Alimera Sciences, Inc.

Richard S. Eiswirth - Chief Operating Officer, Chief Financial Officer, Principal Accounting Officer, Vice President, Treasurer and Secretary Charles Daniel Myers - Co-Founder, Chief Executive Officer, President and Director

Yatin Suneja - Cowen and Company, LLC, Research Division Suraj Kalia - Northland Capital Markets, Research Division

Thank you. Good afternoon, everyone, and welcome to the Alimera Sciences conference call to update you on our progress with ILUVIEN, our sustained-release intravitreal implant for chronic diabetic macular edema, and to review our first quarter 2014 financial results.

A press release regarding these results was issued this afternoon and is available on our website. On the call with me today is Dan Myers, our President and Chief Executive Officer.

Before we begin our prepared remarks, I would like to remind you that various statements we make during this call about the company's future results of operations and financial position, business strategy and plans and objectives for Alimera's future operations are considered forward-looking statements within the meaning of the Federal Securities Laws. Our forward-looking statements are based upon current expectations that involve risks, changes in circumstances, assumptions and uncertainties.

These risks are described in the risk factors and management's discussion and analysis of financial condition in the results of operations sections of Alimera's annual report on Form 10-K for the fiscal year ended December 31, 2013, which is on file with the SEC and available on the SEC's and Alimera's websites. Additional factors may also be set forth in those sections of our Form 10-Q for the quarter ended March 31, 2014, to be filed with the SEC in the second quarter of 2014.

We encourage all investors to read these reports and our other SEC filings. All the information we provide on this conference call is provided only as of today, and we undertake no obligation to update any forward-looking statements we may make on this call or on account of new information, future events or otherwise.

Please be advised that today's call is being recorded and webcast. Additionally, the non-GAAP financial measures of adjusted cost of goods sold, adjusted gross margin, adjusted net loss attributable to common shareholders and adjusted net loss attributable to common shareholders per share will be discussed on this conference call.

A reconciliation of these measures to GAAP can be found in our press release, which is available on the SEC and Alimera's website. Now I would like to turn the call over to Dan Myers, our President and Chief Executive Officer.

Dan?

Thanks, Rick. We're pleased with the revenue growth and other activities this first quarter, and remained focused on continuing improvement in our European business.

We more than doubled our revenue from sales of ILUVIEN during the first quarter of 2014 compared to the fourth quarter of 2013 due to continued growth in Germany and the adoption in a number of hospitals in the U.K. following the NICE decision to reimburse ILUVIEN.

In Germany, progress with the statutory health insurance funds continued to be a great critical focus. To impact our engagement [ph], we need to continue to drive greater demand.

To address the demand, we are restructuring our sales efforts in an effort to improve the reach and frequency with retinal specialists. We have also made some personnel changes, including a new country manager for Germany, with sales management experience specifically focused on innovative biotechnology drugs for the treatment of special retinal diseases, most recently at Alcon Germany.

We are excited to see this progress with our German team in the coming quarters. With regards to our update on ILUVIEN in the U.K., reimbursement through the National Health Service progressed in the first quarter, as the trust began implementing the positive NICE guidance from fourth quarter 2013.

Through our experience in the U.K., we've learned that when market access hurdles are removed, we're able to move more quickly and broadly to penetrate the market. Our commercial team has been leveraging this during the first quarter of 2014 by registering hospital pharmacies and targeting the top retinal accounts.

We're also pleased with the performance of ILUVIEN as we have seen promising initial results among those first NHS patients who received an ILUVIEN implant this past January. Regarding further expansion, in France, our prelaunched commercial infrastructure is in place and prepared for the availability of ILUVIEN when our price is negotiated with the French government.

We plan to expand our local presence once we have agreed upon the price. In Portugal, we've been able to secure a contract for reimbursement for a limited number of patients and are currently evaluating our options to make ILUVIEN readily available in the country.

As you may recall, last year, we filed with the MHRA in the U.K. as a reference member state for 10 additional European Union country approvals through the Mutual Recognition Procedure.

We expect to have a consensus decision on the MRP process at the end of the second quarter and then move forward towards the national phase in each of the 10 countries shortly thereafter. Marketing authorization will follow in each country over the course of 2014 and 2015, depending on the timelines at each particular country.

Also, when I touched on our recent announcement in April regarding our exclusive 5-year agreement with Specialised Therapeutics Australia, or STA, for the distribution of ILUVIEN in Australia and New Zealand. STA will also handle all regulatory and commercial activities for ILUVIEN in those countries.

We are excited about this partnership and see this as an important milestone in the expansion of ILUVIEN worldwide for patients suffering from chronic DME. Now let's finally look at our progress with the FDA.

We resubmitted our NDA for ILUVIEN in March, responding to all questions and issues raised in the agency's October Complete Response Letter. We announced last month that the FDA acknowledged our NDA as a complete class 2 response, and that our new PDUFA goal date was established for September 26.

I will now turn the call over to Rick to discuss our fourth quarter and year-end financials.

Thank you, Dan. Turning to our financial results for the first quarter.

We generated $2.1 million of net revenue from ILUVIEN sales compared to $935,000 in the fourth quarter of 2013. As Dan mentioned, revenue for the first quarter came from sales of ILUVIEN in Germany and in the U.K., where ILUVIEN has been commercially available since the second quarter of 2013.

GAAP cost of goods sold were $564,000 for the first quarter of 2014, and GAAP gross profit was $1.5 million. GAAP cost of goods sold and GAAP gross profit during the quarter were impacted by a reserve of $435,000 for potential German inventory expiration later in 2014, because sales in Germany have not progressed at the rate we previously anticipate.

Excluding these items, non-GAAP adjusted cost of goods sold was $129,000, and non-GAAP adjusted gross margin was $2 million for the first quarter of 2014. For the first quarter of 2014, research and development expenses increased by approximately 30% to $2.6 million, compared to $2 million in the prior year period.

This increase was primarily due to increases in cost associated with the submission of our NDA in March 2014 in response to the CRL received from the FDA on October 2013. In addition to costs associated with the new clinical studies being performed in Europe, which included costs associated with a 5-year post-authorization, open-label registry study of ILUVIEN.

General and administrative expenses in the first quarter of 2014 increased approximately 10% to $2.9 million compared to $2.7 million in the prior year period. The increase is primarily attributable to costs associated with employee expansion in Europe.

For the first quarter of 2014, sales and marketing expenses decreased approximately 4% to $3.4 million compared to $3.6 million in the prior year quarter. The decrease was primarily attributable to nonrecurring marketing and market access costs in preparation for the commercial launch of ILUVIEN in the EU in the second quarter of 2013, offset by increases in costs associated with contracting with Quintiles Commercial as the commercial infrastructure in the EU we've built over the course of 2013.

During the first quarter of 2014, we saw an increase in the fair value of Alimera's derivative warrant liability, which resulted in noncash expense of approximately $13.1 million compared to $5.6 million for the 3 months ended March 31, 2013. The increase value of the derivative warrant liability for both periods were due to increases in the fair market value of our underlying common stock.

GAAP net loss attributable to common shareholders for the first quarter of 2014 was $20.8 million or $0.58 per common share, compared with a GAAP net loss attributable to common shareholders of $14 million or $0.44 per common share for the first quarter of 2013. GAAP net loss for the first quarter of 2014 was impacted by noncash items, including a change in the fair value of a warrant liability, inventory reserve and unrealized foreign currency loss.

Non-GAAP adjusted net loss attributable to common shareholders for the first quarter of 2014 was $7.1 million or $0.20 per common share, compared to $8.4 million or $0.27 per common share for the first quarter of 2013. GAAP and non-GAAP net loss attributable to common shareholders per share was based on 35.9 million weighted average shares outstanding for the first quarter of 2014 and 31.5 million for the first quarter of 2013.

In January of this year, we completed a common stock public offering resulting in gross proceeds of $37.5 million, and we ended the first quarter of 2014 with cash and cash equivalents of $41.3 million compared to $12.6 million as of March 31, 2013. In April 2014, we entered into a loan agreement with Hercules Technology Growth Capital for a term loan in the principal amount of $35 million.

Under the agreement, Hercules advanced $10 million to us, and will advance the remaining $25 million in the event that the FDA approves ILUVIEN on or before October 31, 2014, and certain other conditions are satisfied. We used the proceeds from the initial funding of $10 million under the term loan to refinance our 2013 term loan with Silicon Valley Bank, which resulted in net proceeds of $4.7 million.

The additional $25 million advance will be used to fund the $25 million milestone payment obligation that we will owe in the event that the FDA approves ILUVIEN. As a result of the closing of the Hercules debt facility, we have also terminated $50 million of working capital line of credit with SVB that had not been utilized.

Now I will turn the call back over to Dan for closing comments

Thanks, Rick. We continue to position ourselves for top line growth through sales of ILUVIEN in Germany and the U.K.

through the remainder of 2014 and into 2015. We look forward to updating our investors on our next quarterly call.

I'll now turn it back over to the operator for any potential questions. Operator?

Maybe I can start with could you give us a breakdown of sales in the U.K. and Germany?

And maybe how many units were sold this quarter?

Yatin, I don't think we're prepared to disclose the number of units, but the mix in the prior quarters have been much closer to 90% Germany and about 10% in the U.K. And we were much closer to a 50-50 split in the first quarter.

Okay. Great.

And then in terms of timelines for Australia and New Zealand launch, could you maybe lay down like how quickly it can be launched there and how big is that market opportunity? And maybe, I don't know if you have disclose or you will be able to comment on the economics that you will receive once ILUVIEN is launched in Australia.

So in Australia and New Zealand, the approval process and the path to reimbursement probably will take us at least 2 years, so I don't know, 2016. However, in the meantime, FDA is evaluating its options to pursue a special patient access program that we would hope that they would be able to start generating some sales and some royalty revenue in 2015.

The market over there is not a huge market, hence, the thought process in licensing that out, there's probably about 20,000 potential patients in that market based on the estimates we received from FDA.

Great. And then would you be interested in doing such regional partnership outside Europe, maybe in Asia or South America?

Yes, I think we did get to look at that. I mean, obviously, our initial focus is the 10 countries that we have going through the MRP process.

Those we feel like we can take on to a direct basis or some kind of basis as we have with Quintiles in the existing countries. Some of the other countries, this could become a model for us as we've done with STA for some of the distribution in those countries.

So the answer would be yes outside of the MRP countries.

Great. Just one more question on the U.S.

regulatory front. So given that you get approval, how quickly you would be able to launch?

And then have you had any discussion with payers regarding the reimbursement and have you started that process yet or it's still too early?

The answer to your first question is we would like to be -- expected to launch in the first quarter of 2015, assuming a PDUFA date of 26 and approval around the PDUFA date. And so building up the sales force, getting training done and so forth will take some 2 to 3 months.

And so it would be my goal to launch in the first quarter of 2015. We have had some discussion with payers at this point and the model with both the chronic population.

We did quite a bit of market research with payers 2 years ago when we were preparing for the launch with our initial NDA before the CRL in 2011. So we have a good basis of payers that we brought in on a couple of outcomes.

We will redo some of that and bring some of those customers back in to see if the leg-length that we expect to receive in this next approval cycle would vary versus what we saw 2 years ago. That should begin within the next month or 2.

So again, the management indicates somewhere between 250 to 350 ILUVIENs were implanted if you look at the numbers, and I know it's not precise, but it's ballpark. I guess, if I could, Dan, how many feet are on the ground?

I'm just trying to get an understanding of what the potential could be at least over the next 4 to 6 quarters, and at the same time, how many centers are you looking at? Any metrics will be great.

Yes, I'll let Rick take that from the European perspective on the number of reps and so forth. Also, Rick, maybe if you could comment more on the strategy of more of a debt call versus the breadth we've had in the centers with the KKs.

Yes, so on the ground right now, in the U.K., we have 5 sales reps in the field. We also have 1 MSL in the U.K.

and then in Germany, we have 6 sales reps and 2 MSLs in the field force. In the U.K., we have probably penetrated from an additional ordering standpoint, maybe 30% to 40% of the hospitals in the first quarter, and that number continues to grow over the second quarter as we're reaching out to more of those hospitals.

In Germany, as we said, the adoption curve has not been quite what we expected, in that I think our outreach from our sales reps was a little bit too thin. So we're trying to go back and increase the frequency of visits in some of the higher volume centers in the key opinion leaders in Germany to drive that growth over the course of the year.

Dan, like I said 2 years ago, you guys were planning on launching and - if my memory serves me correctly, there were about 29 or so reps you had identified in the U.S. that were tentative letters performance that are gone out.

Again, pardon me if my memory is failing me here. I guess, the question is as we come close to the September digital panel, things are -- at least, I would guess, if -- and barring any last minute unseen incidents, we should be getting approval shortly.

Are you in a position to be hiring these people or what's the status there?

We will undertake, potentially, some risk early on, on certain positions. Certainly, MSLs I think could be justified to be hired "at risk" if you will, to begin making calls on the key -- KOLs under the kind of scientific exchange that we're allowed to do.

So I have given Dave Holland, our Senior Vice President of Sales and Marketing, the authority to move earlier on MSLs prior to approval. There are some key opinion leaders, where we have identified people who have a history with myself or David in the past who might be key hires to bring on even as we approach approval.

We feel like the risk is not that great. But in general, though, to begin hiring sales reps, having them terminate a position and come on board, we feel more comfortable being closer to PDUFA date.

Also, as you think about it, we could bring people on the fourth quarter, but by the time you get them through the training and so forth, I think we'll be very pleased if we can get the products launched in the first quarter even if we begin hiring somewhat at risk in, let's say, the third quarter.

Fair enough. One last question, Dan, and I'll hop back in queue.

Am I mistaken, Dan, that there has been some hiccup or it's been delayed, the reimbursement in France has been delayed? Just would be great to just get some color at it.

Sure. No, I wouldn't describe a hiccup in France at all at this point.

I think it's been a bit of early dialogue with the French authorities where there was some clarity issues on ILUVIEN and the product profile of ILUVIEN. We continue to have what I would characterize as very positive dialogue with HOSS and with the [ph] group.

It's just a fairly bureaucratic process as many of our reimbursement processes are in Europe. And so at this point in time, I wouldn't say we had a hiccup.

I will say that we still are kind of grinding through meetings, and we've had a series of meetings in the last 2 months. I think we'll have better transparency, quite frankly, on our second quarter update as to whether the price agreement can come in time for us to still launch in the third or fourth quarter of 2014, which is our original goal.

I'm certainly hopeful we can accomplish that and don't feel at this point in time it's out of question. But I think we'll know more about that probably next month.

And, Dan, forgive me, one last question. So you obviously have an idea what's the European launch is and how people are tackling that landscape.

Again, I'm not asking for guidance. But as you look at the U.S., let's assume, hypothetically, January 1, 2014, you can commercially launch it -- January 2015 you can launch it, how do you see, Dan, is that the housing units you see?

You already identified the KOLs, the potential low-hanging fruit, any color will be great.

I'm sorry, Suraj. As far as this, versus the U.S.

-- the U.S. versus a lot of the experience in the EU as far as the opportunity, is that the question?

Yes, I'm just saying that in Europe, you are seeing a certain run rate right now. You have a certain feel of the market.

As you look at the U.S., how do you see it playing out, let's say, another first step? And I'm not asking for guidance, there's just so many low hanging fruit and so on.

Right. Got it, got it.

I just wanted to get to the spirit of the question. Well, I think we feel like a lot of learning that we've experienced in the EU is going to be very helpful.

I think, Dave Holland and his team have learned an awful lot about positioning vis-à-vis the various labeling, one could argue our labeling will be more attractive in the U.S. than in the EU, and certainly, others could counter that.

I think the fact that we will be more clear in our labeling, the identification and understanding of chronic patients will be, I think, easier for us in the U.S. because we've now had quite a bit of dialogue and a lot of discussion at panels and a lot of the retinal meetings in EU and now the U.S.

as people continue to believe that ILUVIEN is going to get approved. I think there's a much better understanding of the treatment paradigms of the chronic patient population as we begin the launch in the U.S.

versus it took us most of last year to help doctors understand the data, the positioning of chronic versus acute, what is determined [ph] sufficiently responsive mean, which may not be a hurdle that we would have to get through in the U.S. So all in all, I would generally tell you I feel more optimistic about the opportunity in the year 1 of the U.S.

than as we've experienced in the first rolling 12 in the EU. The biggest reasons is, of course, we have always said we think U.S.

ramp will more closely be nearing the U.K. experience than the German experience because much like in the U.K., once you get approval, you don't face the one-on-one and one-by-one issue that you face with the KKs in Germany, where every single contract has to be negotiated uniquely.

So I think we feel that we will see a greater uptake in the U.S. than we did in the first 9 months of the EU launch.

My question is twofold. What happens if the FDA -- what is Alimera's plan if the FDA does not approve the drug and is there a way that it could be used another avenue?

Well, there's other opportunities should we not get approval on the PDUFA date. Certainly, the understanding that we have with the FDA and the progress we've made, the dialogue we've had and the agreement that an ad com [ph] was not necessary, would create quite a difficult position for us with the FDA should, in fact, we get another CRL PDUFA date, considering what we think we have in a way of an understanding of where we are with them.

Obviously, there are options that I would consider at that point in time. I don't think at this point in time I'd go into what our strategic options or legal options would be, but certainly we would have to take and consider other ways to deal with our progress with the FDA should that happen.

Certainly, we don't expect that, but I guess that's the best answer I can give you for now. We do not have plans and we have not run any trials that would suggest that we would have other opportunities for ILUVIEN to be approved in the U.S.

outside of the DME indication.

Last month, you announced that PDUFA date of -- a goal date of September 26 was established. Is that normally given close to that date or is there a possibility that could be sooner?

How does the FDA work on that? I mean, in your experience?

Well, I mean, if you go back and track historically in ophthalmology, typically it's closer to the PDUFA date, although we had a couple of cases last summer where I think we saw the FDA beat those dates by 1 or 2 months in unique situations. The PDUFA date of the 26 was given to us because the standard 6-month review cycle is created when you have any issues around CMC or manufacturing.

And so the fact that in our CRLs, we've announced in the past we have really 2 components of the CRL. One was the clinical data, which we think we've resolved through the labeling discussions that we've announced and been involved with, with the FDA.

The second portion of the CRL was around some quality in CMC issues that we also think have addressed. But the mere fact that it was some CMC issues cited, statute requires it's a class 2, which triggers a 6-month review period.

I guess, there could be some speculation as to whether the data that is being reviewed needs a full 6-month review since obviously the FDA has had this data for quite some time. I think the bigger lead item will be the reinspection of the facility.

AMP who manufactures our product. Whether in fact there will be an inspection, we have not been given an inspection date at this time.

So that is to be determined. Certainly, if the FDA decides there is not an inspection necessary, then perhaps we can have the data accelerated.

But at this point in time, obviously, we're planning on the approval more to the PDUFA date of the 26.

Right. I guess, with all the data that they've had and there is a possibility and, I guess, from just the purpose of stating what 6-month requirement is, is it on or before, even on your line of credit, remains.

So there is a possibility that they could come in considerably before that date?

I suppose it would be. It would be a happy day to Alimera.

I certainly could expect [indiscernible].

Thank you, operator, and thank you for listening in today's call. We look forward to updating you on our progress in the coming months, and this will now conclude our call.

Thank you.