Altimmune Inc (ALT) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2010 PharmAthene, Inc. earnings conference call. My name is [Melanie] and I'll be your coordinator today.

(Operator Instructions)

I would now like to turn the call over to Stacey Jurchison. Please proceed.

Thank you, Melanie. Good afternoon, ladies and gentlemen, and thank you for participating today.

Joining me on the call this afternoon are Eric Richman, president and chief executive officer, Charlie Reinhart, senior vice president and chief financial officer, Dr. Thomas Fuerst, senior vice president and chief scientific officer, and Jordan Karp, senior vice president and general counsel.

I must remind you that during the course of this call management will make projections and other forward-looking remarks regarding future events and the Company's future performance. These forward-looking statements reflect PharmAthene's current perspective on existing trends and information. Any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those noted in PharmAthene's filings with the SEC on Forms 10-K, 10-Q and 8-K. Actual results may differ materially from those projected in the forward-looking statements. For the benefit of those who may be listening to the replay, this call was held and recorded on November 11, 2010. Since then, PharmAthene may have made announcements relating to the topics discussed, so please reference the Company's most recent press releases and SEC filings. PharmAthene disclaims any intent or obligation to update these forward-looking statements.

I will now turn the call over to Eric Richman, PharmAthene's president and CEO, to begin to today's conference.

Thank you, Stacey, and good afternoon, everyone. We're pleased that you could join us today for our third quarter 2010 operational and financial review.

After my remarks, Dr. Tom Fuerst will discuss recent progress in our medical countermeasures programs, followed by our Chief Financial Officer, Charlie Reinhart, who will review PharmAthene's third quarter financial results. Before we move on to Q&A, we will update you on the status of PharmAthene's litigation against SIGA Technologies.

But first, I will provide a brief overview of recent activities in the third quarter and subsequent events, which have set the stage for a potentially transformative time for our company with the opportunity for significant value creation.

As you now, earlier this month we closed a public offering of 4.3 million shares, which generated net proceeds of approximately $14.1 million. The financing is significant for PharmAthene for a number of reasons. First, we reduced our existing debt through the early conversion of a portion of our 10% senior convertible notes due in July 2011. We are also in discussions with other note holders about further possible early conversions.

Second, the remaining capital strengthens our balance sheet and we believe will provide additional runway to finance our operations through potentially the end of 2011, a period during which we anticipate several value catalysts for the -- valuation catalysts for the Company.

We have the potential to be awarded up to three major U.S. government contracts in 2011, which collectively could contribute up to $250 million to $300 million in advance development funding over the next several years. This additional funding, combined with our existing contracts, could allow us to achieve cash flow neutrality late next year. Further, we were notified in November that PharmAthene was awarded four separate grants totaling approximately $850,000 under the government's qualifying therapeutics discovery project.

And finally, we were pleased to report recently that the NYSE Amex determined that we have made reasonable demonstration of our ability to regain compliance and grant us an extension until January 26th, 2012, to execute against our compliance plan. During this time the NYSE Amex will continue to list our common stock subject to certain conditions, which are outlined in the Company's SEC disclosures.

We have already made progress on implementing our plan by reducing our debt, and are confident we can meet the other obligations and conditions outlined in our plan next year.

I'll now turn it over to Dr. Tom Fuerst, who will provide a brief update on our medical countermeasure programs.

Thank you, Eric.

Let me begin with our SparVax rPA anthrax vaccine program. We are developing SparVax for general use prophylaxis and post exposure prophylaxis for anthrax. I am pleased to report that progress in this program remains on track as we continue to successfully meet our milestones under our existing development contract with BARDA. Our current efforts are primarily focused on completing the technology transfer from Merck Avecia based in the UK to our U.S. based manufacturing partner, Merck RTP.

During the third quarter our process sciences team made excellent progress optimizing the fermentation process to increase rPA production yield. Our results demonstrated a six-fold increase in yield at the bulk drug substance stage, which is significant.

Also, subtle improvements to the formulation process have enabled us to further enhance the stability of the vaccine, which has been the Achilles heel of our other recombinant anthrax vaccines. We have presently demonstrated stability of our rPA bulk drug substance at 52 months using a well characterized mouse challenge [protease] assay and 39-month stability of our final drug product, with a 56-month time point due at the end of this month.

We are very encouraged about the opportunities for our rPA program, as the benefits of an rPA based vaccine are well established and we believe our program is at the forefront of efforts in this field. Most importantly, our rPA anthrax vaccine program meets a fundamental objective of Project BioShield, which was established to encourage the development and acquisition of newer, modern medical countermeasures that offer potential improvements in cost, convenience, safety and effectiveness for the U.S. government and its citizens.

Moving on to Valortim, we have completed the final phase of our investigation to determine the cause of adverse reactions seen in the Valortim cipro study, our second phase 1 study for Valortim, which commenced last year. The adverse events that occurred during this trial caused the program to be placed on partial clinical hold in November 2009. Various evaluations have been ongoing since that time to determine the cause of the adverse events.

Results from our recently conducted skin testing study suggest that the reactions observed in the study were not caused by an IgE mediated allergy to either Valortim or its selected components. We recently presented the results of our investigation to NIAD, BARDA and the Safety Monitoring Committee for the current Valortim clinical studies. Pending FDA approval, they all agreed with our proposed plan to initiate an intravenous dose escalation study of Valortim, with an infusion rate slower than the first phase 1 study, in which no serious adverse events were observed.

We have submitted our formal response to the partial clinical hold to the FDA for formal consent to reinitiate clinical testing of Valortim. If approved, we expect to begin clinical testing of Valortim by January 2011. At such time as Valortim is taken off partial clinical hold, BARDA has told us we will be eligible to resubmit a request for additional advanced development funding for the Valortim program. This could result in the award of additional funding for this program exceeding $100 million over a period of several years.

The goal of this new contract would be to complete all R&D required to deliver product to the Strategic National Stockpile. We believe that Valortim is the leading anthrax antitoxin candidate for future procurement in the stockpile due to its efficacy in animal studies at low doses and a presumed different mechanism of action relative to other anthrax monoclonal antibodies, which could impart certain advantages.

Regarding developments in our nerve agent bioscavenger, or recombinant BChE program, we were recently informed by the Department of Defense that it is considering deferring a decision on whether to fund continued advanced development of Protexia, our transgenic derived recombinant BChE product candidate, pending a decision on a preferred source for BChE, either human plasma derived transgenic or mammalian cell culture. As a result, it is uncertain whether our September 2006 contract will be extended past its current end date of December 31, 2010.

Meanwhile, we are currently in negotiations with the DOD regarding funding for research we have been conducting and self-funding related to the production of recombinant BChE using a traditional mammalian cell-based expression system. We're very encouraged about the potential for this advanced expression system for recombinant BChE, as it represents a robust, scalable and mature technology platform offering important advantages over both plasma derived BChE and transgenic recombinant BChE.

Specifically, the potential for a more streamlined development and production process enabling commercially viable production yields and substantially lower costs of production, ultimately with better margins. In addition, such an approach is consistent with the DOD and HHS initiatives to support the use of flexible state-of-the-art technologies to meet the needs of both the military and civilian strategic stockpiles.

We are currently in discussions with the DOD regarding a path forward for the recombinant BChE program and anticipate that we may receive funding later this year or early next year for additional evaluation of our advanced expression system program or to fund additional data to support a decision to move forward with the transgenic program.

I will now turn it over to Charlie to briefly summarize our third quarter 2010 financial results.

Thank you, Tom.

For the third quarter ended September 30, 2010, revenues were $6.2 million compared to $6.8 million in the same period of 2009. For the nine months ended September 30, 2010 and 2009 respectively, revenues were $14.1 million and $20.4 million. Revenues during the most recent quarter and first nine months of 2010 consisted primarily of contract funding from the U.S. government for the development of our medical countermeasure programs, SparVax, Valortim and Protexia.

The decline in revenue in the third quarter and first nine months of 2010 compared to 2009 is attributable to the completion of activities under the Company's existing Department of Defense contract for Protexia, which concluded in the third quarter of 2009, partially offset by modest funding from the DOD for this program in the second and third quarters of 2010 and reduced activity in the Company's Valortim program, and the completion of all activities in the Company's plague program during early 2010, partially offset by increased revenues under the Company's SparVax program.

Because R&D expenses drive revenue, we saw reductions in our R&D expenses that were similar to the reductions in revenue. Specifically, PharmAthene's research and development expenses were $6.2 million for the quarter ended September 30, 2010 compared to $7.9 million for the third quarter of 2009, and $17.1 million and $23.9 million for the nine months ended September 30, 2010 and 2009 respectively.

Research and development expenses decreased in the third quarter and the first nine months of 2010 compared to the prior year period as a result of decreased activity in the Company's Valortim anthrax antitoxin and chemical nerve agent bioscavenger programs, as well as the completion of all activities in the Company's plague program, partially offset by increased activity under the SparVax anthrax vaccine program. In addition, the decrease in research and development costs for the nine months ended September 30, 2010 also reflects the inclusion of a onetime $3 million Avecia termination fee in the second quarter of 2009.

Expenses associated with generation administrative functions were $3.2 million in the third quarter of 2010 compared to $6.2 million in the same period in 3009. Expenses associated with general administrative functions were $12.6 million and $15.8 million for the nine months ended September 30, 2010 and 2009 respectively. Our general and administrative expenses decreased approximately $3 million for the three months ended September 30, 2010 and approximately $3.2 million for the nine months ended September 30, 2010, as compared to the prior periods as a result of a targeted cost reduction plan which included reductions in personnel expenses, professional services and non-cash stock-based compensation.

For the third quarter ended September 30th, 2010, PharmAthene's net loss was $4.3 million, or $0.14 per share, compared to $14.0 million, or $0.50 per share, for the third quarter of 2009. For the nine months ended September 30, 2010, the Company's net loss attributable to common shareholders was $18.7 million, or $0.62 per share, compared to $26.6 million, or $0.97 per share, in the same period of 2009.

As of September 30th, 2010, the Company had cash and cash equivalents, short term investments, restricted cash and U.S. government accounts receivable and other receivables totaling $11.5 million as compared to $13.7 million at June 30th, 2010.

As Eric mentioned, we recently completed a public offering of 4.3 million shares of our common stock, which generated net proceeds of approximately $14.1 million before certain expenses. Several new institutional investors participated in the financing, as well as some of our current shareholders.

Also, simultaneously with the closing, certain of the Company's 10% senior convertible note holders converted their notes into an aggregate of approximately 3.4 million shares of our common stock. Several of the holders of our convertible notes converted upon the closing of the offering, which has helped to reduce our current debt. A substantial number of insiders participated in the note conversion, including some of our original venture capital investors, a board member and our CEO, underscoring confidence in PharmAthene's near term prospects.

We currently believe that based on our current operating cash requirements and expected capital expenditures and assuming the over-allotment option is exercised and expected receipts from our government contracts grants and other sources of funding are realized, we will not require additional funding to continue our current level of operations through at least the end of 2011.

I'll now turn it back over to Eric to wrap up.

Thank you, Charlie.

As many of you are aware, SIGA Technologies announced on October 13th, 2010 that the Department of Health and Human Services had informed them of its intention to award SIGA a procurement contract. The contract is valued at between $500 million for the base period and up to $2.8 billion in potential revenue if all options are exercised by the government and pending resolution of issues related to SIGA's status with the Small Business Administration.

We believe that ST-246 is the leading smallpox antiviral therapeutic option available and that it meets the criteria under the RFP to be included in the Strategic National Stockpile. We're very encouraged by SIGA's early renouncement that the government intends to procure ST-246 and look forward to the U.S. government and SIGA resolving this issue in order that this important product can be included in the Strategic National Stockpile.

Now moving on to the litigation, the case is scheduled to go to trial on January 3rd, 2011. In March 2010, SIGA filed a motion for partial summary judgment and the parties presented oral arguments during a hearing on July 22nd, 2010. We continue to await the court's decision on the motion and expect an opinion from the judge at any time. We are confident in the merits of our case and look forward to presenting our evidence at trial.

If we are successful in our litigation, a substantial portion of the value of any procurement contract award to SIGA for 246 could flow to PharmAthene. We will certainly keep you updated regarding any developments.

With the number of significant opportunities for value creation over the near term, we believe that the next several quarters could be a transformative time for PharmAthene. To recap, upcoming valuation catalysts for the Company include a decision from the court on SIGA's motion for partial summary judgment, which is expected at any time, notification from the (inaudible) permitting us to commence the next Valortim clinical study, potential funding from the Department of Defense to support ongoing research related to an advanced expression systems for rBChE, and commencement of the bench trial in the SIGA case on January 3rd, 2011.

Our mission at PharmAthene is straightforward, to develop and commercialize new and improved medical countermeasures which enhance our nation's biosecurity and protect the wellbeing and safety of all Americans. We are dedicated to achieving this mission and sincerely appreciate your support. We look forward to keeping you updated as we achieve these goals.

Operator, that concludes my formal remarks today. Could you please instruct the audience on the Q&A procedure?

Yes, sir. (Operator Instructions)

And our first question comes from the line of [Ragh Selvaraju] with Noble Financial Group. Go ahead.

Thank you very much for taking my questions. Just a few things. First of all, with respect to the brief from the judge that we are continuing to await, can you give us some color on at what point we might expect it to appear by and how much time you typically would see between the issuance of the brief and the onset of the actual trial, which, as I understand it, is slated to begin in early January? Obviously the judge would need to provide both parties with (inaudible) in advance of the trial date to allow both parties adequate time to prepare correct?

Yes. Ragh, thanks for dialing into the call today. I think that question is probably best addressed by our general counsel, Jordan Karp.

Hi, Ragh. In terms of the timing of the court's opinion or ruling on (inaudible) motions and partial summary judgment, frankly, that could come any time now. we continue our preparations for the trial, and both parties in the case are right now coordinating with the court pretrial activities. And as we mentioned earlier, the trial is still scheduled to start January 3rd.

Could you provide us with some color on what it would mean for the trial context if the judge does uphold all of PharmAthene's claims [in this court opinion]?

Well, just to be clear, PharmAthene has not filed a motion for summary judgment. SIGA did. And so SIGA has asked the judge to rule on two discrete aspects of the case. Depending on how the judge rules, that would shape what issues are ultimately put before the court and decided at trial. Even if, in the worst case scenario, the [Judge Braus] granted SIGA's motion in full, there are still issues that would need to be resolved at a trial.

Based on his remarks at the hearing in July, the judge indicated he would likely deny the motion and just hear the entire case at the trial. And that's our current expectation is that he'll just hear all the claims and just decide them after a full trial.

Okay, that's helpful. Then just a couple of quick questions regarding SparVax and eventually some guidance on what we could expect regarding contract revenue for 2011. When do you expect to hear back from BARDA regarding the next potential contract award on SparVax? What's the magnitude of that which you are expecting right now? Could you contextualize that in light of the recent contract award that was previously given to the [Emergent's] product candidate?

And also, could you give us any information, perhaps, Charlie, this is a question for you, on what we could expect to see relative to level of contract revenue in 2011 compared to what we've seen in the quarter?

Sure, Ragh, I'd be happy to do that. So the first part of your question is focused on SparVax. And we have a white paper submitted for the next phase of that program's funding. We expect to move forward with BARDA and hope that that contract is up and running in the middle of next year. We believe the contract in size will be in excess of $100 million over a three or four-year period.

And that, as you're probably aware, is one of the cornerstones of the evolution of this company from a company of our current size into one next year that should approach something like a $70 million top line, depending, of course, on the timing and size of the new contracts. And so in order to get to something like a $70 million top line, we will need to get the second generation anthrax vaccine next contract. We'll need to do the same for Valortim.

So earlier you heard us comment that we expect to get off of clinical hold and start -- and start to reengage BARDA on the negotiation of that contract, and some additional funding on the recombinant bioscavenger program also. And as you may recall, we've already been awarded over $200 million worth of funding on the SparVax program in and of itself.

And so the importance of accomplishing those milestones to this business is that it puts us in a position to be -- to reach cash flow neutrality late next year. And we think that's really an important thing for us.

Our next question comes from the line of Matt Duffy with BDR Research. Go ahead.

Hi. Thanks for taking my question. Couple of things. Just in terms of trying to bookend sort of an outcome of the SIGA litigation, is there any range on the damages or the outcome of the trial that you might be able to provide us? For example could the judge go so far as to enforce the original licensing agreement?

Matt, hi. It's Eric. Thanks very much for joining us this afternoon. to answer your question in a word, yes. That is a possible outcome. But to provide really the full range of options that could come out of a trial, I'm going to turn it over to Jordan Karp once again.

Hi, Matt, it's Jordan. Look, again, assuming we don't lose the case or we win the case and the judge awards us some nominal damages, we really asked the court for any of the following three things. Our lost profits, which is a common damage remedy in a breach of contract case. Enforcing the license agreement term sheet, as you just mentioned. And then even another possibility we've put by the court is having SIGA pay us a royalty on sales.

So we've put forth a range of potential remedies that I think any of which would be welcome from our end.

Okay, great. Thanks. That's very helpful. And just in terms of the rBChE program, how far behind the transgenic program is that? And can you talk a little bit about what timelines would look like if DOD ended up going for the mammalian line as opposed to the transgenic?

Yes, sure. This is Tom. And with regard to the advanced expression system, the development timeline with that system would be the same, if not sooner, than the transgenic [goat derived] product because it's a conventional manufacturing platform.

Yes. And, Matt, just a little bit more detail on that. Tom mentioned that it is an earlier stage program and that we have self-funded it to a certain stage. We have at this point already been able to demonstrate that we are able to make the recombinant BChE through this cell expression system. And secondly, we know that through various assays that it is active. So we're quite encouraged by the results so far.

Very good. Thanks, guys.

Our next question comes from the line of [Steve Brozak] with WBB Securities. Go ahead.

Hey, good afternoon, gentlemen. I'm going to jump off the bandwagon here and not really talk too much about what earnings are, but more about the tenor. Because obviously we've just had a pretty interesting set of new elections and you basically just got a situation where you strengthened your relationship with BARDA. Can you talk about the tenor of the relationship with, let's say, the government in terms of contracting and contracting going forward and what you think their interests are? Because obviously a lot of people have been complaining there hasn't been execution in terms of awarding of contracting new technology. And what kind of a spirit you're seeing and how will that benefit you obviously in what's left of 2010 and into 2011? And I'll have one follow-up after that.

Okay. Thanks, Steve. Maybe I'll take the first stab at that question. What we've seen this year is really a renewed enthusiasm on the part of BARDA. They are extremely engaged in our program. They have been nothing but supportive in their biweekly team meeting. The questions typically at the end of our meetings with them are what else can we do to help you, to support you. And that's quite refreshing.

And I think when the [stem c] strategy was rolled out in August of this summer, August of this year, I think that that was a very important sign from the administration and that they are in full support of biodefense initiatives and that we have seen it at every level within the government. So we're very encouraged so far by what we see, at least on the working team level, within BARDA. And we see that on certainly on a weekly basis. So we're quite optimistic about that.

But I think I'll turn it over to Francesca Cook, who's our senior vice president of government affairs, to provide additional commentary.

Thanks. Hi, Steve. I know that you certainly were part of the whole (inaudible) review strategy, so you were a party to the government deliberations there. And as Eric mentioned earlier, I think the (inaudible) strategy does very much focus on trying to improve the landscape and working with contractors such as small businesses like PharmAthene and moving more aggressively toward identifying positive products that have a good potential to be stockpiled and to work more closely and collaboratively with those companies on their development and move more swiftly towards procurement.

I think we've also had some changes after the election in terms of the congressional makeup. And I think we'll see certainly a continued focus on national security. And I think in terms of the biodefense and chemical defense programs that there still will be very much support and perhaps even greater support for these national security related efforts going forward.

Okay. That actually leads me to the follow-up, the bookend on the other side. A lot of the projects that you work on are dual purpose in essence. But you don't really see them as the redheaded stepchildren of large pharma because you don't really see them as being necessary until there's some kind of crisis.

What do you see with successful project execution of your ability to partner for commercial purposes for some of the products that you're working on, obviously under the auspices of different government agency work? What do you see the possible logical next step that might, how should I put it, strengthen your franchise even more in terms of discussions with large pharmaceutical or more innovative large biotech companies? And I'll jump off the queue after that.

Thanks, Steve. Our focus today purely is in the biodefense sector, and the products that we have -- that we're currently developing really serve that market. The immediate market obviously is the U.S. government, and that includes the Strategic National Stockpile as well as the Department of Defense. Beyond the U.S. government, there are markets outside the U.S. which we believe that our products could serve and we certainly market our products towards.

We think that eventually there will be some sort of commercial market, although that's not actually established today for the products that we're developing. And this would be some sort of a stockpiling type of commercial market we saw with the desire to stockpile antivirals during pandemic flu and other situations that have occurred over the last several years.

So as far as a dual purpose, initially our focus really is biodefense. But we think ultimately, certainly with the recombinant modern technology produced vaccine where capacity is not constrained and there is the ability to produce large amounts of product, we would be able to serve other markets.

Our next question comes from the line of [Nathan Colly] with Noble Financial. Go ahead.

Hi, guys. Good afternoon. Thanks for taking the questions. Regarding the SPA ruling with SIGA, do you guys have any thoughts there as far as what would progress there? And have you seen any rulings and precedent cases as far as the affiliate question that's going on now?

Nathan, thank you for joining the call. And I'll try to address that question. The matter that's between SIGA and the Small Business Administration and BARDA and the protestor of the Company called [Chimerix] is something that we don't have a lot of insight into, and I'm not sure that we'll be able to provide any detail. And we would suggest that you address the question specifically to those companies.

But I would like to point out, though, that the ST-246 product does meet the RFP criteria, as far as we know. And it's an essential product for the Strategic National Stockpile. So as far as the protests and the contracting mechanism, our view, and it's purely my opinion, is that the contracting mechanism will get worked out. The product is too important for the Strategic National Stockpile and the product will be stockpiled. Maybe, Jordan, you have additional view?

I mean, just to reiterate what SIGA has said, is they plan to appeal the hearing officer's initial ruling. They've also mentioned publicly that there may be other options available for procurement of ST-246. Again, we don't have insight into that, but I'm encouraged by those public statements. And to what Eric said, ST-246 is a very promising product and I'm hopeful the government will work out a way to put it in the stockpile.

Okay. And then as far as the case that's going on with SIGA, and you guys are asking for lost profits and royalties and so forth, do you have any particular numbers that you're looking for as far as the lost profits? And what would you expect as a potential royalty?

This is Jordan here. Again, I think it would be premature to say a lot about this before the trial. I will note that SIGA has publicly noted in its SEC filings that our damages expert has provided an assessment of potential damages up to and including $1 billion. So I think the damages could be significant. And we look forward to getting into the court and putting on our evidence and making our case.

Okay. And then I just have one more question. On rBChE, as far as if you were to manufacture that in mammalian cell, would you indicate a manufacture -- contract manufacturer there? And what do you expect as far as manufacturing that product?

Nathan, we would -- we would look for a contract manufacturer, at least initially, for that product. We've actually been looking at different methods of producing that product. Some of them involve disposable technology and something which could be done on a campaign basis and using some of the newer methods for protein production. So we have been looking at various contract manufacturers.

We haven't really at this point selected one or needed to select one yet. So that's, at least initially, a product that we would have produced outside of our facilities.

Ladies and gentlemen, that does conclude the time that we have available for Q&A today. I'd like to turn the call back over to Stacey Jurchison for closing remarks. Please proceed.

Thank you again, Melanie. And, ladies and gentlemen, thank you also for joining us this afternoon. If there are any additional questions or if any of you would like additional information about PharmAthene, please don't hesitate to contact me directly at any time.

Thank you very much and have a great evening.

Ladies and gentlemen, thank you for your participation in today's conference. That does conclude the presentation. You may disconnect. Have a wonderful day.