Armata Pharmaceuticals, Inc. (ARMP) 2004 Q2 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Targeted Genetics 2004 second quarter financial results conference call. Today's presenters are Stewart Parker, President and CEO of Targeted Genetics and Todd Simpson, CFO of Targeted Genetics.

(Operator Instructions.)

At this time I would like to introduce our first presenter Stewart Parker.

Thanks, John. Good morning, and on behalf of my colleagues here at Targeted Genetics, I would like to thank you for joining us and I look forward to reflecting on our second quarter progress with you this morning.

We have continued our string of successes with the close of the second quarter, including positive reports in the clinic and on the business side as well. With now three clinical programs moving forward, 2004 continues to be an important year for us as we grow closer to significant value that we believe will really help validate our gene-based approach to treatment and prevention of disease.

Now, as with previous quarters, throughout the course of this call, I will be providing you with an update on the company's progress as well as future milestones to look out for. You will also hear from Todd Simpson, our Chief Financial Officer who will review our financial results for the second quarter of 2004.

Before I go further I would like to remind you that during the course of this call we may make projections and other forward-looking statements regarding future events or future financial performance of the company. We do wish to caution you that such statements are only predictive and actual events or results may differ materially from the statements we make. So please see our documents that we file from time to time with the SEC for information about risks that may affect the company including our most recently filed quarterly report on Form 10-Q.

One of the most important events for the company in the second quarter annually is the American Society of Gene Therapy or ASGT Conference. This year marked the seventh anniversary of this meeting, held in early June, and it was clear that this field as a whole has made marked progress in turning basic science into commercializable product development. It was also clear that we as a company continue to play a leadership role in the transition of the field.

Targeted Genetics presented data from programs that are currently in the clinic being tested in humans with the goal of commercialization. It is an exciting time for us and we are pleased to play a part in driving this sector forward as we continued to advance our programs.

At ASGT this year, Targeted Genetics' technology was highlighted in 12 different presentations. Most of these presentations focused on our AAV vector technology. As you may know, AAV vectors are considered by many in this field to be one of the most promising gene delivery technologies with the potential to play a role in the treatment and prevention of a wide range of diseases. AAV, as you know, is being utilized in all of Targeted Genetics' current clinical active programs.

To provide a summary of data presented at the meeting, I will start with our rheumatoid arthritis program. We presented some new preclinical data this year and in these preclinical studies we measured the effectiveness of our product candidate using different modes of delivery instead of direct delivery into affected joints which is the basis for our current clinical trial. In addition, we looked at the utility of different (inaudible) types of AAV vectors.

As we move forward with clinical development of tgAAC-94, our product candidate, we continued to consider expanded opportunities for this product in the treatment of autoimmune disorders. In our first series of studies, we tested intramuscular, intravenous and pulmonary delivery of AAV rat TNFR:Fc, the animal equivalent of our candidate and (inaudible) serotypes of AAV vectors.

The studies showed that both intramuscular and intravenous administration resulted in sustained high levels of secreted soluble TNFR:Fc protein in the systemic circulation for over one year. Following pulmonary delivery maximum expression of TNFR:Fc protein in the circulation was achieved in six weeks after administration and gradually declined over a period of eight months. However repeated administration via pulmonary delivery resulted in renewed expression.

In another series of studies, scientists at Targeted Genetics injected rats intramuscularly with AAV TNFR:Fc vector with AAV1 serotype capsid. Here we were looking at different modes of delivery as well as an alternate capsid serotype. The data demonstrated the efficient long-term and sustained secretion of soluble TNFR:Fc protein through the systemic circulation. More importantly when recurring flows (ph) of information were introduced again into the joint the vehicle is completely suppressed throughout the duration of the study.

So what does all this mean for us? Why are we looking at different modes of administration and alternate capsid serotypes? Again, we are really trying to more fully understand the potential impact of our product candidate on the advanced treatment of rheumatoid arthritis and other autoimmune diseases for which we believe TNF-á may play a role.

As we move forward in the clinic with an intra-articular strategy, we want to continue research to further define our approaches to treatment. We believe these preclinical data continue to support the broad potential of our AAV gene delivery technologies in the area of TNF-á mediated autoimmune disease.

Our AAV-based AIDS vaccine was highlighted during ASGT as well. Dr. Phillip Johnson of the Columbus Children's Research Institute spoke during a session titled "Gene Based Vaccine" and discussed the clinical application of our AIDS Vaccine Program. As many of you know, Dr. Johnson is part of our three-way collaboration involved in this program. Our other partner is the International AIDS Vaccine Initiative.

During the presentation, Dr. Johnson discussed the unique attributes of AAV based gene delivery that makes this particular technology qualified to play a role in disease prevention. Dr. Johnson also referred back to preclinical data from our program to support the rationale for continuation of studies to understand the role of AAV in the prevention of disease.

He noted that in Targeted Genetics AIDS Vaccine preclinical studies, first there were no dose related or clinically significant safety issues. The vaccine did not integrate into host chromosome, a robust and sustained dose-dependent antibody and antigen specific T-cell response were observed and vaccinated animals were protected from disease with statistically significant reduced viral load at peak and set-point.

In this program on Rheumatoid Arthritis, we have transitioned into clinical development and we are actively accruing patients and anxious to gather clinical data to begin to get a sense for the product candidate potential in humans.

Moving on to updates in our CF program, soon after the conclusion of this year's ASGT meeting, we announced results of our interim analysis for our ongoing phase II clinical trial in patients with cystic fibrosis. This is a relatively significant milestone for us as we knew that the independent analysis meant a "go" or "no go" for this trial.

This interim analysis was part of our protocol plan designed before the clinical trial began. We included an interim analysis, as companies often do at this stage of drug development, for ethical, financial, and program planning purposes. An independent data monitoring committee or DMC conducted the interim analysis, so Targeted Genetics could continue to be blinded to the data.

The DMC will be the 30 day data point for 54 patients and provided us recommendation based upon an analysis of whether or not there was a chance that upon full patient enrollment the study could show a statistically significant positive impact on lung function measurements and patients treated with our product candidate compared to placebo.

The DMC recommended continuation of the clinical trial as planned. We were certainly pleased with this outcome and continued to accrue patients into the study. We still expect to complete patient enrollment by year-end on this, our largest cystic fibrosis clinical trial to-date.

Switching gears now away from clinical programs, I would like to discuss our announcement during the second quarter of a new home for CellExSys. As many of you are aware, we have been seeking out strategic opportunities for CellExSys to help realize the benefit of their technology and support advancement of the company's product development effort.

While CellExSys technologies are outside of the scope of Targeted Genetics' core focus, we thought that CellExSys had a substantial intellectual property position related to a unique approach to cell therapy and we believe that this approach has the potential to yield marketable products for infectious diseases and cancer.

We were pleased to sign a merger agreement with Chromos Molecular Systems on June 22 and expedited closing of the deal just a couple of days ago. Under this agreement, Chromos has acquired all of the outstanding shares of CellExSys due to merger between the two companies. We felt that Chromos was a good player for CellExSys because of their intent to grow Chromos into a leading cell therapy company along with their commitment to transition CellExSys technology into product development initiative.

We have always believed in the product potential of CellExSys technology and this arrangement allows Targeted Genetics to realize the monetary benefit of any product success. We are extremely pleased with this acquisition and I am pleased that we have a found a home for CellExSys that plans to aggressively move potential product candidates into the clinic with the goal of product commercialization.

So before I turn things over to Todd, I would also like to highlight new patent and licensing transactions announced during the second quarter. First, Targeted Genetics expanded its AAV patent portfolio during the quarter with the issuance of a patent for AAV vectors with sequences from AAV serotype 1. As some of you may know there are various serotypes of AAV thought to have a range of attributes that can play a role in more effectively treating different types of disease.

Studies done with AAV vectors containing AAV1 serotype capsids show they are extremely efficient for gene expression when delivered to muscle. Due to their enhanced expression in muscles, genes delivered using AAV1 appear to express secreted protein and have greater bioavailability in circulation than genes delivered with AAV2 to muscle. This could potentially result in an opportunity for lower cost of goods, less frequent dosing and improved therapeutic utility in certain disease settings.

We believe that AAV1 assets and technology have the potential to become a major component of our future product development and partnering activities. Also with an expanded AAV patent portfolio we continue to fortify our leadership role in the general area of AAV product development.

Now, additionally, Targeted Genetics signed an exclusive worldwide license with the National Institutes of Health for patents that cover ITR sequences as a promoter when utilizing AAV vectors. To clarify the role of ITRS promoter, there are certain disease states that make the therapeutic replacement gene plus an additional promoter element is too large in combination to fit in a single AAV vector. The use of the ITR from the AAV genome as the promoter along with these genes allows for expression of the therapeutic gene while still providing opportunities for it to be packaged into a single AAV vector.

Targeted Genetics already had exclusive license to the same technology for use in the specific field of cystic fibrosis. This new license agreement expands its use for any product indication significantly broadening our product opportunities with regard to use of ITR as a promoter. So that is a brief look at some of the successes during the second quarter.

I will now turn the call over to Todd Simpson, our Chief Financial Officer who will review our financial results for the second quarter of 2004.

Alright. Thanks, Stewart, and thanks again to everyone for joining in today. So this morning, I will just quickly go over our financial results for the second quarter but also reiterate that through now and the midpoint of 2004 we're continuing to make really nice progress on advancing each of our three core product development programs forward.

Earlier today, we announced our financial results which included a net loss of $4.5 million or $0.05 per share for the quarter ended June 30, 2004, compared to a net loss of $6.9 million or $0.13 per share for the second quarter of 2003. Our net loss was $9.3 million or $0.12 per share for the six months ended June 30, 2004 compared to $7.7 million or $0.15 per share in 2003.

Revenue in the second quarter of 2004 was $2.8 million compared to $2.1 million for the second quarter in 2003 and with $4.1 million for the six months ended June 30, 2004 compared to $7.7 million in 2003. Again, as I have mentioned in previous calls, revenues in 2003 included revenues from our former collaboration with Wyeth and Biogen.

The primary sources of revenues in 2004 though comes through our AIDS Vaccine Collaboration with IAVI and our contract manufacturing relationship with GenVec, which is now complete and throughout the remainder of 2004, we expect that our revenue will consist of R&D revenue from IAVI which we expect will increase through the remainder of the year as planned program activities increase.

Our operating expenses for the second quarter of 2004 were $7.1 million compared to $8.7 million in the second quarter of 2003 and were $13.3 million for the six months ended June 30, 2004 compared to $14.8 million a year ago. R&D expenses increased to $4.8 and $9.1 million for the quarter and year-to-date in 2004 up from $4.3 and $8.9 million for the same periods in 2003. These increases primarily reflect increased investment in our AIDS vaccine and rheumatoid arthritis program.

2004 expenses also include approximately $1.1 million in cost related to CellExSys, most of which will now end as a result of the recent merger of CellExSys into Chromos. G&A expenses increased to $2.1 million and $3.8 million for the quarter and year-to-date in 2004, up from $1.4 and $2.8 million for the same periods in 2003. This reflected a higher patent cost, personnel cost and compliance and transaction related professional costs.

Total expenses in 2004, however, are down from 2003 levels due to the restructuring charges that we have talked about in earlier calls related to our share and yield (ph) in Bothell facility of approximately $2.9 million and $3.2 million for the quarter and six months ended June 30 of last year. These charges represent the accrual of future ramp (ph) payments due on these leases.

As of June 30, our combined cash and cash equivalent has increased to $37.4 million compared to $21.1 million at December 31 of last year. Earlier in the year, we raised approximately $24 million in net proceeds from a common stock offering completed in February. The other principal sources of funding for the company for the year have been payments received under our AIDS Vaccine collaboration with IAVI and contract manufacturing payments received from GenVec.

We are currently planning next year's work activities with IAVI which we should be able to talk more about later in the year. However, if we exclude any funding assumption from IAVI which of course we don't expect to be the case, we believe that our cash resources will be sufficient to fund our operation at least until the beginning of 2006.

So at this point we feel we are in good solid financial shape and obviously continue to plan for the future capital needs of the company. Our plan has been and continues to be aggressively pushing our clinical programs forward and generating clinical data that should help build value and we feel that we are certainly on track to accomplish that.

And with that I think I will turn the call back over to Stewart.

Thanks Todd. So to briefly touch base on activities related to our three product development programs over the remainder of the year, at first, again, just to reiterate we continue to recruit patients into our ongoing phase II--cystic fibrosis clinical trial and we plan to complete patient enrollment by the end of 2004. Now after this point, we will need to collect 90 day data point for the final patients and then we can begin to analyze the results.

We expect that in the first half of 2005 we will present these data in an appropriate QED setting. We also continue to enroll patients in our AIDS Vaccine Clinical Trial with the expectation again of completing the dose escalation portion of the study by the end of this year.

As we previously mentioned, Targeted Genetics and IAVI are hard at work on pursuing a multi-component AIDS vaccine strategy also. The collaboration believes that a multi-component AIDS vaccine provides potentially the best hope for preventing AIDS. This vaccine will include genes for both regulatory and structural proteins from HIV.

After reviewing data from our ongoing preclinical studies, we will determine what we believe is the optimum protective vaccine against AIDS so that we can begin to advance with the best AAV based vaccine candidate. In the meantime, we are making excellent progress with patient (inaudible) in our current phase I clinical trial and also expect to present these data in an appropriate QED setting in the first half of 2005.

With regard to our RA clinical trial which started in the first quarter in this year, we are actively accruing patients into the study and have opened 7 sites to date. We believe we are still on track to complete patient enrollment for this study during the first quarter of 2005.

And finally in addition to progress expected with our three core clinical programs, we are also hard at work on a number of other activities that support our product development program, business development effort and expanded technology opportunity.

So I will close this morning by thanking you all for your time and in conclusion would also like to thank the team here at Targeted Genetics that has really worked so hard to keep our programs on track.

It is in large part because of them that we're on the brink-I believe-of yielding a large body of data that we hope will support gene delivery, AAV and the potential of our product candidates to treat and prevent disease. So with that I would be happy to answer any questions you may have.

(Operator Instructions.)

And our first question is from the line David Miller with Biotech Monthly. David, please go ahead.

Good morning.

Hi, David.

Good morning.

Can you update us on the patents discussions with Amgen?

Well, there is no real update other than the companies continu to have discussions. They are very amicable and there is a lot of respect between the two companies but I don't have anything really to add at this point, we -- other than to reiterate that we believe very strongly that a license agreement with Immunex that Amgen acquired gives us a very strong proprietary position in this area.

OK. The next step for the -- for that program, the rheumatoid arthritis program, is that taking what you currently have into phase II or will you go back to phase I or kind of a phase I, II program using a different serotype or different injection method?

Good question. The preclinical data that we are generating right now is really designed to generally support an overall program in the anti-inflammatory area. Our-basically-step wise (ph) plan is, first of all, to generate the data from a phase I study, look at it, and then potentially if the data supports it, move into phase II studies with that program.

We are also looking and using the preclinical data and we'll use the safety data from the phase I study to look at alternate indications or additional indications, if you will, that we might be able to broaden the program into that would potentially be able to move quickly into clinical trials. So it is really multi-faceted program at this point.

OK, and last question I have is that, do you expect -- you know, you mentioned that you don't expect the IAVI funding commitment to disappear. Do you expect that to increase or would you expect that to decrease in 2005?

Well, that is really the brunt of the work that we are doing with IAVI is to determine what level of work plan and work activities we will have for next year and then the budget will follow out of that as it relates to funding in. But we don't know what that is today, we will more likely know towards the end of the year and we will be able to talk about it then.

OK, if it stays generally the same how far would it change your burden to (inaudible)-- first part of 2006?

I mean, I think until we know what is actually going to happen, you know we really haven't commented too much on that.

OK, fair enough. Thank you very much.

Thank you.

Your next question is from the line of Russell Gilbertson with Roth Capital Partners, please go ahead.

Good morning, Stewart. Good morning, Todd.

Good morning, Russ.

Hi Russ.

Congratulations on the progress you guys have made this year.

Thanks.

Thanks.

I have a couple of questions for you. First question, you - did you fully recognize the revenues from the GenVec contract in second quarter or is there more revenues to recognize down the road?

No, we finished everything up in the second quarter. Bear in mind the manufacturing work itself was actually done towards the end of last year I guess into the first quarter, but we were waiting on final lot release paperwork from GenVec and that came in, in the second quarter and as that came in, we were there in a position to recognize the revenue.

OK. And in terms of the second half of '04 certainly the IAVI deal is up to I think $10.7 million for the year, I mean, what is your expectation in terms of revenue in the second half? Was it going to be consistent with the first quarter, the second quarter or grow from where the second quarter revenue number is?

It is somewhat variable, although, the pattern for this year has been a little bit more back-end loaded with respect to work activities, so we--as I mentioned on the call--do expect the revenues to begin to increase throughout the remainder of the year.

OK, very good. Now in terms of the CellExSys Systems stock in Chromos, there is an option tied to that and it is easier could be I think an additional number of shares about $3.5 million total or there will be a debt issuance. How long does that option run?

Now, let me maybe just clarify a little bit. The transaction work is as follows: chromos acquired all of the stock of CellExSys. Targeted Genetics is about a 79% shareholder in CellExSys. The acquisition proceeds included 1.5 million shares of Chromos stock that were issued at closing and then about a $2.5 million debenture that is payable in two installments on the first and second anniversary of closing. Chromos has the option of paying the debenture in cash or through issuing additional shares of its stock, but the option is really in Chromos' hands.

OK. But I just wanted the timeframe and that answers my question.

Yes. First and second anniversary.

OK. And thank you very much. And will there be any restructuring charges in the second half?

No, we don't expect any now.

So you are done with that? Thanks for answering those financial questions. Just one, in terms of your clinical program. In your phase IIb trial in cystic fibrosis, can we expect data on the full study at the American Society of Gene Therapy next year or you think you will have it prior to that meeting?

Yes, we are still looking at that, I think we will most likely have a data before -- in June usually and then the question is what other venues are appropriate for releasing that kind of information, so I mean as soon as we have a good handle on that we will let people know, when they should expect that data.

OK. But most likely do you think it is the second quarter then of 05'?

I would say yes.

OK. And are you using the same delivery device with the second 50 patients compared to the one used in the first 50 patients in that study?

Yes, we are if we had changed it, it might have jeopardized the statistical significance of the data, so we are using the same Pari LC Plus nebulizer.

OK. Very good thanks for answering my questions.

Thank you.

Our next question comes from the line of Geraldine O'Keefe (ph) with Fotostinx (ph). Please go ahead.

Good morning, Stewart and Todd. How are you?

Great, good morning.

Good morning.

Just a couple of quick questions for you, if I may. First on the RA data. You said the TNF activities stand up to one year, was that kind of in the joints, the infected joints of the animals? (inaudible) what was the blood level?

No, we looked at joints but we didn't deliver directly into joints.

OK.

And we would be happy to send abstracts for those two, if you would like to look at them.

OK. I will get back to that. The levels (inaudible) detectable in their blood, the blood of the animals?

I am sorry, I missed the question.

Sorry, Stewart. The TNF levels, you said were detectable high levels over one year in the rats and I was wondering was that blood level you are referring to?

That was just systemically. We can see maintenance in that (inaudible) expression, yes.

OK. And then on the CF in chemanalysis (ph) , if I may ask a question on that. Sorry?

Yes.

That -- in chemanalysis, I thought that was only a safety analysis. Did they also look at efficacy then, once you are getting that?

In fact, it was primarily done for as they call it, force utility to determine if based on the data from the first half of the patient. There was a likely possibility of achieving statistical significance in the study. So safety was certainly looked at, but probably of more importance was the studies looking at the potential efficacy.

OK. So we can take some comfort from that then that they have looked at the efficacy and see whether it is on track to meet the efficacy targets in the (inaudible) study?

(inaudible) Yes. Based on what they looked at, we have a shot at making statistical significance. Now we don't know any of the grey aspects of that, and what we got was a "yes you should continue the study". So we are not unblinded.

But they were able to look at the unblinded data to make their assessment?

Correct.

OK. Good, thank you. And last question just on the CellExSys deal again, just to clarify my own perspective. Tedia now owns about 14% or so of Chromos, after the deal, if I understand correctly. I am just wondering, are you tied into holding those shares for a set period of time or what are you restrictions there?

Let me just clarify as of the issuance of the initial 1.5 million shares we're I think about an 8% (ph) owner of Chromos. If the debenture is fully repaid through the issuance of stock, it could be as many as 3.5 million shares, which would make the shareholders of CellExSys a 17% holder in Chromos.

OK.

With respect to the marketability of those shares Chromos is a Canadian public company traded on the Toronto exchange, the shares themselves are freely tradable, so there is no holding period restrictions on those.

OK. That answers my question. Thank you very much.

Thanks.

(Operator Instructions.)

And your next question is from Kevin Devidar (ph) from Texas BikeRoder (ph). Please go ahead.

Hi good morning guys. Most of my questions have been answered here. But actually I did have one or two housekeeping items. How much did you receive from IAVI in the quarter?

Revenue?

Revenue from IAVI in the second quarter?

About $2 million in the second quarter.

OK. And you still expect to obviously spend the full $10.7 million for the year, correct?

Well, the $10.7 million reflects everything in the work plan. You know, as I mentioned a lot of the work activities are loaded into the back half of the year, so we do expect things to pick up when we get to the full 10.7 you know, unclear some of that may flip into next year, but we, again, do think that the second half of the year will be quite a bit more active.

Fair enough. And just quickly on SG&A line, I know you have been re-hiring selectively certain new personnel some of whom you had to layoff last year. That line has continued to grow here a little bit. How should we think about that in the second half in terms of both, what type of employees you are adding and where that number may level out here?

Well, I think we are a pretty good size for ourselves right now. Perhaps a little bit of hiring in some of the manufacturing and PD areas but otherwise I think we are sized just about right.

OK. Thank you.

Ladies and gentlemen at this time we have no further questions.

Well, I would like to thank you all for participating in our call and we look forward to talking with you soon to continue to report our progress.