Mario Corso of Mizuho. Please go ahead.

Mario Corso - Mizuho

Yes, good evening. Thanks for taking my questions. In terms of data presentations in the second half of the year, I wonder if there is any kind of specific analysis or sub analysis we should be looking forward. It’s the matter of just we’re going to see similar cuts of data to what we have already seen but obviously you are building awareness in the various physician populations. And I am wondering what you can say separately longer term about kind of where you see the product in the company breaking even. And finally on the pipeline, anything – any thoughts percolating that you’re willing and able to share about future NanoTab targets or it where ARX-04 maybe heading? Thanks.

Richard King

Thanks, Mario, great question. So (indiscernible), you should anticipate that the data presentations later this year are primarily focused at with them covering much of the ground that we covered earlier in this year, but providing additional contact, and additional average to additional audiences. Next year as we start to build towards a commercial launch, you’ll see some additional data analysis presented that – in 2014, but derived from broader analysis across the entire database of the three studies that we’ve completed in our Phase 3 program. And we’ll look at subpopulations we look at a host of other interesting aspects of managing moderate to severe pain in the hospital setting. So that’s more 2014 to think about the – translations for the data in 2013.

In terms of your question about breaking even, we are still anticipating breakeven point around the middle part of 2016 and so with a penetration rate in U.S. And that’s based purely on U.S. commercialization by the way, but with our commercialization in the U.S. penetration rate of around kind of 4% to 5% by the mid-year point of 2016. Your question on pipeline, yes, obviously ARX-04 presents some very interesting opportunities for us as we think about this product that can potentially manage the pain of wounded soldier on the battlefield as well as provide other acute pain management situations with a product that can respond effectively to those conditions.

Certainly we’re interested in moving that program forward, ideally with support from a third party to move that forward. ARX-02 and ARX-03 at this stage are definitively waiting for partners to move those forward. Although, I do see significant opportunities for each products and certainly I think in many cases ARX-01’s clinical data set provides a lot of insight to how ARX-02 and ARX-03 may be able to help manage cancer breakthrough pain and also procedural pain and anxiety in an effective fashion. So – but certainly, ARX-04 at the moment is one that we are focusing on to see if we can move that forward quickly.

Operator

And our next question will come from David Amsellem of Piper Jaffray. Please go ahead.

David Amsellem – Piper Jaffray

I’ve just a couple of questions. Regarding your thoughts about use of cash into ‘14 and ‘15, is that building any spend on potential post-approval, post-marketing studies and just a broader question about Phase IV studies. Can you give us some color on what kind that you have planned in order to enable the product to gain further traction? This is beyond sort of the subgroup analysis and more expansive analysis that you just alluded to, but I was just thinking about your thoughts, your plans on that front, thanks.

Richard King

Okay. So Jim, do you want to talk used cash in ’14 or ’15 first?

Jim Welch

Yeah, absolutely. As we said and look at the ‘13, we don’t have any further studies that we have planned in ‘13. I do think that as we do look forward we’ve got a number of things that we want to look at in terms of the Phase 3b, 4, but most of that is going to out in ‘14, out in 2014, and 2015 is when we expect those things to occur rather than having it occur concurrently with the evaluation of the NDA with the FDA.

Richard King

So, a bit more specificity as well for you, David in terms of specific sorts of studies, clearly assist a study to the head-to-head study, I think will be very helpful so gaining traction from a labeling standpoint and would be certainly part of our plans and expectations. We are still looking at which population would be the total population to study for that head-to-head additional second head-to-head study, but certainly I think a study to support the IV PC morphine comparison would be helpful. We will also do work in pediatrics. Initially, I think we will look for expansion of labeling to basically accommodate adolescents between the age of 12 and 18. We anticipate an indication by the way for 18 years and above on initial approval. But we certainly are interested in providing support for pediatric population aged just 12 to 18.

As we go back to the between 6 and 12 population, which is what would be a second kind of push. Obviously it will depend on how we see the ability of young children to utilize the Zalviso device effectively, but we would certainly see some value first for Sufentanil and its application to manage the pain of the younger population, younger than adult population.

David Amsellem – Piper Jaffray

Okay, that’s helpful. And then another question if I may, this is a clarification question about the proposed indication in the label and you may have alluded to this, but would you expect the label indication to be just the moderate severe post- operative pain or is just a more general pain indication where potentially you could see usage of Zalviso in the ICU or in the emergency room or in say the (indiscernible) section of hospital. How should we think about that?

Richard King

Yes. So, we certainly think about this as being a broader indication than just postoperative, moderate-to-severe pain. It will be specific to hospitals. Clearly, our rooms will be focused on ensuring that the product stays within the environment of the hospital. And that’s something which we are very committed to as a company, but moderate-to-severe pain in the hospital certainly encompasses it comes to the broad range of arenas. Yes, the emergency room, but I think more particularly I anticipate you mentioned the kind of environment certainly I think that’s one where there is significant amounts of pain that could be managed – assisted and management by Zalviso Burns unit would be another one, where delivering an IV medication to a Burns patient is not necessarily an ideal set up at all in a variety of other situations. I mean, most people are in the hospital with pain if you think about the conditions that you find in the hospital. So, effective way of managing pain is certainly something which I think would be found to be abused by a broad set of people in the hospital setting and our indication is to support that.

David Amsellem - Piper Jaffray

Thank you.

Operator

(Operator Instructions) I am showing no additional questions at this time. This will conclude the question-and-answer session. I would like to turn the conference back over to Richard King for his closing remarks.

Richard King - President and Chief Executive Officer

Well, thank you everyone for joining us on the call today. If you have any additional questions, you would like to ask then please feel free to contact either Jim or myself. In the meantime, have a great evening everybody. Thank you.

Operator

Ladies and gentlemen, the conference has now concluded. We thank you for attending today’s presentation. You may now disconnect your lines.

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