Amarin Corporation PLC (AMRN) 2003 Q2 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Amarin Corporation second quarter 2003 earnings conference call. (CALLER INSTRUCTIONS). It is now my pleasure to hand the floor over to your host, Mr. Rick Stewart. Sir, the floor is yours.

Thank you Maria. Good morning. This is Rick Stewart, Chief Executive Officer of Amarin. I would like to welcome you to our second quarter 2003 earnings conference call. With me today are Ian Garland and Mike Coffee. As a reminder, this call may contain forward-looking statements that are subject to inherent risks and uncertainty. For more information, I refer you to the Safe Harbor statement on our website and to Amarin's Form 20-F on file with the SEC.

Amarin announced a major accomplishment this morning with a significant restructuring of our financial obligations to Elan. Under the terms of the agreement, Amarin will pay Elan a total of $30 million in cash by year end, plus an equity milestone of $10 million when Zelapar achieves revenues of $20 million. This will be a full and final settlement of financial obligations of up to a potential maximum of $90 million, which includes $46.5 million of debt relating to the acquisition of Permax and future fixed consideration payments for Zelapar totaling $42.5 million, with an additional payments of potentially (inaudible).

In addition, if Amarin raises in excess of $40 million from additional financing or asset disposals, we will deploy 50 percent of those funds to buy back Zelapar royalties from Elan at a rate of $1 million, or half a percent in royalties. We are currently obligated to pay Elan a 12.5 percent royalty on net sales of Zelapar. As you can see from the terms, this transaction is a great benefit for Amarin. We are reducing financial commitments greater in total than our entire market capitalization. The overall purchase price of our Parkinson's franchise, which is Permax and Zelapar, has been significantly reduced as result of this transaction.

We believe this agreement and the subsequent additional financing will be instrumental in achieving two key objectives. Firstly, through the financing we will create a longer term capital structure which more accurately reflects the value of the group. We are currently in discussions with our investment bankers to determine the optimal financing structure. We believe that our historic short-term capital structure has constrained the overall value of Amarin. And we aim to release that value to market capital structure.

Secondly, additional financing will allow Amarin to resume its growth objectives in neurology by leveraging its neurology infrastructure by neurology product acquisitions, co-promotion arrangements with big pharma, and refilling the product development pipeline with quality end license developments. Ian will talk in more detail about the transaction structure.

Turning to the second quarter results, which were in line with our expectations, revenues were $2.6 million, gross margin was 59 percent, and operating expenses were $8.3 million. Net loss for the quarter was $7 million. The second quarter results reflect the continuing challenges resulting from generic competition to Permax and the resultant impact on wholesaler inventory management, which were explained in detail in Amarin's first quarter conference call.

The effect on the second quarter continues to be significant. The rate of generic penetration stabilized towards the end of the second quarter, with generics filling 49 percent versus 44 percent in the first quarter of all pergolide prescriptions written. We are expecting a second generic to enter the market in September, which will further erode Paramax's market share and forecast that by year-end generics will have approximately 75 percent of the pergolide market.

It is important to remember that 2003 is a transition year away from our reliance on Permax, which was a mature product with limited growth opportunities to Zelapar, which is a new product with substantial upside. Amarin always expected a different performance due to the timing difference between generic competition to Permax and the approval of Zelapar. Our focus is now on the future success of Zelapar. Preparations for the launch of Zelapar are underway, and pre-launch marketing activities have commenced. The prospects of Zelapar are encouraging, as it addresses several unmet medical needs in Parkinson's patients including a significant reduction in off time by approximately 2.2 hours. It also reduces amphetamine-like side effects, which often cause sleep disturbance in patients taking regular selegilines.

Zelapar dissolves on the tongue and is absorbed directly into the bloodstream. This has two advantages over conventional soluble dose tablets. Firstly, it avoids the difficulties which many Parkinson's patients have with swallowing. And secondly, it avoids what is known as the first parse (ph) effect. As a result, the once-daily dosage of Zelapar is dramatically lower than the solidorial (ph) dose equivalent, improving bioavailability by 8 times, so the 1.25 milligrams of Zelapar is equivalent to 10 milligrams of the solidorial dose selegiline.

Ongoing discussions are taking place with the FDA to resolve the various matters contained in their approvable record. Additional non-efficacy data will be provided to the FDA in the fourth quarter to support the approval of Zelapar. And we're optimistic that the launch will be successful. We intend to double the size of Amarin's neurology salesforce to approximately 48 specialists in neurology sales representatives in order to maximize the probability of a successful launch. In order to reinforce the successful launch of Zelapar, Amarin is in discussions with several potential copromotion partners in the U.S. Amarin will focus sales activities on the neurology market where it strength lies. And it is seeking a partner to support the primary-care market.

Finally, progress is being made in the planning for additional LAX-101 phase three clinical trials for Huntington's disease. The protocol is in the latter stages of design and will be reviewed by investigators and the FDA this quarter. We intend to have substantially more patients in the trials and more centers. We would learned a considerable amount in the initial phase three trial and intend to fully exploit that knowledge in order to maximize the prospects for success.

I will now hand over to Ian, who will review the numbers in more detail.

Thanks Rick. I will now take you through the results for the second quarter of 2003. As summarized by Rick, the revenues for the quarter were just $2.6 million dollars, which compares to $20.2 million for the second quarter of 2002. That represents an 87 percent decline and reflects the impact of generic competition to Permax, but also the wholesaler de-stocking across all of our U.S. brand. Total revenue for the second quarter 2003, comprises licensing and development income of $0.5 million, and product sales and royalties of $2.1 million. Licensing and development fees are down $0.1 million from the same quarter of 2002 due to timing differences.

The largest contributors to the decline in product sales and royalties are Permax and our primary-care product line in the U.S. We look first at Permax. Sales in the quarter were just $0.1 million and that compares to 14.4 million in the second quarter of 2002. As indicated at the time of the first quarter conference call, sales of Permax are unlikely to be significant for the remainder of 2003. Wholesalers continue to hold high inventories of Permax at current run rates, and we do not anticipate their needing to reorder until the end of the year. End market erosion of Permax prescriptions in the second quarter has been in line with our expectations for the quarter.

Turning to other product sales and royalties, revenues were down by $2.2 million, or approximately 46 percent, compared to the same period of 2002. This decline is due to wholesaler de-stocking and declines in prescriptions of our primary care products, which together were down $1.3 million, and reduced royalties and manufacturing revenue in the Amarin Development business, which was down $0.9 million due to the greater mix of license to base development activity.

The gross margin in the second quarter was 59 percent, which is in line with the same period of 2002. As Rick said, total operating expenses at $8.3 million for the quarter are down 3 percent compared with the same quarter in 2002. The decline is primarily due to selling, general and administrative costs which are lower than in 2002 due to reductions in Permax promotion following the launch of generic competition. We are currently maintaining our infrastructure in preparation for an approval and launch of Zelapar.

For the quarter, the resulting net loss was $7 million, which compares to net income of 7.2 million in the same period of 2002. The 2002 second quarter net income benefited from a foreign exchange gain of $3.9 million. There was no material foreign exchange difference in the second quarter of 2003. The second quarter loss per ADS was 39 cents, and compared to a fully diluted net income per ADS of 61 cents in the same period of 2002.

Basic weighted average shares rose to 17,932,000 in the second quarter of 2003, from 9,838,000 in the second quarter of last year because of the full impact of shares issued in the January private placement and conversion of 2 million preference shares in February of this year, both of which were highlighted in the first quarter conference call.

Below the income statement is a summary of the group balance sheet. This shows total assets of $68.3 million. Tangible assets amounted to $2.3 million. Intangible assets, which totaled $44.7 million, include our rights to all products sold in the U.S. and investment in development products. Cash and receivables at the end of the quarter totaled $14.9 million.

In the first quarter 2003 conference call we discussed the need to renegotiate debt and raise finance to secure adequate cash for the group to continue its operations and meet its debt obligations beyond September. Since that call, we have reached agreement with Elan to potentially settle our debt obligations to them. And as part of that agreement, also to alter the terms of the Zelapar option agreement, as Rick has already outlined. The first impact of the agreement with Elan is to defer until the end of the year all debt and interest payments. This will result in the deferral of approximately $8.1 million of payments that would otherwise have fallen due prior to the end of this year. This provides Amarin with adequate cash for operations through the end of the year as compared to the end of September at the end of the first quarter.

Prior to reaching agreement with Elan, Amarin had the following obligations to Elan. Firstly, it had debt totaling $46.5 million. 7.5 million of that fell due in 2003 and is included in the $8.1 million I referred to. $24 million fell in 2004, and $15 million in 2005. Secondly, on Zelapar, Amarin would have been required to pay $10 million to exercise its purchase option, which it must do on approval or the option lapses.

In addition, Amarin will have to pay a third of the $17.5 million when annual net sales reach $15 million, and to pay $10 million when annual net sales reach $20 million. All three potential fixed milestone payments plus the payment of the -- including the payment of the option totaled $42.5 million. And are to be made in cash. A further potential milestone of $15 million was payable 8 years after launch of Zelapar to the extent that it had not already been paid in royalties on sales. As Rick had indicated, royalties are payable on Zelapar sales at 12.5 percent.

The agreement with Elan that we announced today gives Amarin the opportunity to settle its debt obligations and reduce the amounts it would potentially be required to pay under the Zelapar agreement. The agreement reached with Elan provides for two payments from Amarin, $30 million in cash by the end of the year and $10 million in stock when annual net sales of Zelapar reach $20 million. If Amarin makes these payments, it will have settled all of its debt obligations to Elan and eliminated the payments under the existing Zelapar agreement. In cash terms, the agreement provides for a reduction in potential Zelapar milestones and debt cash payments of $89 million in return for cash payments of $30 million.

The potential elimination of part of the Zelapar royalties represents a further opportunity to improve the Zelapar gross margin and operating cash flow to the extent that we are able to raise sufficient funds. In the event we are not able to raise sufficient funds, the royalties will remain at 12.5 percent. As we have indicated in our press release, we must now secure sufficient finance to enable us to make the payments due to Elan by the end of the year and to fund our working capital requirements. We've held discussions with a number of banks in this regard. And we will be embarking on a fund-raising through the remainder of Q3 and into early Q4. To manage the risk that we might be unable to raise sufficient finance, we will also pursue potential strategic alliances over that same time frame. We will retain the services of an investment bank to assist us in both of these processes.

I will now hand you back to Rick.

Thank you Ian. As we discussed in our first quarter conference call, an important milestone was to restructure our existing short-term capital structure into one which more accurately reflects the long-term potential of the group. The terms of the Elan settlement will now allow Amarin to raise additional funding either by asset sales or other financing activities to achieve this goal. Once achieved, we aim to continue our strategy of building strength in the neurology market by select product acquisitions, co-promotion activities with larger pharmaceutical partners, and through end licensing products and development.

Significant resources have been applied and continue to be applied in order to gain FDA approval for Zelapar. The significant expansion of our neurology sales force in anticipation of a Zelapar launch will also allow additional opportunities to enter into co-promotion arrangements with partners with perhaps one or two neurology products in their portfolios.

The management team will now take questions. Maria, if we could open up the lines.

Thank you. [Operator Instructions] Thank you, your first question is coming from Joan Ank (ph) of DTI Financial. Please go ahead with your question.

Hi, good morning everybody. Could I just have one last clarification? I just what to make sure that I'm understanding this correctly. The amount of the discount with Elan, you originally had financial obligations for about 90 million, I believe. And they are settling now for 30 million. Do I understand this correctly? This is like 30 cents on the dollar.

Hi, Joan. Yes, that's correct. The total obligations that we had were $46.5 million on Permax, 42.5 million on Zelapar as fixed payments, but there was also a potential for a further $15 million milestone on Zelapar to the extent that royalties payable during an eight year period haven't achieved that $15 million. So we are actually focused more on the $90 million number. And we will be -- intention is to settle that in cash by year end for $30 million. It was effectively 30 cents on the dollar.

Thank you. And again how does this relate to your market capitalization in the scheme of things, if this happens by year end?

Well, interestingly, at the moment the amount of the haircut is effectively $60 million, which is greater than our entire market capitalization today. I think only today we have a market capitalization in the order of $50 million. So we view this as quite an achievement. And frankly, we view it as a win-win situation for both Amarin and for Elan. So it gives us the opportunity to settle the debt and future consideration payments outright.

Great, well thank you very much for the clarification.

Thank you, your next question is coming from Keith Heslop (ph). Please go ahead with your question.

Thank you. Rick, if I understand you right, you owed Elan 46.5 million for Permax and 42.5 million for Zelapar. Does this new deal effectively make it to your getting Zelapar for free?

I'm going to hand that one over to Ian. I think we haven't actually allocated the accounting yet, but I think in...

Yes, I will answer that one. Effectively you can view it that we've got total obligations of 90 million, as Rick just outlined. We're approaching at 90 (ph) the 89 million, which we are settling in cash for 30 million. Clearly, for accounting purposes, we're going to have to allocate that cash between Zelapar and the debt that we currently owe to Elan, and they will have to be a split of those proceeds. But one way of viewing is that all of those proceeds were allocated to the debt, we would have reduced the debt from 46.5 million to 30 million. And Zelapar would then have no payments due on it in cash, but there would be one potential equity milestone when sales reached $20 million. So you could view it -- that is one way of viewing it that Zelapar is for free, but clearly the accounting will actually allocate some of the consideration to Zelapar.

I appreciate that. One follow up question would be, Rick, you mentioned co-promotions on the call. I was wondering if you could go into a bit more detail?

Absolutely. Amarin is focused entirely on the neurology market, and we believe there is substantial opportunities in that area. But we also view that there is additional potential opportunities in the primary care market. And we're looking for a potential partner who can actually exploit that particular market. I'd like to -- Mike -- to hand it over to Mike Coffee as well who can explain it in a bit more make detail.

Specifically in the neurology area, as Rick said, our plans are to expand our sales force from the current 24 to 48 in anticipation of Zelapar. But that does give us an opportunity to present an additional one or two other products to the neurologists that we call on. And we have been in discussions with several large pharmaceutical companies who value our position in the Parkinson's area and think that potential co-promotion with one of their products along with Zelapar would be beneficial to their product, and we agree it can help us as well. I think that is probably enough to say right now until such time as we get a little further in these discussions. But I think it is a natural thing. And I think it is very much a win-win for both the big pharma company with their products, as well as for us in utilization of our sales force.

Just to clarify, Keith, this is really a two-way arrangement that we're looking at here. One part of it is that we're looking for a copromotion partner to promote Zelapar. And the other way around is we have a number of people who are interested in -- large pharma -- who are interested in utilizing the capabilities of our neurology sales force for their own products. We see two opportunities in this situation.

Great, thank you very much.

Once again ladies and gentlemen if you do have a question please press the number one followed by four on your touch tone phone at this time. Gentlemen, I'm showing no further questions at this time.

Okay, I would like to thank you for joining us. And we look forward to updating you on progress in the third quarter results. Thank you very much.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. And have a wonderful day.