Armata Pharmaceuticals, Inc. (ARMP) 2006 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Targeted Genetics fourth-quarter and year-end 2006 financial results conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (OPERATOR INSTRUCTIONS). This conference is being recorded today, Thursday, March 29, 2007.

I would now like to turn the conference over to Ms. Stewart Parker, President and CEO. Please go ahead.

Thanks, Heidi. Good morning and thank you very much for joining us.

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. We do wish to caution you that such statements are only predictions, and actual events or results may differ materially from the statements we make, so please do 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 recent Form 10-K for 2006, which is being filed today.

So, during this morning's call, I plan to review the numerous objectives we achieved in 2006, and I will also discuss the very important financial, product and business development goals that we've set out to achieve in 2007, but first, I'd like to start with just a little perspective. Those of you who have followed us for some time know that our business of molecular medicines or gene therapy has been challenging; it has been tough; it has been full of hurdles. Resources have had to be stretched and focus honed down constantly on those milestones which have the best chance of showing the validity of the technology and its very bright prospects.

From a financial standpoint, there have indeed been times in the past when Targeted Genetics' cash resources dipped below that magic one-year threshold, and yet we've always found creative ways to extend our resources, lengthen our runway and continue to develop our products. At this point, once again, we find ourselves at a slightly less than one-year cash position, which has prompted our auditors, in the context of their yearly fiscal review, to issue an emphasis paragraph. We will discuss this in more detail later in the call. However, I do want to ensure that this issuance doesn't take away from the fact that we've had an extremely successful year and in many ways are stronger financially and from a capital structure than we ever had been. In fact, as you will hear, we were profitable in the fourth quarter of 2006.

We do have an aggressive plan in place to move our programs ahead clinically and to exploit our IP through new licenses and partnerships, and of course manage our current resources effectively in order to be able to capitalize on new data generated midyear, especially related to our arthritis program. You'll be hearing more about this plan -- these plans later in the call.

I'm very proud of what we've accomplished this year. Specifically, we made significant progress in our lead product development program in inflammatory arthritis; we advanced our partner product development collaborations focused on HIV AIDS, congestive heart failure, and Huntington's Disease; we expanded our patent portfolio; and we strengthened our financial position with a series of financings and other transactions. I will discuss these achievements with you this morning in greater detail and give you additional information on our plan for 2007. You'll also hear from David Poston, our Chief Financial Officer, who will review our financial results for 2006, including results for the fourth quarter and year-end, and our planned guidance for 2007.

I'd like now to turn to my discussion -- to turn my discussion to our clinical and partnered programs, starting with our lead product candidate, tgAAC94 for the treatment of inflammatory arthritis. We've moved this therapeutic program forward in significant ways during 2006, and we are on track to achieve many milestones this year as well.

Specifically, we finalized the study and reported complete results of our Phase I trial of tgAAC94 in subjects that were not currently on concomitant TNFalfa antagonist therapies. The data from this study demonstrated that an intra-articular injection of tgAAC94 was safe and well-tolerated at doses up to 10(11) DNase resistant particles per mil of joint volume.

Though the study was not powered for efficacy and secondary parameters, we observed continued measurable improvements in swelling and tenderness for up to 24 weeks. We found that the reduction in mean scores were greater at the higher dose, suggesting a dose response correlation, and we saw a decrease in mean tenderness and swelling scores over time in the untreated joints of patients receiving this investigational agent. I want to point out that this observation is important because it suggests that a single local administration of tgAAC94 may provide clinical benefit to multiple joints and merits further evaluation.

We amended the tgAAC94 clinical protocol of our second Phase I trial of this drug in patients with inflammatory arthritis to include a higher does and increased target patient enrollment from 40 to 120. Under the amended protocol, the study was redesignated a Phase I/II trial.

We also presented very encouraging interim Phase I/II data at multiple time points during 2006 and most recently summarized the safety and efficacy measurements for the first 60 patients from three dose cohorts. We continue to be very encouraged with the growing body of positive data which continues to provide evidence of the therapeutic potential for local administration of tgAAC94 to affected joints. We are also pleased by the rate of enrollment on the second half of the study and as a result anticipate the opportunity to analyze and present more complete data from this Phase I/II study and gain additional insight toward our next clinical steps by the middle of this year.

We also achieved all of our milestones from our 2006 clinical development plan for tgAAC09. This AAV-based vaccine candidate is designed for high-risk populations in developing nations to protect against the progression of HIV and is being developed in collaboration with the International AIDS Vaccine Initiative or IAVI, Children's Research Institute of Columbus, and Children's Hospital of Philadelphia. In February, 2006, the ongoing Phase II clinical trial in South Africa was expanded to include Uganda, and then in April, we began the first preventative HIV vaccine trial in Zambia as well. Initial results from this Phase II clinical study are anticipated in the second half of 2007.

In August of 2006, results from the Belgium and Germany arms of the Phase I study were presented at the AIDS Vaccine 2006 Conference in Amsterdam, Netherlands. It's important to note that this Phase I trial was the first ever to test a recombinant AAV-based prophylactic vaccine and was primarily designed to evaluate safety and tolerability of the vaccine at escalating dose levels and to evaluate immune responses following vaccination. We were very pleased that there were no safety concerns identified and that even at this initial dose, some immune responses were observed. This is excited to us because it's the first human evidence that an AAV-based vaccine may be stimulating the immune system to respond to HIV proteins.

Also, as part of our comprehensive developed strategy of the HIV/AIDS vaccine program, we have research and development activities underway to identify HIV vaccine candidates for the developed world. As a reminder, these efforts stem from a five-year, $22.5 million NIAID contract awarded in 2005 to Targeted Genetics and our research collaborators at CCRI and CHOP. As a subcontractor, we have an improved 2007 development budget of over $8 million to achieve our R&D objectives in the program. A safe and effective vaccine is essential to controlling the global HIV AIDS pandemic and we believe that our HIV/AIDS vaccine programs offer compelling, humanitarian and commercial opportunities.

Another of our successful collaborations is with Celladon Corporation to develop gene-based therapies for congestive heart failure, a condition that is the leading cause of morbidity and mortality in the United States. This partnership is structured to develop a novel AAV-based therapeutic agent, AAV2/1/SERCA2a, -- it's a catchy name -- that is delivered directly to the heart to improve the heart's ability to contract.

During 2006, Celladon's academic collaborators presented very positive preclinical results showing a significant improvement in fractional shortening, or FS, which is a measurement of cardiac contractility and function, to treat heart failure. The favorable safety and gene expression profiles of AAV may help to realize the clinical and commercial potential of gene-based congestive heart failure therapies. Given positive results from these and other preclinical studies, our first product target in this program is anticipated to move into human clinical studies in the second quarter of 2007.

Moving to our collaboration with Sirna Therapeutics, which was purchased by Merck last year, we are pursuing a new class of AAV RNAi based therapies for Huntington's Disease. The scientific viability of gene silencing as a therapeutic modality continues to gain great credibility among pharmaceutical companies as well as on Wall Street. However, a key hurdle to translating the scientific excitement around siRNAi technology into therapeutic candidates has been delivery to target tissue. We believe that the use of AAV vectors to express sequences in coding therapeutic siRNAi may overcome this hurdle. Preclinical studies to select a lead AAV HD siRNA candidate are ongoing, and the program is anticipated to enter human clinical studies in 2008.

Also fueling our Huntington's Disease program as well as other potential RNA therapeutic development is our intellectual property in RNAi. In October of 2006, we were issued an additional patent related to our Adeno-Associated Virus vector AAV technology covering delivery of genes, delivery of small therapeutic generic constructs, and delivery of small therapeutic RNA molecules such as RNAi. This patent is the first to demonstrate that AAV vectors containing genetic sequences that are roughly half the size of an AAV payload can form intrastrand-based pairing, rapidly converting the therapeutic construct to an expressible form. This results in a much more rapid and efficient expression of the therapeutic construct and has the potential for 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 IP in the expressed RNAi field. Now, this patent is in addition to our earlier issued IP covering the use of AAV to deliver RNAi therapeutics such as RNAi.

Additionally, we further strengthened our AAV leadership position with the issuance of a number of other important patents covering our AAV technology platform and expect numerous additional patents to issue in 2007 as well. Our AAV manufacturing competence is indeed the foundation of our ability to attract corporate and academic partners, and in turn enables us to undertake and aggressively advance our product development programs.

I will close my summary of 2006 by highlighting our ability to further leverage this portfolio of AAV-related intellectual property assets. In December of 2006, we entered into a non-exclusive license agreement with Amsterdam Molecular Therapies providing AMT with the rights to use AAV1 in its development and commercialization of products to treat type 1 and type 5 lipoprotein lipase deficiencies. Under the terms of the agreement, Targeted Genetics received an upfront payment from AMT of $1.57 million and will receive milestone payments and royalties on the sale of any products commercialized using the licensed technology. AMT is currently conducting Phase II trials of an AAV-based therapy for type one LPL deficiency, anticipates launching the product in the European Union in 2008.

I will now ask David Poston to discuss our fourth-quarter and the year ended 2006 financial results, and then I will close our call with a summary of our strategic focus for 2007, before we open the call up to questions. David?

Thanks, Stewart, and thanks for everyone for joining in the conference call this morning.

As Stewart mentioned in her opening remarks, the audit report from Ernst & Young that is in our form 10-K to be filed with the SEC contains a going-concern qualification. Before we get started, I'd like to discuss what it means to our company. The language in the audit report indicates that our current limited working capital, combined with our recurring losses and negative cash flows, raise substantial doubt about our ability to continue as a going concern. As part of Ernst & Young's audit, the independent auditor rules require them to compare our projected December 2007 cash balances with our projected payables and payroll liabilities at that time, as if we would deploy our year-end 2007 cash balances to settle all of our accounts rather than use the cash to move our business forward. Following these accounting metrics, Ernst & Young concluded that they needed to include a going-concern qualification in their report.

As we have a long history of successfully moving the Company forward while operating on a relatively short cash horizon runway, and as you know, recurring losses and negative cash flows are not uncommon in this industry, this time, however, our short cash horizon intersects with our year-end audit. This intersection, if you will, is unfortunate, as it triggers the going-concern qualification, but it also comes at an interesting time for us as today we're showing good business momentum and reporting our first profitable quarter in quite some time as a result of restructuring our debt and the largest sub-license revenue results in our history. We are also reporting our highest fiscal year revenue results in three years, better-than-planned cash burn for the year, forward movement in building our patent estate, and progress in both our inflammatory arthritis trials and AIDS vaccine trials. This going-concern qualification does not and will not slow this momentum and does not impact our contracts, collaborations, or stock listing with NASDAQ.

We intend to continue to move our product candidates into the clinic and towards commercialization. We plan to fund these objectives with cash from our current collaborations and contracts, additional cash from stock and debt placements, and continue our ongoing pursuit of partnering and M&A opportunities. We believe that our current cash resources, including the capital we raised in January 2007, combined with the projected revenue from our collaborative partners, are sufficient to fund our planned operations, including our clinical trials, into the fourth quarter of 2007.

From a cash burn perspective, we began 2006 with $14.1 million in cash and cash equivalents. In January 2006, we reduced expenses to extend our cash horizon, resulting in a reduction of our forecasted cash burn to a range of 13 to $16 million. We ended 2006 with cash and cash equivalents of $6.2 million, which does not include the $8.1 million of net proceeds from our January 2007 private placement of common stock and warrants. We are happy to report that our net burn for 2006, at $12.7 million, was slightly better than our projected range.

We also made important progress in cleaning up our balance sheet by amending our agreement with Biogen Idec. In November of 2006, we restructured our 8.15 million Biogen Idec loan, converting $5.65 million of debt to 1 million shares of our common stock. We also paid them $500,000 in cash at the time we entered into this arrangement to satisfy a portion of the remaining debt and reduce the debt further as a result of entering into a non-exclusive sub license of our AAV1 technology. As a result, we now have a manageable $1.5 million of debt remaining. We will repay this debt in an installment of $1 million on August 1, 2007 and the remaining balance on August 1, 2008.

As many of you know from following Targeted Genetics for awhile, Biogen Idec has been a long-term shareholder and collaborative partner to the Company. As a result of this debt-to-equity conversion, they now hold just short of 17% of our stock and remain our largest shareholder. We appreciate their continued commitment to us and the promise of our products.

Collaborations also continue to play an important part in generating cash to fund our operations, leveraging our product development and manufacturing infrastructure and building shareholder value through our interest in downstream product revenues, milestones, and royalties. The largest contribution to revenue among our collaborations in 2006 was our congestive heart failure collaboration with Celladon Corporation, which generated a total of $4.2 million of revenue in 2006. This project will also continue to be a significant funding source for us as we enter the clinic, and expect to receive about $3 million of revenue from this collaboration in 2007. This program is emblematic of the possibilities of gene medicine to possibly treat previously untreatable diseases. It is also a testimony to the strength of our product development capabilities. As this program approaches the clinical-trial phase, our expectations continue to build. Our long-running HIV AIDS vaccine development program with the International AIDS Vaccine Initiative contributed just over $2 million of revenue in 2006. Since its start in 2000, funding for this project has totaled over $28 million. This revenue does not include the costs of clinical development, as IAVI manages and funds those activities separately.

For 2007, we will be earning revenue from our HIV AIDS vaccine-development work in support of the NIAID-funded subcontract. This project leverages our established development platform and is valued at $18 million to Targeted over the contract span of five years. In 2006, we recognized $1.5 million of revenue from this project, and our current work plan for 2007 includes revenue of about $6 million. We are excited to be working closely with Children's Hospital of Philadelphia and Columbus Children's Research Institute on this project and are pleased with the financial stability a five-year project of this size can contribute.

Earlier this morning, we announced our 2006 and fourth-quarter financial results. As a result of the $2.6 million gain on the Biogen debt restructuring and the $1.75 million license agreement we received from Amsterdam Molecular Therapeutics, we reported a net income of $808,000 or $0.08 per common share for the fourth quarter of 2006, compared to a $3.6 million loss or $0.41 per common share for the fourth quarter of 2005. Our net loss for the full year in 2006 was $34 million or $3.47 per common share, compared to a loss of $10.2 million or $2.24 per common share in 2005.

Our revenue in the fourth quarter of 2006 was $4 million compared to 1.9 million for the fourth quarter of 2005. And it was $9.9 million for the year in 2006 compared to 6.9 million of revenue in 2005. Revenue in 2006 primarily reflects the development activities under the congestive heart failure collaboration with Celladon, the HIV AIDS vaccine collaboration with IAVI, and to a lesser degree collaborative revenue from the HIV/AIDS NIAID-funded subcontract. Revenue in 2005 was primarily from development activities earned through the IAVI collaboration.

Our operating expenses for the fourth quarter of 2006 were $5.8 million, relatively flat compared to -- excuse me, $5.7 million in the fourth quarter of 2005. Our expenses increased to $46.6 million for the full year of 2006, compared to $26.2 million for 2005.

R&D expenses decreased to $4 million for the fourth quarter of 2006, compared to $4.2 million for the fourth quarter of 2005, and also decreased for the year to $14.5 million in 2006 compared to $18.2 million in 2005. General and administrative expense increased slightly to $1.6 million in the fourth quarter of 2006, compared to $1.3 million in the fourth quarter of 2005, but remained relatively consistent year-to-year at $6.4 million for the year in 2006 compared to $6.3 million in 2005. The decrease in R&D expense for the fourth quarter of 2006 was due to lower product development costs from our HIV AIDS vaccine program with IAVI, and lower indirect costs as a result of our restructuring in January. The modest increase in G&A expense during fourth quarter of 2006 reflects higher intellectual property costs and stock-based compensation expenses. Our expenses for the full year increased to $46.6 million in 2006 compared to $26.2 million for 2005 as a result of a $23.7 million goodwill impairment charge we recognized in the second quarter of 2006.

We finished 2006 with a net cash burn of $12.7 million and $6.2 million of cash. Entering 2007, we raised $8.1 million of net proceeds from a private placement of common stock and warrants. When combined with the projected $10 million of funding generated from our partnered programs, we are currently targeting a cash burn for 2007 in a range of 13 to $16 million, which is up somewhat from our 2006 net burn.

All in all, we are generally pleased with our results. We have accomplished a lot in 2006 to position ourselves for success by focusing our resources on our key arthritis program, by focusing our attention on building our intellectual property patent portfolio, now including early RNAi patent positions, by implementing our work plans to generate significant revenue from our Celladon partnership and the NIAID project, and by restructuring -- and by the restructuring of our Biogen Idec debt and further by raising additional capital earlier this year to extend our cash horizon. While good progress has been made, we appreciate that we have more work to do. Our plan is to pursue additional capital through a combination of sales of stock or placement of debt, additional revenue or funding through expanding or extending our current collaborations, additional product development collaborations or strategic transactions, or initiatives to leverage our manufacturing capabilities and development infrastructure expertise. We are also continuously monitoring our cost structure for reductions to our ongoing operating expenses. Extending our cash horizon depends not on the accomplishment of one of these objectives, but rather a combination of these efforts. We are committed to achieving our scientific, clinical and financial milestones and will report progress on these fronts in upcoming updates.

I'm now going to return the call back to Stewart, who will highlight some of our program plans moving through the rest of the year.

Thanks, David.

So, we realize that we have a lot of work ahead of us, and we recognize that 2007, like 2006, will continue to be challenging. However, we have a number of important clinical, business development and financial-management milestones ahead that we are intently focused on achieving. I will end today's call with an overview of our primary areas of focus for the remainder of the year.

We will continue to aggressively pursue development of our inflammatory arthritis program. We continue to be very excited about the growing body of human data generated in the advancement of this product, tgAAC94, as a therapy to treat inflammatory arthritis. During 2007, we plan to continue to deliver on current partnered opportunities. Our product development collaborations focused on HIV AIDS, congestive heart failure and Huntington's Disease are advancing nicely and are anticipated to generate important clinical and preclinical data in 2007. These collaborations serve to further invalidate the broad applicability of AAV in multiple disease settings and also provide important revenue to the Company. They also allow us to monetize our earlier investment in AAV scale-up, manufacturing and product development.

We will also explore monetization of our RNAi assets. We believe that expressed RNAi has certain significant advantages over other RNAi approaches related to stability and delivery, and we intend to find ways to partnership some other vehicles to exploit our early IP in this area.

We will also seek additional product opportunities. We intend to pursue opportunities in therapeutic areas of interest that are complementary to ours in the context of mergers and acquisitions, as well as product in-licensing. The Company is also pursuing opportunities to further leverage the investment in AAV manufacturing and scale-up we've made through additional product collaborations.

We will also obviously continue to closely scrutinize our cash and take advantage of every opportunity to extend our runway. As David outlined above, these steps include equity raises, partnerships, grants and other means of financing that will extend our cash horizon.

Before we close, I'd like to take this opportunity also to let you know that we will be presenting later this morning at BioCentury's Future Leaders of the Biotech Industry Investor Confidence in New York. Our presentation will be webcast live and also archived on our Web site, and I do hope that you will all be able to join us.

In closing, I want to thank you all for your support and for your time this morning. At this point, we would be very happy to answer any questions you have. Heidi?

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS). We have no questions at this time.

Okay, well, thank you again. As we've outlined for you today, we have a number of important clinical business development and financial milestones ahead. We are going to be working very hard to accomplish those and we look forward to telling you about that over the next several months.

Thanks again for joining us and please stay tuned.

Ladies and gentlemen, this concludes the Targeted Genetics fourth-quarter and year-end 2006 financial results conference call. If you'd like to listen to a replay of today's conference, please dial 1-800-405-2236 or 303-590-3000. You will need to enter access number 11087268. ACT would like to thank you for your participation. You may now disconnect.