Altimmune Inc (ALT) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 PharmAthene, Inc. Earnings Conference Call. My name is Rathinia and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Stacy Jurchison. Please proceed.

Thank you and good morning, everyone. Joining me on the call today are Eric Richman, President and Chief Executive Officer; Dr. Tom Fuerst, Executive Vice President and Chief Scientific Officer; Jordan Karp, Senior Vice President and General Counsel; and Jim Rousseau, who has been providing strategic guidance to our finance and accounting group since September 2011 and will be transitioning the responsibility to our newly appointed Senior Vice President and Chief Financial Officer, Linda Chang.

Before we begin, 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 9, 2011. Since then, PharmAthene may have had 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.

With that, I would now like to turn the call over to Eric Richman, PharmAthene's President and Chief Executive Officer.

Thank you, Stacy. Good morning and thank you for joining us today for our third quarter earnings call. We are pleased to update you on the significant developments here at PharmAthene during the quarter and to introduce our new Chief Financial Officer, Linda Chang. Linda joins us from Human Genome Sciences and brings considerably financial management depth and expertise to the team. We are delighted to have her on board.

After my opening remarks, Dr. Tom Fuerst will discuss recent progress in our Biodefense Medical Countermeasure Program. Following that, we'll review PharmAthene's third quarter 2011 financial results and open the call to your questions.

I am pleased to outline the major developments achieved in the quarter and what these mean for the future of PharmAthene and their contribution to building shareholder value. During the quarter, we won a major victory in an almost five year long litigation against SIGA Technologies that should result in a major revenue stream for the Company over the next 10 years.

We also made substantial progress across our Medical Countermeasure Program. The decision by the Delaware Court of Chancery is transformative for PharmAthene. The ruling awards PharmAthene the right to receive 50% of the net profits over 10 years from all sales of SIGA's smallpox antiviral therapeutic ST-246 and related products after SIGA receives the first $40 million in net profits along with one-third of our reasonable attorneys fees and expert witness costs. This is a meaningful economic stake in ST-246, which has significant market opportunity.

Comments that SIGA has made in its public disclosures suggest that sales of ST-246 to the US government could begin as early as late summer 2012 or early 2013 under an initial contract awarded to SIGA by BARDA. BARDA is the agency that oversees medical countermeasure procurement.

The contract awarded in May of 2011 and modified in June of 2011 has a base value of $433 million, which includes $20 million in product development funding. Dr. Rose, Chief Executive Officer of SIGA, has publicly confirmed that the performance of the base contract is SIGA's number one short-term priority.

Briefly, for those of you not familiar with ST-246, it's an orally administered small molecule antiviral intended for the treatment of symptomatic smallpox infection. ST-246 is currently the leading smallpox antiviral candidate and the only one that has demonstrated efficacy in non-human primate models of orthopox virus disease. It functions by preventing the ability of the orthopox virus to spread to other cells, thereby preventing disease progression.

The market opportunity for ST-246 is among the largest of all biodefense-related markets and, in addition to the initial contract, includes the potential for additional sale to the US government and sales to foreign nations, which we believe could potentially represent an overall market opportunity in excess of several billion dollars.

In its sole source justification for the contract, which was initially issued in December of 2010 and supplemented in May of 2011, the US government identified a smallpox antiviral as a potential important secondary prophylaxis option for approximately 4% of the US population, or 12 million people. Those 12 million people are currently estimated to have an uncertain immune response to smallpox.

These additional 12 million treatment courses were originally included in the contract awarded to SIGA in May of 2011 as an option, bringing the total overall potential value at that time to approximately $2.8 billion. Based on the government's statements, we believe that BARDA will procure the additional 12 million treatment courses under future procurement RFPs.

While the options may have been cancelled for the initial contract, we believe that the US government will make significant follow-on purchases of ST-246 as they have done so for other medical countermeasures for the strategic national stockpile. Further, international recognition of the threat of smallpox is also strong and presents significant additional sales opportunities for smallpox antivirals worldwide.

And, for example, Israel's Operation Orange Flame 4 will run in early 2010 evaluated a potential smallpox exposure response scenario. During this exercise, the State of Israel reached out to SIGA to negotiate the hypothetical procurement of ST-246 for its citizens. We also understand the World Health Organization, NATO, and other nations have expressed strong interest in stockpiling a smallpox antiviral.

So, what are the next steps with regard to the case? On October 4, 2011, SIGA filed a motion for re-argument asserting, among other things, that the court erred in its application of law in an equitable payment stream to PharmAthene. PharmAthene filed a brief in response to this motion citing precedent both in Delaware and other states supporting the court's use of a constructive trust as a remedy in this case.

While there is no set timeline to rule on this motion, our Delaware counsel indicates that a decision could occur within approximately 30 to 60 days from filing. If the court denies the motion, the parties will have 20 days from the date of the ruling to submit a proposed form of final judgment, following which the court will render its final order.

At that time, each of the parties will have 30 days within which to file a notice of appeal. While we have not made a final decision about whether to appeal those aspects of the case as to which we did not prevail, we would strongly consider it if SIGA files an appeal.

There is only one level of appeal in Delaware -- the Delaware Supreme Court. Our Delaware counsel has indicated that if SIGA pursues an appeal, it is a relatively swift process and should take approximately six to 12 months to complete. We anticipate that this time period will coincide with that for SIGA to commence sales of ST-246 to BARDA under its initial contract. So we are optimistic that any potential legal process will be resolved by the time PharmAthene is eligible to begin collecting payments on sales of ST-246.

At this point, I will turn it over to our Chief Scientific Officer to update you on recent achievements in our biodefense programs.

Thank you, Eric. Our product development teams have continued to make solid progress in each of our core biodefense programs this year. Our anthrax vaccine program, in particular, stands out as we achieved three important milestones in 2011.

We believe this vaccine candidate has features that should make it a highly desirable candidate for inclusion in the strategic national stockpile, and we are working aggressively towards its advancement.

First, we now have data demonstrating 36-month stability for a final product stability for SparVax, an important milestone for the program. As you may be aware, stability has been a major stumbling block for other recombinant anthrax vaccine programs. Our data suggests that SparVax is both highly stable and potent.

Second, we recently completed technology transfer of our manufacturing process for the bulk drug substance for SparVax to our US-based contract manufacturing organization at the 1,500 liter commercial scale -- another significant technical achievement for our program.

Unlike the first generation anthrax vaccine or other rPA-based vaccines, our rPA vaccine technology platform utilizes E. coli, which enables a much more robust manufacturing process.

This process has the capability of annually producing more than 150 million rPA vaccine-equivalent doses of bulk drug substance at the 50 microgram per dose range using a single 1,500 liter fermentor, a significant improvement in production yield compared to the first generation anthrax vaccine, which with current capacity constraints, can only product 7 million to 8 million doses annually.

Further, our manufacturing platform enables significantly enhanced rPA production yield without production of destructive proteases that can be detrimental to product stability, a key differentiating feature between PharmAthene and other rPA-based anthrax vaccine programs.

The use of modern recombinant vaccine technology will enable a more refined and cost-effective anthrax vaccine solution for the US government and its citizens, and also provides the flexibility to rapidly scale up productions in the event of a national emergency.

On another front, we were awarded a contract from the Department of Defense valued at $5.7 million over the next 21 months for development of a mammalian cell culture approach for a recombinant RChE program, a broad spectrum chemical nerve agent prophylaxis. If successful, the advanced expression system, or AES platform, could have significant advantages over the original transgenic approach utilized for Protexia.

Specifically, the advantages include the production for a more streamlined development and production process, enabling commercially viable production yields and substantially lower costs of production, ultimately with better margins. We are continuing to work collaboratively with the DoD to execute on this contract and position the AES platform for future funding to initiate Phase I plan for development.

With regard to our Valortim program, we have completed the in-like portion of the current Phase I dose escalation clinical trial and expect to report results from the clinical trial by the end of the year.

Data from an initial Phase I study of Valortim will be published in the upcoming December 2011 edition of Clinical and Vaccine Immunology. These data showed that Valortim was generally safe and well tolerated and non-immunogenic when administered as single 0.3 mg/kg to 20 mg/kg IV infusions or as a single 100 mg IM dose injection.

There is a strong need for additional therapeutic options for inhalational anthrax disease as current therapies; specifically antibiotics and aggressive support of care are not optimally effective in individuals with active symptomatic anthrax infection.

I look forward to keeping you updated on our future progress in each of these program areas.

Thank you, Tom. Let us switch gears for the moment and briefly review PharmAthene's financial and operating results for the third quarter of 2011.

Joining us for the first time on our quarterly calls is our newly appointed Chief Financial Officer, Linda Chang. With over a decade of experience in healthcare corporate finance and demonstrated track record of success in completing financial transactions and developing corporate strategy, Linda will be a tremendous asset to PharmAthene as we position ourselves for continued growth and success.

Prior to joining PharmAthene, Linda spent 11 years at Human Genome Sciences, where she was a key member of the team that raised over $1.8 billion in equity, issued and restructured over $600 million in convertible debt, and transacted over $950 million in real estate financing. We are very fortunate to welcome Linda to our executive team and look forward to her contributions.

Linda, please go ahead.

Thank you, Eric. I'm delighted to join PharmAthene, particularly at such an exciting time in the Company's history. I look forward to working closely with my colleagues to advance our objectives and to meeting many of you at future investment banking conferences and other events.

For the third quarter of 2011, PharmAthene recognized revenue of $5.3 million, compared to $6.2 million in the same period of 2010. Revenue for the most recent quarter consisted of contract funding from the government for our SparVax and Valortim biodefense programs.

Revenue for SparVax was $4.3 million for the three months ended September 30, 2011, compared to $3.8 million for the same period in 2010. This increase is attributable to efforts related to the technology transfer process for SparVax.

Revenue for Valortim was $0.9 million, compared to $0.6 million for the same period in 2010. The increase in revenues during the third quarter of 2011 was partially offset by a decrease in Protexia revenue resulting from the completion of the Department of Defense contract.

Research and development expenses were $4.9 million for the quarter ended September 30, 2011, compared to $6.2 million for the same period in 2010. The year-over-year difference was due to the decrease in development expenses as a result of the completion of the DoD contract.

General and administrative expenses for the Company were $3.3 million and $3.2 million for the quarters ended September 30, 2011 and 2010, respectively.

For the third quarter of 2011, we were essentially break-even given a net loss of approximately $33,000, or $0.00 per share, compared to a net loss of $4.3 million, or $0.14 per share, in the same period of 2010. The year-over-year decrease in net loss is mostly attributable to the change in fair value of the Company's derivative instruments due to the decrease in our stock price.

As of September 30, 2011, the Company had cash and cash equivalents, short-term investments, and net receivables totaling approximately $16.9 million, compared to $21.6 million at December 31, 2010. The decrease was primarily due to a loss from operations of $10.6 million offset by net proceeds of $5.8 million from a common stock and warrant offering completed in June as well as a net reduction in receivables and other expenses.

Now, looking ahead. With our existing cash and government receivables, we are comfortable that we will have sufficient capital to meet our liquidity needs into the third quarter of 2012. We are also evaluating non-dilutive financing options to strengthen our balance sheet and ways to further improve our operating efficiencies.

With that, I will turn the call back over to Eric to continue.

Thank you, Linda. Before I conclude, let me briefly review the status of biodefense funding and the government's ongoing commitment to the support of national security priorities.

Funding for biodefense maintains strong bipartisan support in Congress and was one of the few areas that received a substantial increase in funding in the 2011 fiscal year. Both the Senate and House have proposed $415 million for BARDA's advanced development activities in their FY2012 appropriate bills, which is the same level of funding in fiscal year 2011 and represents an increase of $110 million over the FY2010 appropriated amount of $305 million.

In summary, the recent favorable decision from the Delaware Chancery Court represents a fundamental change in the value proposition for PharmAthene. It serves to accelerate our near-term profitability.

At no other point in our history have I been more confident about the Company's prospects. The future profits from ST-246, along with the significant progress we continue to make in our second generation anthrax vaccine program, positions PharmAthene as an emerging leader in biodefense with an interest in two products with billion dollar potential over the next five to seven years -- our second generation anthrax vaccine and a robust income stream from ST-246.

We believe that our current market cap does not reflect this potential and, consequently, that this is a very attractive entry point for investors. I am delighted by the interest we are seeing from investors in the Company. We look forward to the future with significant optimism and to keeping you updated on our achievements.

Operator, that concludes my prepared remarks. Could you please advise the audience of the Q&A procedure and open the line for questions?

(Operator Instructions). Your first question comes from the line of Joe Pantginis from ROTH Capital Partners. Please proceed.

Hey, guys. Good morning and thanks for taking the question.

Eric, this might be an overgeneralization on my part, but it appears that a majority of investor focus still is remaining on the ongoing drama, if you will, with SIGA. So with that said, I think -- you're not getting due credit for all of the background activities for really what is your core pipeline of products, especially with SparVax.

So with that said, I was just curious. The general question is what are going to be some good trigger points to get investors interested in your core programs again? And, more specifically, thanks, Tom, for describing the differentiated properties of SparVax and you did mention proteases, for example, in other vaccine products. Maybe you could talk to the importance of the presence of those proteases, or negative importance.

And, Eric, you mentioned continued biodefense funding. I was wondering if you could talk to maybe a little bit more specifics of next potential funding steps for SparVax. Thanks a lot. I knew that was a mouthful.

Joe, thanks for joining us this morning and appreciate your interest and your question. So, there are several questions there. I think that I'll take a couple of them and I'll hand a couple over to Tom Fuerst.

But you start off talking about the credit that we're receiving, or not receiving, from our biodefense programs. And I tend to agree with you quite strongly that I don't believe that we're getting credit for our second generation anthrax vaccine program, which we believe to be a very valuable biodefense asset, as valuable as the ST-246 product, which we also don't believe we're getting full credit from.

And I think that you're probably better than I am at trying to understand or explain why our stock hasn't caught up with the fundamental value change in the Company. But I would suggest that has to do with a lack of understanding of what the value of the ST-246 product means to PharmAthene and what it represents overall.

And as I mentioned in the comments this morning, originally there was a $2.8 billion contract, and that was reduced to the base contract due to protests of some negotiations that went on between the Company, SIGA, and BARDA, I believe. And that reduced it to a base contract of around $400 million.

And I think that analysts and investors are not understanding the commitment that the government has to fill the stockpile with 12 million doses, but are rather focusing on that initial contract and then discounting it and then attributing PharmAthene to a portion of it. So I don't think that the value of that revenue stream has been fully recognized for SIGA nor for PharmAthene.

As it relates to our SparVax program, as we said a year ago, while we were pursuing a legal strategy with SIGA, our number one focus was to execute our programs under our contracts with BARDA and NIH; and that's exactly what we've done.

And we have put our heads down and we've focused on executing and achieving major objectives this year and, as Tom outlined, we hit the -- checked the major boxes that are necessary for additional funding. That's 36-month stability; and that is transferring the manufacturing process from the UK to the US; and then also producing the product at full scale in GMP, when we just completed our first run last week.

So we will continue to execute. We will -- certainly are thinking about the stock price and are concerned about the stock price, but our number one focus is coming out of the litigation with a court order, which we expect in the next couple of weeks, and then continuing to execute on our major programs.

Tom, I'll turn it over to you to address the question about proteases in other anthrax vaccine products.

Sure, I'd be happy to comment on proteases. And so proteases, as you probably know, they cleave proteins, and so our SparVax vaccine is a protein-based vaccine based on rPA. And so you can look at it from two-fold -- proteases, have they cleaved the protein that destabilizes the vaccine? So it really important to have a manufacturing platform in a purified product that is free of proteases.

So you can look at it two-fold. One is the manufacturing platform itself. We use E. coli, as you know, and that strain of E. coli that we used was designed to have a reduced secretion of proteases as compared to some other manufacturing platforms that have not been designed to reduce the number of proteases. So it just makes it more difficult to purify a subunit-based vaccine free of proteases. So the manufacturing platform is very important, ones used that's been designed to basically minimize the issues associated with proteases.

And then two is the actual process, the purification process that can be deployed to produce a recombinant vaccine free of proteases. And so the process that we have actually has a critical step that helps to separate the subunit protein away from proteases. So the approach that we have, the manufacturing platform, one, the platform itself reduces proteases and the purification process itself lends itself to go ahead and separate the subunit protein from proteases.

And so these are very important to basically purify a protein and then formulate it so that it's stable.

So, in essence, it could certainly impact another product's stability and potentially its immunogenicity over time?

Exactly. So it's all about product ability.

Okay, thank you. And just to make sure, what is the next potential funding step for SparVax?

Yes. And so the next funding step is really to -- since, as you probably know from our previous calls, and important step for us was to go ahead and complete the technology transfer from the UK to the US, which we've done, and then we scaled it up [to for] commercial scale -- 1,500 liters. And we just completed our GMP run.

And so that was an important milestone for us to achieve, to go ahead and work with our customers, BARDA, for additional funding for the program. And as I think you know, we have current funding for our program through September 2013, but we're in active dialogue with the government right now for additional funding for the protein, and so we're targeting additional funding for our SparVax program by the end of 2012.

Okay, great. Thanks for the added details, guys.

Your next question comes from the line of Elemer Piros from Rodman. Please proceed.

Good morning, gentlemen. And what I'd like to ask is, Eric, you mentioned that you may have a final court order in the next couple of weeks. But do we have a sense of whether there is some sort of a deadline or a normal course of action in response to these two motions, whether there is some sort of a standard clock in place that the judge would have to reply to those?

Elemer, thank you for joining us this morning. We appreciate it. I'm going to turn that question over to our General Counsel, Jordan Karp.

Hi, Elemer. No, there's no specific deadline. But speaking with local counsel who appear before this court regularly, they've advised us typically it's the 30 to 60-day time period. As with all these things, it depends to some degree on how busy the judge is at the time. But at this point, we have no reason to believe he won't stick to that general timeline.

Okay. And is there some sort of a communication between the court and SIGA and the court and you in the interim or it's just completely quiet until the judge speaks?

Yes. There's no contact until the judge rules on the motion.

Okay, thank you. And, Eric, a strategic question that I had in mind. You have a potential windfall, a significant windfall of funding coming to the Company. Could you please talk as to the use of proceeds? Would you like to expand and maybe more aggressively pursue some additional biodefense programs or are you thinking about perhaps acquiring some clinical assets and develop drugs for the pharmaceutical market?

Thank you, Elemer. That's a very interesting question and one that we deal with on a daily basis in developing a strategy moving forward. As many of the analysts that follows SIGA Technologies have noted, this is a very valuable biodefense asset.

And based on calculations that they have made for the total market opportunity and looking at how that translates to PharmAthene, in that there's a 50% net profit after the initial $40 million comes to PharmAthene, we're looking at a net present value of a 10-year stream in the range of $800 million based on what analysts who follow SIGA have projected.

And with an $800 million net present value, that translates into a stock price somewhere around $13.00 to $14.00 a share. Certainly, that creates a very valuable currency for PharmAthene to do something in the future when our stock price catches up with the value of the revenue stream.

So, what are we thinking about? I think that -- I can tell you that we haven't made any definitive plans yet; however, we are considering a wide range of opportunities that stretch from accelerating our current programs, for example, if we can get our second generation anthrax vaccine product to market sooner, that's something that would be in the best interest of our shareholders.

We're also looking at expanding our biodefense business, but we're being very careful and using the criteria of selection of products where these products will be generating revenue within the next two to three years and they're completely funded by BARDA or by other government sources or in some other fashion. So they've got to be funded programs, completely funded, profitable, and generating revenue over the next two to three years.

And then, there's also something else that we're considering is a way to be able to return a portion of the revenue stream to PharmAthene shareholders. So we're considering all of those and I think the best I can say is stay tuned; we're actively managing this process and having discussions with various parties to be able to figure out exactly what is the best use of the potential revenue stream from SIGA Technologies.

Thank you very much, Eric. And I just wanted to corrected myself. I would also like to greet Linda and Stacy in addition to you, gentlemen.

Thank you, Elemer.

Thank you.

Your next question comes from the line of Jason Kantor from RBC Capital Markets. Please proceed.

Hi. Thanks for taking the question. I'm just wondering, are there any ongoing discussions directly with SIGA, either to come to some kind of amicable terms around the potential structure of the judgment or potentially to settle at this point to avoid further wrangling which appears to be hurting both of your stocks?

Jason, I'm going to make a comment then I'm going to turn it over to our general counsel to answer that question. But I think I've mentioned before that I don't think there is any reason for this to end up in Delaware Chancery Court. There was ample opportunity to resolve the suit and settle differences over the last five years. And certainly, the pie is big enough for both parties to have walked away quite satisfied.

Unfortunately, that didn't happen and we ended up in suit -- in a lawsuit. And after five years, the Delaware Chancery Court found our case to have very strong merit and issued the 118-page ruling in favor of PharmAthene.

At this point, I'm going to turn it over to comment on any discussions that we may or may not be having with the company.

Yes. Jason, we -- under terms we've agreed with SIGA, we can't discuss one way or the other if we're having any settlement discussions. So we have to leave it at that.

And two other questions. You talk about the timing of this coinciding with possible commencement of commercial sales. What is your current thinking about when commercial sales for ST-246 would actually commence?

Jason, we don't have any information that is not available to the public. So we're looking at the same information that you're looking at and guidance from the company which says late summer 2012. And we assume that there could be hiccups and delays, and so it could be the end of 2012 or even early 2013. So we don't have any information beyond what is available to the public.

And then finally, your interest in 246 is a passive interest. You're not responsible for doing anything, so I'm just wondering if you're considering monetizing that, either to an outright sale to a third party or some kind of secured debt vehicle where you can take some of that value upfront at this point.

I think, Jason, the best response is that first of all, we believe that the revenue stream is potentially very valuable. And so that's something that we would like to have come to PharmAthene and PharmAthene own that over the next 10-year period.

However, we are looking at various ways of financing that bridge if, in fact, PharmAthene ends up with -- in a position where we don't have the cash and there is a time period before we receive the SIGA revenue. So we were looking at various non-dilutive options to bridge that time gap, if that time gap will actually appear.

But as far as selling the, let's call it, revenue stream or royalty stream, that's something that's not something that's under active consideration at this point.

Thank you.

Okay, thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.