Brickell Biotech Inc (BBI) 2006 Q3 法說會逐字稿

Good day, everyone and welcome to the Vical Incorporated financial results conference call. At this time, I would like to inform you that this call is being recorded and that all participants are in a listen-only mode. At the request of the Company, we will open the conference up for question and answers for invited participants after the presentation. I would now like to turn the conference over to Mr. Alan Engbring, Executive Director of Investor Relations. Please go ahead, sir.

Thank you, Tony. Hello and welcome to our third-quarter 2006 financial results conference call. Participating on the call today are Mr. Vijay Samant, our President and Chief Executive Officer and Ms. Jill Church, our Chief Financial Officer.

I will begin with a brief notice concerning projections and forecasts. This call includes forward-looking statements, including financial expectations and projections of progress in our research and development programs that are subject to risks and uncertainties that could cause actual results to differ materially from those projected, including the risks set forth in Vical's annual report on Form 10-K and quarterly reports on form 10-Q filed with the Securities and Exchange Commission, as well as the specific risks and uncertainties noted in Vical's news release on third-quarter 2006 financial results.

These forward-looking statements represent the Company's judgment as of today. The Company disclaims however any intent or obligation to update these forward-looking statements. Now I would like to introduce Vical's President and Chief Executive Officer, Mr. Vijay Samant.

Thank you, Alan and welcome to all our participants and our call today will review recent events and provide an update on some of our key product development programs. But we will begin with a review of our financial results for the third quarter of 2006 by Jill Church, our CFO. Jill?

Thanks, Vijay. Good morning. I will begin with the third-quarter results recorded earlier today and then provide some perspective on our series of recent financings. We reported revenues of $13.4 million for the first nine months of 2006 compared with $10.2 million in the same period in 2005.

In the fourth quarter, we expect to complete shipments to the NIH under the $12 million production order for HIV vaccine in support of a large Phase II trial scheduled to begin next year. Our net loss for the first nine months of 2006 was $15.2 million or $0.52 per share compared to $18.7 million or $0.79 per share in the first nine months of 2005.

For the full year 2006, we continue to project an adjusted net loss of $22 million to $26 million, excluding an estimated $1 million to $2 million for non-cash stock-based compensation expense. For details, please refer to this morning's financial results news release, which has been posted to our website.

We ended the third quarter with approximately $70 million in cash, cash equivalents and marketable securities, up from $60 million at the end of June largely as a result of a $10 million registered direct offering to a single institutional investor in August, the first of three such placements in recent months.

I would like to spend just a few minutes to provide some context for these transactions, which were unusual in the way they were initiated and executed. Normally we complete such stock offerings through one or more of our investment banking relationships. Our registered direct placements implemented in 2005 and 2004 were far more typical. Although we had received inquiries in the past from potential investors seeking direct purchases, we had not acted on them. The investment proposal we received in late July was different because of the quality of the investor and the size of the purchase.

Our first in this recent series of investments came in early August from Capital Group International. Capital Group is a global investment manager with approximately $900 billion of assets in the American Funds family of mutual funds through its capital research and management division and approximately $300 billion of institutional investments under management through its capital international division. The firm has a track record of long-term investment driven by bottom-up fundamental research.

Their proposal was to acquire a 6.5% position in a single transaction at the current market price with no discount. Because we would be arranging the transaction directly with the investor, there also would be no commission. We completed the sale of approximately 2.1 million shares in early August for net proceeds of approximately $9.7 million.

Our second investment came in early October when we were approached by a pair of institutional investors seeking to make a combined investment of $12.5 million at the current market price. These investors have chosen to remain anonymous, but again the size of the investment and the quality of the investors were significant factors in our decision to proceed. We completed the sale of approximately 2.5 million shares in mid-October with no discount or commissions for net proceeds of approximately $12.4 million.

Our third investment came just four days after the second when Temasek Holdings of Singapore purchased approximately 5 million shares of our common stock on the same terms for net proceeds to Vical of $24.9 million, moving it to the top of our largest shareholder list.

For those who may not be familiar with Temasek, this is a private investment firm managing a diversified $80 billion portfolio for only one client, the government of Singapore. Since Temasek was incorporated in 1974, it has generated total returns for its client of 18% compounded annually. Temasek has assembled a portfolio of investment in companies across diverse industries, including telecommunications and media, financial services, real estate, transportation and logistics, energy and resources, infrastructure, engineering and technology, as well as bioscience and health care.

Their reach extends from Singapore throughout Asia and globally through the major countries of the developed world. Temasek's approach involves extensive research leading to long-term investments and ongoing interactions with management in support of corporate growth. Their international reach and extensive relationship are often leveraged into new business opportunities.

We were introduced to Temasek earlier this year and engaged in a series of discussions over the last several months in support of their diligent evaluation. Their investigation covered virtually all aspects of our business, including scientific assessment of our technology, analysis of our intellectual property, rationale, status and outlook of our development program, familiarization with our management team and review of our financial position.

A key point of interest for Temasek was our pandemic flu vaccine program. Because of Singapore's proximity to the epicenter of the world's avian flu outbreak along with the firm's philanthropic interest, they were actively seeking investment opportunities that would support the advancement of the novel medical intervention in this field. We are pleased that our program and indeed our Company met the stringent investment criteria of this highly selective investor and we are excited that their investment has provided us with the financial flexibility to advance into Phase I human clinical testing of our pandemic flu vaccine next year.

All of these placements were completed at the current market price or at prices above the recent averages on very favorable terms that maximize the net proceeds to Vical while protecting the interests of our current shareholders.

In addition, we are pleased to have attracted additional quality long-term investors to our shareholder base. The net impact is a cash balance of over $100 million providing sufficient financial resources to support significant advances in our ongoing program. I will now turn the call back to Vijay who will provide an update on our development program.

Thank you, Jill and I'll start with our flu vaccine program where we have a lot of news lately. Previously we had shown that two doses of our vaccine provided 100% protection in ferrets against the [heart] Vietnam avian strain. We recently showed 100% protection in ferrets with a single dose. That's a major improvement from our last clinical/preclinical data.

Our Vaxfectin adjuvant, which was developed originally for our DNA vaccine was effective in a mouse study at the dose sparing adjuvant with commercial Fluzone vaccine from Sanofi. Third, as Jill mentioned, we have been successful in raising enough money to support further development of our flu program. We plan to advance into a Phase I human trial next year. By the way, we continue to seek government funding for this program also.

As a reminder, our lead flu vaccine candidate includes three genes. Two of those encode highly conserved proteins, but do not change significantly from strain to strain, making them ideal targets for a universal influenza vaccine. The third gene encodes the H5 surface protein, which is the key glycoprotein of the circulating avian flu strain.

Our vaccine is intended to provide underlying protection against severe disease and death from the (indiscernible) H5 plague or other flu strains that may arise unexpectedly in (indiscernible), as well as specific protection against the targeted H5 avian flu.

I am sure you all saw the announcements earlier this week about a new strain of H5N1 avian flu, the Fujian-like strain that is now infecting poultry in humans in Asia. The PNAS paper suggests that the H5 poultry vaccines currently being used in China have not been effective against this new strain and in fact may have encouraged the emergence of the vaccine resistant strain. If the same effect translates to humans, the current H5 human vaccines may not be effective against the Fujian-like or other emerging flu strains. The current H5 human vaccines, I mean the ones that are being stockpiled right now.

We believe our vaccine may offer a level of protection that cannot be achieved with conventional vaccines. The recent emergence of this new strain and the initial field observations in Chinese poultry farms provides further support for the logic of our vaccine development strategy.

Earlier this year, we announced that two injections, a two of three-component flu vaccine to provide 100% protection in mice and ferrets against the pathogenic Vietnam strain and this study was conducted at St. Jude's Children's Research Hospital. Simplified versions of our vaccine, including only two of the encoded proteins provided almost 80% to 90% level of protection in mice against the lethal challenges that H1 and H3 circulating human flu strains, as well as the H5 avian flu strain.

The survival data provided clear proof of concept based on simple (indiscernible) observation that our vaccine has the potential to protect against emerging pandemic flu strains even before the specific plague or strain is known.

In a follow-up experiment, we actually vaccinated ferrets with only a single dose of our three component vaccine and here again some compelling (indiscernible) observations, we demonstrated 100% protection against the highly lethal Vietnam strain.

As you know, conventional vaccines being developed by others, but avian flu typically requires two or more doses in humans. Even with the novel adjuvant and frequently at higher doses than used for seasonal influenza. Therefore, a single dose vaccine regimen could provide a critical advantage during a pandemic from a product supply perspective.

Under the key component of our three gene pandemic flu vaccine is our patterned adjuvant Vaxfectin, which is a cationic lipid formulation specifically designed to enhance the immune response to DNA vaccine. In September of this year, we received additional patent coverage on Vaxfectin for use with conventional vaccines.

Then in October, we provided the concept with data from studies in my showing that Vaxfectin may be an effective dose sparing agent for conventional flu vaccine. In that study, mice were vaccinated with the Sanofi Pasteur Fluzone trivalent in activated influenza vaccine from the 2005-2006 season with or without Vaxfectin as an adjuvant. We then evaluated HI titers, the accepted standard correlate of protection for conventional flu vaccine. Vaxfectin-formulated vaccines resulted in significantly higher HI titers than unformulated vaccines at the same dose.

We are currently seeking access from the government and private sources to a conventional vaccine against H5 strain of avian flu to support potential dose sparing studies with Vaxfectin and the goal really is to mimic what we saw with the seasonal vaccine with the currently stockpiled H5 vaccine.

We have been advancing steadily in our pandemic flu program with funding under our $3 million NIH grant. We are now conducting preclinical safety studies that would lead to initial human studies with the recently raised capital from our register director offerings. We now have the financial flexibility to advance into human testing in 2007. Our long-term growth for this program are about to provide a potential defense against a pandemic outbreak and to explore the potential for a seasonal flu vaccine using a similar approach. So that covers my discussion on flu.

I will move on to Allovectin-7. As you know, Allovectin-7 is our lead program in metastatic melanoma. We entered into a collaborative agreement with the Japanese company, AnGes MG, in the second quarter for future development and commercialization of Allovectin-7. Under the agreement, AnGes is funding the full expected cost of our Phase III trial in addition to sales-based milestones totaling up to $100 million plus royalties of Allovectin-7 once fully commercialized.

The Phase III trial was designed in agreement with the FDA through a special protocol assessment. It is a small trial of 375 patients, will be enrolling only chemo (indiscernible) patients this trial. Not a mix of patients like we did on our Phase II trial and most of them were chemorefractory. So their immune systems should be healthier. Patients will be randomized with two patients getting Allovectin-7, one patient getting chemotherapy control. Importantly, the primary endpoint is not survival, but durable response rate after 24 weeks, which should favor a long-lasting immunotherapy approach with a fast acting but short duration chemotherapeutic approach.

We recently initiated [post] three clinical sites for this trial and we will be ramping up to approximately 40 sites across the United States over time. We expect to enroll the first patient in the near future. Stay tuned for that announcement.

CMV, which is our third independent development program, our initial focus with this program is to reduce or prevent reactivation of CMV in immunocompromised HTP patients or stem cell transplant patients. We are currently enrolling in stem cell transplant donors and recipients for our Phase II trial.

Some of the challenges we are facing include dealing with transplant centers that do not have experience in using vaccines. Vaccines are not a part of the normal transplant procedure. As a result, we have to engage in extensive education with the site staff as well as with the donors, patients and doctors. We will continue to monitor the progress of the trial very closely and we plan to announce the results of our [DSMD] safety evaluation after the initial falloff on the first 20 donors (indiscernible), which we are not there yet.

The next item is our collaboration with the NIH and we have a number of activities going on with NIH, but in the interest of time, I'm going to focus just on our collaboration on HIV. First, the NIH program has generated substantial revenues for Vical to contract manufacturing orders in advancing our technology with federal government dollars. That is very critical to us. We wouldn't be with the flu program without that kind of support.

Second, HIV is by far the largest and most advanced DNA program among those fully funded by the NIH. Third, although HIV is a very difficult target, reliance on Vical's DNA technology is an increasingly common thread in the active HIV vaccine development programs with about 75% of the ongoing clinical trials around the world include DNA as part of the regimen.

The DNA vaccine used in the various NIH HIV vaccine trial includes six plasmids encoding genes from the envelope protein from multiple clades of HIV, as well as the common internal HIV proteins, which are (indiscernible). Together with these targets, they represent about 85% of all HIV infections around the world. A series of recent NIH trials and (indiscernible) regimens, which prime the immune response with multiple doses of DNA vaccine and boost the response with a single dose of adenovector vaccine.

At the International AIDS Vaccine Conference in Amsterdam this August, the NIH presented data from a Phase I clinical trial demonstrating that a prime-boost vaccine regimen tested in 40 HIV negative subjects was safe, well-tolerated and was highly effective in inducing a broad cross-protective T-cell immune response with multiple functions that will be important for controlling HIV infection.

The prime-boost combination is currently being tested in another 480 HIV-negative subjects through a multinational Phase II trial initiated in October of 2005. That trial is enrolling well and should yield data early next year.

You may recall we are expecting to complete shipments by the end of the year for under a $12 million order from NIH for a large clinical trial. This trial we expect to start in 2007. This Phase IIb trial will enroll several thousand HIV-negative subjects in eastern Africa, southern Africa and the Americas. The trial is designed to test whether the vaccine regimen can prevent infection or disease progression. So it is really a proof of concept study.

In August of this year, the NIH also started a Phase I therapeutic clinical trial designed to prevent and control disease in patients already infected with HIV. Antiviral drug combinations that improve the outlook for HIV-positive individuals, but complicated treatment regimens, serious side effects and increasing drug resistance call for a better long-term solution and this therapeutic vaccine is the appropriate pathway to support that.

We are pleased to be part of the NIH's HIV vaccine program, which is among the most advanced HIV programs today and is increasingly being recognized as the best hope for success against this major global threat. Beyond the implication for HIV, this program is a part of a growing body of evidence supporting the concept of DNA vaccines, both as DNA vaccines on there own as well as prime-boost applications.

This concludes my prepared statements. Operator, can you open the call for questions?

(OPERATOR INSTRUCTIONS). Navdeep Jaikaria, Rodman & Renshaw.

Good day. Good morning. A quick question, now with the shored up treasury that you have, are you going to look into doing studies for seasonal flu as well?

The answer to that question is yes, but not in the short term because the beauty of our development strategy is our pandemic testing basically gives you proof of concept to do a seasonal vaccine because remember the two internal genes that we use in the pandemic vaccine will be the same internal genes that we'll use in a seasonal Vaccine. So the answer is yes to your question. But we are not going to do a clinical trial for seasonal flu because we will get over the regulatory hurdles using the pandemic pathway and use the success there to expand the program to a seasonal flu vaccine.

George Fulop, Needham & Co.

This is Alan Carr actually calling for George. Considering that Temasek is phased out in Asia and they have a particular interest in avian flu, could you review for us the regulatory path for DNA-based flu vaccines in Asia versus U.S. and Europe?

Excellent. I think of all the countries in that part of the world, the Singapore government is probably the best regulatory agency for young budding agency. We actually have met with the agency as a matter of a protocol. Anytime I go to any country, I meet with the agencies because we have relationships, not particularly on the influenza program and they are pretty dynamic in terms of how they operate. But they basically rely on the U.S. IND. So normally if a U.S. IND is approved then the Singaporean government will allow you to conduct a trial in that part of the world. If the Singaporean agency concurs then they have the ability through their networking in that part of the world to conduct trials in Malaysia or Indonesia.

Eric Schmidt, Cowen & Co.

A couple of housekeeping questions for Jill if I might. First on the conclusion of the shipments under the $12 million NIH contract in Q4, will that be accompanied by (indiscernible) of revenue recognition or have we seen most of that? I just can't recall.

We have seen the majority of the revenue recognition on that, but there will be some more that comes through -- that we expect to come through in the fourth quarter of 2006.

We have only one -- we have shipped five plasmids. We have got one more plasmid to ship.

So roughly 1/6 of the revenue?

Yes.

And Jill, also on the recent transactions, can you provide us with a pro forma cash and pro forma shares outstanding?

The pro forma cash I actually mentioned in the conference call. It is over $100 million that we have.

Is it $100 million exactly?

$106 million to be exact. The number of shares that are outstanding after all those transactions is 39 million shares and on a fully diluted basis, it is approximately 43 million.

And then a question for Vijay on the CMD vaccine trial. Not sure I caught exactly what you are trying to do to speed up enrollment and make these centers more comfortable with the vaccination process and also whether you have a new timeline for completing the first 20 cohorts.

As I said, generally trials in that patient population are generally hard to conduct and particularly as I told you vaccines have not been used in that patient study because the precarious nature of those transplants. So I think we have undertaken a pretty extensive education program, particularly educating the donors and the patients in terms of the value of vaccination, how it could help them, not just using (indiscernible) case study, but other vaccinations. You'll be surprised that a lot of people don't fully understand the benefits of vaccination. So we're working with the physicians.

So there is an extensive education with (indiscernible) staff that we have undertaken as well as with donors, patients, coordinators. This effort is clearly front ended in the trial and site-specific. As sites gain more experience, we should be able to enroll a high percentage of (indiscernible) patients. Alan, how many sites do we have already up and running right now?

We have three sites open right now or initiated. They are not all open yet.

No. I am talking about TMB.

TMB, I think it is about 10 sites that are open.

Ten sites are open and so we are ramping up in the right direction. You mentioned three. That was Allovectin-7. So we would be in a much better position based on all these education programs, which are being undertaken in the last month and so the results will pay off in the next two months. So by early next year, we should have a good idea how we are doing with the recruitment.

Sean Wu, Rodman & Renshaw.

I just have a small question about your adjuvant program. You said it can be used for conventional vaccine. I don't know that process very well. Is this essentially [applicable] to GSK's new adjuvant? Do you have to go through some kind of very expensive testing basically to be used for common use?

The answer to that question is any time you bring a new adjuvant, the first thing you need to demonstrate is that you need to demonstrate that the adjuvant is indeed dose sparing or improves immunogenicity. If you can't do that, then the adjuvant is of no value. As you know, the only adjuvant that has been approved right now in the United States is alum and then the GSK adjuvant has been only approved in Europe so far. So there haven't been any adjuvants.

The second issue comes with assuming you get great immunogenicity and you need to make sure that the adjuvant is safe, is not toxic. The beauty of our adjuvant is that it's a cationic lipid-based adjuvant. There are no components in there of human origin. So unlike some of the adjuvants that are being developed, a lot of people, which are animal human, this is a pretty clean adjuvant. So I don't think -- obviously we'll have to go through the tox testing, but we don't see that as a hurdle at this stage.

So do you have to have a comparison between (indiscernible) to show -- to compare the [large] to show that it is indeed dose sparing?

The dose sparing studies will have to be done in humans. You can do it 100 patients side-by-side, one getting just the H5 vaccine or H3 vaccine and the other getting the H3 vaccine with the adjuvant and show that the vaccine indeed is more immunogenic. Once you to do, then you will have to do after discussion with a regulatory agency a broader safety study.

Now in influenza, the approval is pretty straightforward because the target market approval is the title against age. That is all you need in conventional vaccines, but if you're using it for a brand new vaccine then all the surrogate markers that need to be proven in a brand-new vaccine have to be demonstrated. So influenza is the much easier pathway.

(OPERATOR INSTRUCTIONS). May-Kin Ho, Goldman Sachs.

I have two questions. One is that with the investment, I know that previously, not so much with this particular investor, but government of Singapore where a number other companies have gone there with investments they would decide to establish manufacturing in Singapore. What are your plans along that line is the first question. The second question is on the Pfizer acquisition of PowerMed. What do you think of some of the differentiating features in terms of their technology approach versus yours?

Excellent question. I think you are right on the Singapore investment. Primarily (indiscernible) investments are good in Singapore, people make commitments to manufacture in Singapore or do something in Singapore specifically. We haven't made no such commitments of doing anything in Singapore. This is a straight equity investment and we were pretty firm that we are not going to commit to doing anything because we are going to do right -- what is right for the Company.

That doesn't mean if Temasek or through their affiliates we get an opportunity or funding to conduct a clinical trial in that part of the world that we won't do and we will be looking forward for such opportunities because we really don't have a lot of expertise in conducting trials in that part of the world (technical difficulty) just through the epicenter of influenza.

Also future in manufacturing, as you know, Singapore has those economic development zones where there has been a lot of manufacturing infrastructure and assets in place and if we need to make those, those could easily be made available to us. Jill and I actually met with them when we were in Singapore and they are open at a future date to consider us giving access to their manufacturing capacity. So does that answer your question on the Singapore?

Yes, thank you.

On the Pfizer question, first of all, as I have said, is that I am very excited that Pfizer's acquisition in this space particularly because it is an important validation of DNA vaccine and the fact that a company like Pfizer, which is trying to get into the field of vaccines, has chosen this particular platform bodes well for us.

Now as I have said in my public comments on this, we have the broadest intellectual property covering both (indiscernible) viral gene delivery, including the core technology enhancements to that technology, applications of that technology, specific processes used for manufacturing for plasmid DNA. Clear validation of our IP written by the list of licensees including Merck, Sanofi, Novartis and even Pfizer was a licensee for almost 5 years in the animal health area.

All of these entities conduct current reviews of the patent position before entering into such agreements and would not do so unless they believed their IP position was sound.

In addition, a growing number of academic research institutions, which are Harvard, MIT, Yale, Stanford, I can go on and on, have accepted our intellectual property, which is a great precedent and we have given them a royalty-free license and we have right of first refusal for any new IP that comes out of it. So we are pretty excited with that acquisition.

We are in great shape because we know how to make plasmid DNA. We have great adjuvants, which has allowed us to improve this technology platform. Having been in this business of biological development for a long time, anytime you take a new technology platform and you marry a device, you're increasing the complexity of approval by a lot. So we -- even our application for electroporation has been in the field of cancer where the hurdles of getting a new device approved are much easier.

Trying to go with a preventive vaccine where you are dealing with elderly and infant immunization and you marry a new technology (indiscernible), that is a big hurdle. We can basically hopefully demonstrate very soon after this H5 trial that we are doing that we can do basically what that device claims to be achieving without having its complexity. So we are excited.

So why do you think Pfizer chose that approach, especially if they already have some (indiscernible) with your approach?

I can't comment on what Pfizer sees in the crystal ball. You just saw Merck acquire recent company, RNA interferon, where there are a whole bunch of major players with a broad set of intellectual properties in the other fields. So how pharmaceutical management thinks and how their research heads think and how they go after intellectual property or assets is a conundrum that we have seen over the years.

(OPERATOR INSTRUCTIONS). Eric Schmidt, Cowen & Co.

Thanks for taking the follow-up. Vijay, just one more question on the pandemic flu program. Historically you said this program moving forward would be reliant on government funding and can appreciate that you now have a new slug of money from an equity investor. But going forward, how much will be driven by government funding versus your own cash resources?

We haven't given formal projections, but let me first of all tell you that all the money leading up to the IND, meaning filing of the IND, are funded by the government right now. So all that we will be expecting to spend money in the first two trials in a few hundred patients, which should come out of a trial. So I don't expect it to be a lot amount of money. But as I have told you in my call that we are still actively seeking funding from the U.S. government and I don't think we have given up on it. It just takes time to get that funding. So the purpose of raising money from Temasek is that there was a delay in getting money because of their funding calendar. We didn't want to hold up starting this trial.

There appear to be no further questions. I would like to turn the conference back to Mr. Samant for any closing comments.

Thank you for joining us and we look forward to seeing you folks in the near future. If there are no other questions at this time, I will end the conference call.

This does conclude today's conference. We do thank you for your participation. You may disconnect at this time.