Armata Pharmaceuticals, Inc. (ARMP) 2006 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Targeted Genetics third quarter 2006 financial results conference call. Today's presenters are Stewart Parker, President and CEO of Targeted Genetics, and David Poston, Targeted Genetics' Chief Financial Officer. Ms. Parker will open today's call with highlights from the quarter and a brief discussion of goals and objectives for the remainder of the year. Ms. Parker's comments will be followed by a financial update from Mr. Poston, and then the call will be opened up for a question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded this Wednesday morning, November 8, 2006. I would now like to turn the conference over to Ms. Stewart Parker. Please go ahead, ma'am.

Thanks, Mary. Good morning, everyone. I'd like to welcome you to Targeted Genetics' third-quarter results conference call. Today I'll start with an overview of our quarterly and year-to-date accomplishments and provide an outlook for the remainder of the year. I'll be followed by our Chief Financial Officer, David Poston, who'll discuss our third-quarter performance in more detail.

Before we begin I'd 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. So we caution you that such statements are only predictions, 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 annual report on Form 10-K. We'll also file our quarterly report for the third quarter of 2006 on Form 10-Q early tomorrow morning.

I'd like to begin today's call with good news announced yesterday about the restructuring of our $8.15 million debt outstanding to Biogen Idec. Biogen Idec has agreed to restructure this debt, converting 5.65 million of the debt into 1 million shares of TGEN common stock, and restructuring the payment schedule for the 2.5 million remaining debt. David Poston will provide additional detail on this action, but suffice it to say we are extremely pleased and gratified by this vote of confidence on the part of Biogen Idec.

I'd like now to turn to the continued progress in our clinical programs, starting with a discussion of our lead product Canada, tgAAC94, for the treatment of inflammatory arthritis.

First let me quickly review the protocol for context. We are conducting a Phase I/II study of approximately 120 adults that are randomized into three dose groups to receive a single intra-articular injection of either tgAAC94 or placebo, followed by an open-label injection of tgAAC94 after 12 to 30 weeks, depending on when swelling in the target joint meets criteria for reinjection.

The primary endpoints of this study are to establish the safety of higher doses and of repeat administration of tgAAC94 into the joints of subjects who may be taking TNF-alpha inhibitor therapy. Secondary endpoints include evaluation of pain, swelling, duration of response, and overall disease activity following intra-articular administration of tgAAC94 to the affected joints.

The approximately 60 patients to be enrolled in the latter half of the study will undergo more extensive evaluation, including additional target joint assessments such as functional measures, tenderness and swelling evaluation by a second examiner, and MRI scans.

We reported interim Phase I/II data in June this year, which summarized the safety and active efficacy measurements for the first 40 patients from the first two dose cohorts. These data support the safety and tolerability of intra-articular administration of tgAAC94 to affected joints, and suggest that this product candidate may result in improvements in signs and symptoms of arthritis in injected joints.

As we near year-end we continue to make good progress in the study. We finished enrollment of the first half and the principal investigator, Dr. Philip Mease, will report on safety and efficacy measurements on all three dose levels for the first 60 patients next week in a [post] presentation at the American College of Rheumatology meeting.

Recently the Data Monitoring Committee overseeing the study has given us permission to enroll the remaining 60 subjects in the study. We anticipate the opportunity to analyze and present more complete data from this Phase I/II study, and get resulting clarity on our next clinical steps by mid-2007.

The growing body of positive data that we're generating continues to support the therapeutic potential for local administration of tgAAC94 to affected joints, and provides us confidence to proceed in our clinical development toward commercialization of the first gene-based therapy for rheumatoid arthritis.

Now, in addition to inflammatory arthritis, we also continue to make progress in our partnered programs. In our collaboration with the International AIDS Vaccine Initiative, Children's Research Institute of Columbus, and Children's Hospital of Philadelphia, we're developing tgAAC09, which is an AAV-based vaccine candidate designed for high-risk populations in developing nations to protect against the progression of HIV.

In August, Dr. Nathan Clumeck of St. Pierre University hospital in Brussels, Belgium, a principal investigator for the Phase I tgAAC09 study, presented results from Belgium and Germany trials at the AIDS Vaccine 2006 Conference in Amsterdam, The Netherlands.

This clinical program is the first ever to test a recombinant AAV-based prophylactic vaccine, and it is primarily designed to evaluate safety and tolerability of the vaccine at escalating dose levels, and to evaluate immune responses following vaccination.

There were no safety concerns identified in the study to date, and the vaccine has been very well tolerated. Also, in a subset of the volunteers receiving a single administration of the highest dose of the vaccine, some immune responses were observed. This is exciting to us because it's the first human evidence that an AAV-based vaccine can stimulate the immune system to respond to HIV proteins.

Now, we recognize that these data require additional analysis, but this does provide us critical insight into the activity of tgAAC09 that will help in our development program for AAV-based vaccines designed to protect against HIV/AIDS. Further studies are planned to determine the clinical relevance of this observation, and a second clinical trial of tgAAC09 is ongoing in South Africa, Uganda and Zambia to evaluate a higher dose and to systematically evaluate the utility and optimal timing of boost vaccination.

Also, as part of our comprehensive development strategy of the HIV/AIDS vaccine program, we have R&D activities underway to identify HIV vaccine candidates for the developed world. These efforts stem from a five-year, $22.5 million NIAID contract awarded in November of last year to Targeted Genetics and our research collaborators at CCRI and CHOP. Recently, our year-two development budget of over $6 million was approved.

Agreements of this kind, we feel, not only validate our AAV-based vaccine approach and underscore the growing appreciation of the AAV technology platform, but also highlight our extensive capabilities in the manufacture and development of AAV-based product candidates. This significant funding mechanism expands our development of AAV-based HIV/AIDS vaccines against other HIV strains, and augments our comprehensive development program with IAVI.

Next, in our collaboration with Celladon Corporation to develop gene-based therapies for congestive heart failure, we are on track to move into human clinical studies in the first half of 2007.

And finally, in our collaboration with Sirna Therapeutics, we're pursuing a new class of AAV RNAi-based therapies for Huntington's disease. And I'm sure you have heard the news of Merck's intent to purchase Sirna. Clearly, the concept of gene silencing as a therapeutic modality is, obviously, gaining credibility among pharmaceutical companies, as well as on Wall Street.

We're very excited to play a part as we work with Sirna to develop an AAV RNAi-based therapy, designed to inhibit the production of the Huntington protein. Once the dust settles and we have the opportunity to discuss our collaboration with Sirna and Merck, we will give you an update on how we plan to move forward. But we're very excited to have the opportunity to further explore RNAi-based therapy.

Academic and corporate partnerships like the ones I've discussed today are key to achieving our goals for the development and commercialization of novel therapeutics. These partnerships not only validate the broad applicability of our AAV manufacturing and development capabilities in multiple disease settings, but also provide substantial revenue and upside to the Company. We continue to pursue additional strategic partners as a key element of our business strategy, and we expect to make progress with additional partnerships in 2006 and beyond.

Now, before I turn the call over to David, I'd like to discuss the importance of two patents that have recently issued to us that further strengthen our leadership in developing AAV-based therapies. Although we've previously announced the issuance of these patents, we believe this IP in particular merits additional notation.

The first patent I'd like to highlight describes the delivery of genes or the delivery of small therapeutic genetic constructs, or small therapeutic constructs including therapeutic RNAi molecules such as RNAi.

So, giving you a little science 101 background, single-stranded DNA vectors like AAV require conversion to a double-stranded DNA form in order for the therapeutic gene of interest to be expressed. Now, the AAV virus DNA is about 4.7 KB in size. However, a significant number of genes, as well as genetic constructs such as expressed RNA, or RNAi, are approximately half this size or less.

The patent that was issued to us covers the use of AAV vectors containing genetic sequences that are roughly half the size of an AAV payload, can form interest strand-based pairing, rapidly converting the therapeutic construct to an expressible form. And this results in a more rapid and efficient expression of the therapeutic genetic construct, and has the potential for much-increased benefit in treating or preventing disease.

These AAV vectors, known as self-complementary vectors, are of increasingly broad interest in the delivery of small genetic constructs, including RNAi. We believe that this broad patent predates any other IP in the self-complementary vector field, as well as any other IP in the expressed RNAi field.

The issuance of this patent adds to a portfolio of intellectual property that really enhances the utility of AAV vectors in two important ways -- first, for expressing therapeutic genes in order to add necessary proteins to prevent or correct a disease state; and second, for expressing therapeutic RNA molecules such as RNAi, which can silence or block the expression of abnormal proteins associated with other disease states.

The exploitation of this issued patent is a natural extension of the Company's activity, and really broadens the class of our potential therapeutic targets.

The second patent issued to us recently describes both AAV1 serotype and AAV1 pseudotyped vectors. Just note that vectors of 1 serotype that are engineered to express capsid proteins of a different serotypes are said to be pseudotyped. A growing body of data demonstrate that the use of AAV1 pseudotyped vectors improves the efficiency of delivery of recombinant AAV vectors to various tissues, including muscle and brain. This improved efficiency of delivery leads to increased expression of gene product. We've made significant advances in the development, manufacture and purification of AAV1 vectors at commercial scale, and we believe this will expand our product development and licensing opportunities.

So with that, I'll turn the podium over to David Poston, our Chief Financial Officer.

Thanks, Stewart, and thanks to everyone for joining in this morning.

Now that Stewart has reviewed the progress we've made in our product and business development efforts, I'll start my financial comments with some color on the news we announced yesterday regarding the restructure of our Biogen Idec debt, and then continue with a look at the results for the quarter. I'll finish with a snapshot of our financial position for the quarter as well.

As we announced yesterday, we have restructured our $8.15 million Biogen Idec loan. The key elements of this debt restructure include an equity component, a cash component, and a change in the repayment schedule of the remaining debt.

The most exciting news is the equity component, as Biogen Idec is converting $5.65 million of debt to 1 million shares of our common stock. Our prior arrangement would have required us to repay $3.15 million of this debt in August 2007, and $2.5 million of this debt in 2008. The specter of these relatively-large payments had been a hindrance towards moving forward with many of our corporate objectives.

We also agreed to immediately pay $500,000 in cash to satisfy a portion of the remaining debt, and now have a manageable $2 million of debt remaining. We will repay this in two $1 million installments, the first due October 1, 2007, and the last due August 1, 2008.

Our agreement with Biogen Idec continues to include opportunities for Biogen Idec to receive early payments of a portion of these installments as we make progress in partnering and achieve other value-building milestones.

As many of you know from following Targeted Genetics for a while, Biogen Idec has been a long-term shareholder and collaborative partner of the Company. As a result of this debt to equity conversion, they will hold 19.9% of our common stock and will be our largest shareholder. We welcome their continued commitment to us and the promise of our products.

Our results for the third quarter, obviously, do not include this good news. Our fourth-quarter results will include a gain on the conversion of the debt and add about $5.5 million to our net worth.

I hope you have had a chance to review our third-quarter financial results announced this morning, which included a net loss of $3.2 million, or $0.32 per share in the third quarter of 2006, compared to a net loss of $5.9 million, or $0.66 per share for the same period last year.

Our revenue for the third quarter was $2 million, an increase from 1.5 million for the same quarter of 2005, and was $5.9 million for the first nine months of 2006, also up compared to 4.9 million for the same period last year.

One of the significant revenue drivers in 2006 is our congestive heart failure collaboration with Celladon. We have been very happy with the success of this program, which has grown to contribute $2.8 million so far this year, compared to $400,000 last year.

Revenue from the HIV AIDS vaccine collaboration with the International AIDS Vaccine Initiative contributed $2.1 million in the first nine months of 2006, which is a decrease of 50% compared to the first nine months of 2005, and reflects the movement of the program into the clinic.

Revenue from the NIAID contract to develop AAV-based HIV/AIDS vaccines also made an impact this year by contributing $800,000 in revenues year-to-date.

Operating expenses for the third quarter decreased to $5.2 million from $7.3 million for the same quarter of 2005. Operating expenses were $40.8 million for the first nine months of the year, compared to $20.6 million for the same period in 2005. The notable increase year-over-year is due to the $23.7 million non-cash goodwill impairment charge we recorded during the second quarter. Please refer to our quarterly report on Form 10-Q for the period ended June 30, 2006 for more detailed information about the goodwill impairment. Excluding the goodwill impairment charge, our operating expenses for the nine months year-to-date period are also down this year by over 15%.

We have successfully reduced our research and development costs 33% for the quarter and 25% for the year-to-date. These decreases are due to the continued effects of our January 2006 restructuring, specifically, reduced personnel expenses, as well as lower outside costs, as we focus our energies on the clinical trial portion of our inflammatory arthritis program.

While G&A costs have increased 13% for the quarter compared to the same quarter in 2005, they have decreased 6% for the nine months ending September 30th. Our general and administrative expenses are also decreasing as a result of the close attention to personnel and outside costs, but our also impacted by recording of non-cash stock-based compensation beginning in 2006.

As you can see from our financial results, we have recognized additional restructuring expenses in the third quarter related to our Bothell facility. This expense fluctuates due to periodic updates of our assumptions. While material on our financial statements, these accounting entries are non-cash expenses. We encourage you to refer to our third quarter Form 10-Q, which will be filed tomorrow, for full details on these restructuring charges.

As we've previously shared with you, one of our most important objectives in 2006 is to preserve and extend our cash horizon. We started 2006 with about $14 million in cash and closed the third quarter with $9.3 million. To tell the full story, in the first quarter we added about $5 million of cash from the sale of our common stock, and have used about $9.5 million to fund operations year-to-date, net of significant funding from our partner programs.

Given our careful use of cash and our balancing of resources, we are on track to meet our full year 2006 operating forecast of cash requirements in the range of 13 to $15 million.

While we have done a good job again this quarter to preserve our cash position, and while we are particularly excited about the restructuring of the Biogen Idec debt, we recognize that additional capital to extend our cash horizon is essential. We are aggressively pursuing multiple avenues towards this end, including entering new product development collaborations and strategic transactions, generating additional revenue and funding through expanding and extending our current collaborations, leveraging our manufacturing capabilities and product development infrastructure, and undertaking capital-raising efforts. We continue to carefully manage our cash position, while staying focused on creative ways to build shareholder value, advancement of our inflammatory arthritis program, and continuing to pursue ways to further leverage our capabilities into additional opportunities.

With that, I'll return the mic to Stewart.

Thanks, David. We've made good progress as we near the close of the year, and we continue to focus on achieving very important clinical, business development and financial management milestones necessary to execute on our plan in 2007.

We're continuing to pursue development of our inflammatory arthritis program, and so far are very encouraged by the data, and happy with the pace of our ongoing Phase I/II clinical trial. We look forward to presenting additional interim data from the study at next week's ACR meeting.

We're also continuing to deliver on current partnered opportunities. Our product development collaborations focused on HIV/AIDS, congestive heart failure, and Huntington's disease continue to progress and, we believe, will generate important clinical and preclinical data in 2007.

These collaborations serve to further validate the broad applicability of AAV in multiple disease settings, as well as provide substantial revenue to the Company. They also allow us to monetize our earlier investment in AAV scale-up, manufacturing and product development.

We're pursuing additional product opportunities in therapeutic areas of interest that are complementary to our lead product opportunity in inflammatory arthritis in the context of M&A as well as product in-licensing. The Company is also pursuing additional opportunities to further leverage its investment in AAV manufacturing and scale-up through new product collaborations.

And we continue to closely scrutinize our cash and are working every opportunity possible to extend our financial runway. Yesterday's announcement of our debt restructuring is an example of those efforts, and we do expect more to come.

So in closing, thank you all very much for your continued support and for your time this morning. At this point we're very happy to answer any questions you might have.

(OPERATOR INSTRUCTIONS). Laura Engel, Stonegate Securities.

I know you discussed some receipts from the partnerships for the nine months. I was wondering, as far as the previous guidance or mention of a total of 9 million expected for FY06, where do you stand with that? I have some of the individual numbers written down, but I know you also mentioned some new initiatives you're working on. If you could comment on that.

Thanks for your call. As we have previously discussed, our forecast was up to $9 million. And year-to-date we are on track for that. Our current range is, I'd say, 8 to 10.

Okay. As far as a rate on the restructured debt with Biogen Idec, is that something you can discuss, or will that be in the filing?

What kind of rate?

On the 2.5 on the remaining debt owed to Biogen Idec.

We will be repaying $1 million in August of 2007 and August of 2008. The interest rate on that will be continuing with the LIBOR plus one approach that we've had since the beginning of the loan.

I appreciate it. Thank you.

David Miller, Biotech Stock Research.

I understand that the timing of the debt payments can be moved up depending upon certain milestones. But are the amounts themselves fixed?

The amounts are $1 million in August of 2007 and August of 2008. The provisions of the original restructure, the one we did in August of 2005, allowed for Biogen to receive an accelerated repayment of one-third of potential future -- certain potential future collaborative payments that would come to us, working backwards on the tranches. So, that provision still is in the arrangement.

But nothing more than the $2.5 million in cash?

No. Right. And it's really just the $2 million remaining (multiple speakers) made a $500,000 payment.

Already written that big check.

That's right.

For the data that we're going to see next week, how much efficacy data is going to be in there? Can you give me some idea of the mix between high-dose and low-dose patients?

What we're reporting on is the snapshot of data for the first 60 patients, so three dose levels, 20 at each dose, (indiscernible) 11th, 12th and 13th DRPs per mil. And so it will be safety data on all three cohorts, efficacy data at 12 weeks post-drug first dose for the lower two cohorts, and possibly some efficacy data for the third cohort, but it won't be full 12 weeks. We haven't completed following those patients yet.

Okay. And with the Idec -- Biogen Idec deal and the changes to the assets, can you give us a comment on where you're at with your listing status?

We're finishing the quarter with plenty of cash, as you saw from our financial statements and the press release. We -- our cash horizon is into first quarter of 2007, and our net worth is $1.5 million, which is below the NASDAQ $2.5 million listing requirement. However, the gain that we will be reporting, combined with the equity investment that Biogen is making, will contribute, we estimate, about -- excuse me -- $5.5 million of increase to our net worth. So, we believe that that will address the -- a temporal shortfall.

Perfect. Congratulations on negotiating a great deal, and I look forward to seeing the data next week.

(OPERATOR INSTRUCTIONS). Ladies and gentlemen, it looks like we have no more questions at this time. Management, I will turn it back to you.

Thanks. As you can see, we have a number of pretty important clinical, business development and financial management milestones ahead that we are working very hard to accomplish. So, just again wanted to thank you for joining us. Stay tuned, and thank you very much.

Ladies and gentlemen, thank you for participating in today's conference call with Targeted Genetics. The presentation will be archived and can be accessed at www.TargetedGenetics.com. Thanks again for joining today's presentation. You may now disconnect.