施貴寶 (BMY) 2006 Q4 法說會逐字稿

Greetings ladies and gentlemen and welcome to the ZymoGenetics Fourth Quarter 2006 Financial Results Conference Call. At this time all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. [OPERATOR INSTRUCTIONS]. As a reminder this conference is being recorded.

It is now my pleasure to introduce your host Dr. Bruce L.A. Carter, President and Chief Executive Officer. Thank you, Dr. Carter. You may begin.

Thank you, Claudia. Good afternoon everyone and thank you for being on the phone, and welcome to ZymoGenetics conference call. 2006 was a year that saw substantial progress with all our clinical programs. We completed our pivotal Phase 3 trial for recombinant human Thrombin ahead of schedule, we reported the positive results for the trial in a medical conference in September and we filed our BLA with the FDA in December.

Completion of this established our pathway towards commercialization of our products in the United States ourselves and the positive results from our trial has attracted several potential partners interested in commercializing outside the United States and we are very optimistic that we will announce next the U.S. partnership this year. We look forward to seeing our commercialization strategy for human recombinant Thrombin bear fruit in the month and years ahead and you will hear a little bit more about this from Doug.

2006 also saw us entering Phase 2 trials and broadening the focus of both our Interleukin 21 and the Atacicept clinical programs and at the end of the year we had four clinical trials underway with these candidates. And so far we have been very encouraged by the progress that we are making.

At the end of 2006 we filed an IND for PEG-interferon lambda and we recently started clinical trials, first of all with healthy volunteers and then we'll subsequently examine interferon lambda [inaudible] treatment where we are hoping to find this molecule is as efficacious as interferon alpha but without the side effects.

With our many clinical trials underway it looks to be another year of exciting progress for us. In addition, when we come to talk at this time next year we are going to be a company selling its first product and we will be conducting pivotal trials for Atacicept in lupus. So we anticipate a bright year and a bright future for our Company.

During the remain of this call Doug Williams, our Chief Scientific Officer is going to provide you with an update on our recent progress and 2007 plans for each of the development candidates and Jim Johnson, our Chief Financial Officer, is going to update you on our financial progress and plans for year ahead. And then we are going to be happy to entertain any questions. And I would of course remind you that we will be making forward-looking statements throughout this conference and please look at our SEC filings for further information as to the risks of our business.

And now I would like to turn the microphone over to Doug.

Thank you, Bruce and good afternoon to everyone. As you just heard from Bruce's introduction, 2006 set a strong foundation for all of our development programs and I'll take the next few minutes to tell you how we have done this.

Let's start with our Q4 accomplishments with recombinant human Thrombin. On December 15, ZymoGenetics filed a Biologics license application or BLA for recombinant human Thrombin with the FDA. Supported by the successful outcomes from our clinical trial program as well as the focused efforts of many of the staff here during the latter part of '06. This morning we were pleased to receive a letter from the FDA accepting our filing for review with the producer date of October 18, 2007. We will continue working closely with the FDA to help ensure a timely review of our filing and we'll provide you with updates as appropriate along the way.

ZymoGenetics has also been conducting a Phase 2 trial of Thrombin delivered by a spray device for treatment of bleeding from patients who have required split thickness skin grafting for burns and other dermal injuries. We expect to complete this trial in the first quarter of 2007 and we have been in the discussions with the FDA for planning of a pivotal trial with this device which we expect to initiate in the second half of this year.

Now let's discuss the Atacicept. At the America Society of Hematology and American College of rheumatology meetings at the end of 2006. We presented results from our Phase 1 trials with this product candidate in multiple myeloma, non-Hodgkin's lymphoma, rheumatoid arthritis and systemic lupus erythematosus. Overall our Phase 1 trial program with Atacicept has shown us very encouraging results with regard to safety and dose and schedule dependent biological activity as well as preliminary signs of efficacy and the trials have given us the information that we need to advance Atacicept into larger Phase 2 efficacy trials.

In December, we started a trial in collaboration with our partner, now named Merck Serono with rheumatoid arthritis patients whose disease has failed to adequately respond to TNS Inhibitor Therapy. As many of you recall we expect to enroll approximately 320 patients in this study in approximately 60 centers world wide. We anticipate completing accrual to the study in late 2007 and expect that preliminary results will be available on the second half of 2008.

In addition we are planning to initiate a dose ranging Phase 2 study in TNS Inhibitor naive patients in the second half of the year. We are also expanding our dosing of Atacicept in a Phase 1 clinical trial in D Chronic Lymphocytic Leukemia patients or CLL patients because of signs of disease stabilization after treatment. We anticipate completing this trial in the first half of 2007 and we will evaluate and report these results shortly there after.

We plan to initiate clinical trials with Atacicept in two other indications during the second half of 2007. One of these will be a Phase 2/3 program suitable for registration in patients suffering from systemic lupus. We are involved in extensive discussions with the FDA and EMEA with our partner Merck Serano regarding the design and endpoints for the trials and we will have further information available at the time these trials begin.

In the second half of the year we also plan to start a Phase 2 trial, testing the safety and efficacy of Atacicept in patients with relapsing remitting multiple sclerosis. You may be aware that a growing body of scientific literature attest to the potential of v-cell targeted therapy in this disease and we are hopeful that Atacicept will eventually become a new treatment option for these patients. We believe that our partner Merck Serono is well positioned in this therapeutic area to design and execute this trial with us.

With Interleukin 21, we gave presentations during the fourth quarter of 2006 of clinical results from our Phase 1 trials in Renal Cell Carcinoma and malignant Melanoma as well as preclinical results of our work with Interleukin 21 in combination with the tyrosine kinase inhibitors to support combination studies of these new agents with IL-21 in Renal Cell Carcinoma. The clinical trial results thus far have shown acceptable tolerability of IL-21 as a single agent along with encouraging pharmacologic and anti-tumor effects.

In the fourth quarter of 2006 we began enrolling patients in a Phase 1/2 of trials combining Interleukin 21 and Nexavar for the treatment of Metastatic Renal Cell Carcinoma. Earlier in the year, in July to be exact, we also started a Phase 1/2 trial combining Interleukin 21 and Rituxan for the treatment of Non-Hodgkin's Lymphoma. In both of these studies the first part involves administration of escalating doses of IL-21 in combination with standard dosing of the approved therapy to determine the safety profile of the combination. Once the safety of an appropriate dose is established, an additional cohort of patients will be treated at the pre-determined dose level in order to further determine the safety and demonstrate the potential efficacy of the combinations.

We expect to complete enrollment of both of these trials by the end of the year and expect to have results from the Rituxan study available in late 2007 and for the Nexavar study in 2008.

We are also continuing testing of Interleukin 21 this model here is for Melanoma patients. A Phase 2 A-model therapy trial conducted by Novo Nordisk in Australia has been enrolling Melanoma patients since July of 2006. This trial is expected to complete enrollment later this year. Additionally, we plan to initiate a Phase 2 trial of high dose Interleukin 21 in 2007 in patients with advanced Melanoma. We have high performance status as defined by [ECOG] criteria. As a reminder ZymoGenetics has rights to Interleukin 21 within North America, Novo has licensed rights to Interleukin 21 in all territories outside of North America and the two companies have agreed to share data from their respective clinical trials.

With regard to PEG-interferon lambda, formerly known as Interleukin 29, we presented pre clinical results of the agent's pharmacology at the American Academy for the Study of Liver Diseases meeting last October. These data provided support for our submission of an IND to the FDA in November. Our current Phase 1a trial conducted in healthy volunteers is our first step towards determining the safety and activity of this agent in humans. We began enrolling patients a couple of weeks ago and we expect a complete dosing of the study by mid 2007. After completion of this trial, we'll plan to start a Phase 1b study in patients with Hepatitis C before the end of the year.

As I conclude my comments I think you'll agree that Zymo has established a robust pipeline of potential products. And we expect that by the end of 2007 we'll have our first approved product, recombinant human Thrombin with significant Phase 2 activity well underway with Atacicept and IL-21, both in multiple disease settings, as well as interferon lambda in Phase 1b studies. We'll continue to update you on our progress throughout the year and for now I'll turn the microphone over to Jim Johnson, and he'll provide you with a summary of our fourth quarter financial progress and guidance for the year ahead.

Good afternoon, everyone. From a financial perspective I am pleased to report that we ended the year in very good shape as well within the expectations we previously set out for the Company. We did this while also meeting all of our critical product development milestones. I'll spend the next few minutes giving you a brief explanation of our financial trends for the fourth quarter and looking forward a sense of what you can expect financially from ZymoGenetics in 2007.

Starting with revenues, we recorded $4.4 million in the quarter. Most of the decrease from a year ago is related to a decline in license fees and milestone payments. A year ago in the fourth quarter we had received substantial milestone payments from Novo Nordisk related to the clinical development of recombinant factor 13 and from BioMimetic Therapeutics related to FDA approval of their product GEM 21S. Although we had potential for milestone revenue in the fourth quarter this year, we didn't end up earning any by the end of the year. Additionally, we completed revenue recognition for the recombinant factor 13 upfront license fee earlier this year -- earlier in 2006 so that also contributed to the fourth quarter decline.

For the full year 2006, we recorded revenue of $25.4 million. Our guidance for 2007 is that revenue should be in the same general range as 2006. However, there are a couple of items representing potential upside to this projection. One is milestone payments; there are several additional milestone payments that are difficult to predict from a timing perspective. These could occur in 2007 and increase our total revenues by up to 30%. Second is sales of recombinant Thrombin, we haven't included any Thrombin sales in our guidance. As you know we hope to receive approval in October based on our PDUFA date and assuming we do, we could have up to two months of sales in 2007. However, we don't have enough information at this point in time to provide a reasonable estimate of those potential sales.

Shifting to expenses, we had total expenses of $42.9 million for the quarter, which was about 34% higher than in 2005. A significant part of the increase related to stock option expense recorded pursuant to FAS 123-R. We recorded $4.8 million of this expense in total for the quarter, $3 million was reflected as R&D expense and $1.8 million as G&A. Without this item our expenses increased by only 19%. Other major factors contributing to the increased expenses were similar to what I told you last quarter and those were additions to our employee base, primarily in functions related to product development and costs associated with the filing of the recombinant human Thrombin BLA.

For the full year 2006, we recorded total expenses of $162 million. For 2007, we expect that our total expenses will be somewhere in the range of $180 to $195 million, representing an increase of roughly 10% to 20%. The increase is largely related to the planned launch of recombinant Thrombin.

For R&D, the biggest driver of increased expenses is recombinant human Thrombin inventory build. Until we get the FDA approval we will continue to expense commercial inventory costs. This is a big number in 2007, about $15 million over the first three quarters prior to approval. After approval we will begin to capitalize Thrombin product costs as inventory, which will produce a favorable R&D expense trend in 2008.

We are also expecting increased costs related to clinical development of our other product candidates, Atacicept, IL-21 and interferon lambda, as we push them further along in the pipeline.

For SG&A expense, the biggest reason for the increase will be the addition of the 'S', in other words selling expenses. We plan to begin hiring our sales force in the middle of the year, and throughout the year we will be incurring marketing costs to prepare for the launch.

Looking then at the bottom line, we reported a net loss of $37.1 million for the quarter or $0.55 per share. For the full year our net loss was $130 million or a $1.94 per share and this is right in the middle of the range of guidance we provided in our last quarterly conference call. Our bottom line guidance for 2007 is that you should expect to see a net loss somewhere in the range of $150 to $170 million or approximately $2.20 to $2.50 per share. These amounts include non-cash stock option compensation expense of about $22 million.

Our balance sheet is strong at the end of the year with cash and investments totaling nearly $260 million with no debt. This gives us the financial strength to continue to execute our plan aggressively in 2007. Our guidance is that we will need to use cash of somewhere between $130 and $150 million to fund our operations in 2007, meaning that we have plenty of cash-on-hand to take us well through the launch of recombinant human Thrombin. And we are also optimistic regarding the prospects for completing the next US partnership for recombinant Thrombin, which should further strengthen our balance sheet.

So that concludes my comments on financial results so I'll turn you back to Bruce.

Thank you, Jim. We believe that what we achieved in 2006 has given us many reasons to be optimistic in 2007. We believe that actually the question has changed from will ZymoGenetics be successful to just how successful will ZymoGenetics be? When we meet this time next year, we will as I said, start with the commercialization of recombinant human Thrombin and we will have advanced Atacicept into pivotal trials for Systemic Lupus. And we remain focused on these and other opportunities, and we believe that we can significantly help patients, we believe that we can provide a good financial returns to our investors and we believe that we can make our employees proud that they have been working for ZymoGenetics in this period of time. Thank you very much for listening to our conference call, we will be very happy to answer any of your questions.

Thank you. Ladies and gentleman, we will now be conducting a question-and-answer session. [OPERATOR INSTRUCTIONS].

Our first question is coming from David Miller with Biotech Stock Research.

Great, good afternoon and congratulations on a great year.

Thank you, David.

I wanted to confirm, your XUF partnership for rhThrombin, are you still going to go with kind of a cash payment straight royalty, or you are starting to think about the idea of maybe creating your own XUF sales force?

We'll still thinking about the former and that's the basis of our discussions.

Alright, when we speak to clients for rhThrombin, we did sense, quite frankly, a fair amount of pushback about the idea that you can capture significant kinds of revenue given that you are going to have, not only bovine, but also human Thrombin in the market. And you know the story well enough to know the history of when recombinant Thrombin has got in there. So can you tell me how long you think after launch that you are going to be able to mount the kinds of sales dollars to start making people believers that -- in your predictions for this product, having a similar art to other recombinant products are correct?

I think that's difficult to really answer specifically, but we would continue to reiterate certain things. First, we have the advantage of safety, there's no question that bovine has a black box warning and human plasma will also have a warning talking about notwithstanding improvements in purification there is still the risk of blood borne pathogens. And as you pointed out, you know they are on the wrong side of history, because every time a recombinant come up with a plasma, whether animal or human it's just taken over the market.

There is also the issue of convenience, and I think people forget, we are going to have something that the hospital could store at room temperature for up to two years and the Omerix product is going to be frozen, it's got to be shipped in dry ice. But over and above all these things, Johnson & Johnson can only sell what Johnson & Johnson have in their hands, what Johnson & Johnson can make. And I would encourage you to look at the lease and operating agreement between Omerix and the MDA and then look and decide for yourself whether Omerix can supply the Thrombin market. It is clear from this that they have a limited supply, it is clear from this that they have an obligation to provide -- to take 33,000 liters of plasma from the MDA and in addition they have the problem that much of the Thrombin [native] supply is going to the tissue group so we do not believe that they can supply the standalone Thrombin market.

Okay great. Thank you very much.

Our next question is coming from Ted Tenthoff with Piper Jaffray.

Great thank you very much and thanks for the update and looking for an even better 2007. Real quickly congrats on the PDUFA and the acceptance. As we look at the spray application. I know that you said the Phase 2 should, I believe, complete in the second half of this year, what would be the regulatory path forward on that? And then secondly, Doug you mentioned some of the conversations that you've had with the FDA regarding the lupus trial, can you give us any color on what end points would be doses and when you think that Phase 2/3 may get underway?

Well I'll start with the spray indication. I think Ted as you know the -- one of the -- one of the users of Thrombin out there are the burn surgeons and they typically use this in a spray format as opposed to the sort of standalone vials that we've been talking about primarily. The regulatory discussions that we are having with the agency right now are really focused on trying to define exactly what that Phase 3 program would look like. How big it will need to be, and which surgical indication would be appropriate in order to achieve the endpoint that we'll been looking for. So I think we'll have some guidance for you fairly soon on that, simply because the dialogue is pretty alive right now I guess is the way I would describe it. But you can anticipate some more news on the program I think when we get the final resolution on that issue but we are quite close there.

So that will come into clear focus very soon, and I think as far as lupus is concerned you know again as I said yesterday in New York, or maybe it was the day before, I forget what day it was, we've been having discussions with both the FDA and the EMEA and our goal is to really define a program that is a Phase 2/3 program, registrational program in nature where if we hit the endpoints that we agree to we could be approved for use. And I think the message that I would leave you with is -- again these discussions are very active right now and I can't give you the clear resolution and I hesitate to give you too much information until we've nailed things down with the agency, but the sort of look and feel of the program I think will be a component of general lupus patients, and then a component of patients that would include some [anti-gorogane] disease, likely a lupus and arthritis population where we've got some pretty hard endpoints that we could measure in that study. So probably a look and feel if you will, more like a re-toxin program.

Great, thank you.

The next question is coming from Paul Li with Brown Advisory. Mr. Li your line is live. [OPERATOR INSTRUCTIONS].

Our next question is coming from [Adam Nicholson with Kamber Capital Management].

Thanks for taking my questions today. A quick question I guess number one, given the high cost of human plasma do you think you'll be able to compete also on price longer term with a company like Omirex? That's my first question. And secondly, do you foresee pursuing probably a partnership with other fiber and sealant makers, potentially use your recombinant human Thrombin product which again, as you noted does have some advantages versus human plasma derived Thrombin, in a -- actually as a fiber and sealant component? Thank you.

Your comment is interesting, I think you are the first person who has picked up on the fact that human plasma is actually rather expensive and in rather short supply. With respect to the second part of the question which is tissue glues, we have been interested in tissue glues for a really long period of time but we have not been able to make fibrinogen in sufficient quantities via recombinant DNA technology and we feel that our tissue glue should be an all recombinant tissue glue. So we have other ideas for line extensions with respect to Thrombin as many of you know, but we have not been able to figure out the tissue glue including fibrinogen and if -- I can tell you it's not from want of trying.

Okay, thank you very much.

You have a follow up question coming from Mr. Ted Tenthoff with Piper Jaffray.

Great thank you very much. Excuse me. Just with respect to IL-21 obviously we have Nexavar data this week in liver. Can you just kind of flush out a little bit more detail on how that could impact your IL-21 program and study and also I think you mentioned that cutin could also be a potential combination, and if you could just give us an update on the timing of that trial?

Yeah, actually I think the -- that I am going to tell you that carcinoma data was certainly a nice piece of news for Onyx and Bio with Nexavar. I think in our case we are really trying to focus our initial clinical trials in those areas where we have demonstrated single agent activity already and that's clearly in the area of renal cell carcinoma with IL-21. And really the combination study with Nexavar is a reaction to the changing dynamics of that marketplace since the time we initiated our single agent studies. I think we are encouraged by the pre-clinical data that we have in our pocket looking at the combination effects of our IL-21 and renal cell carcinoma models, and that's really the reason we focused initially on that combination in renal cell.

Sutech is also obviously a player in this area, and Novo Nordisk will actually be initiating a study middle of this year to look at that combination as well in renal cell carcinoma. So we'll be answering the question with both of those agents in renal cell. Moving into hepatocellular at this point in time we don't have plans to do that, but certainly we'll take a hard look at that data and make some decisions a little bit later on in the program.

Great, thank you.

[OPERATOR INSTRUCTIONS].

By the lack of sound I suspect that we have no more questions?

We did just get one question in the queue, we have a follow-up question from Mr. Paul Li with Brown Advisory.

Hi, yeah it's not Paul, he had just got out of this room I think I will ask the question. You talked about probably by mid of the next year you're going to -- this year, you're going to recruit the sales force. What about the manufacturing? Do you have the arrangement in place? It's going to be internal or is it going to be outsource?

We have -- the manufacturing arrangement is in place. We are producing it at the Abbott facility in Worcester, Massachusetts and we have a long term commercial contract with them and we know the price per milligram for that material, which is a fixed price contract per mg.

Okay, great thank you.

Our next question--.

-- we have a mock PAI going on in this building right now.

Thank you. Our next question is coming from [Ryan Kiss] with Kettle Hill Partners.

Yes, hi. Tank you for taking this -- taking the question, I'm new to the story but you said before that this competitor of yours is going to have some trouble supplying the market. Please repeat what you said and just further explain why you think that, I didn't quite understand it. Thank you.

Could you ask the question again, what I wasn't sure I heard the first part.

Sure, just -- am new to the story and it was just -- you had said that your future competitor was going to have some -- you suspect have some problems supplying into the market, could you just explain that again and I didn't quite understand it. Thank you.

It's okay. The current product in the market comes from King Pharmaceuticals and it's made from bovine plasma, and King have stated in their SEC filings for some time now that they've supply constraints. Now, Omirex is coming -- has applied to the FDA for human plasma Thrombin and if you look at the SEC filings, in particular the lease and operating agreement between Omirex and the MDA which is the Israeli Red Cross, then it becomes clear that they don't have a great deal of capacity. They point out that they have plans to increase the capacity so that they can process the quantity of approximately 100,000 liters of plasma per annum. So they clearly don't have 100,000 today.

They also have an obligation to purchase and fractionate 33,000 liters of plasma from the MDA which means that whatever capacity they have now you have to subtract 33,000 liters from that. If you then look at the fact that what they have talked about a lot is tissue glue so they have to supply the Thrombin for the tissue glue, they have very little left over to supply this human recombinant Thrombin stand-alone market. And I think if you look at that operating -- lease and operating agreement you will come to exactly the same conclusion that we do, they simply cannot produce human plasma Thrombin in sufficient quantities to supply other than a very small fraction of the market and that is why we continue to say -- J&J is formidable, that even someone who is formidable cannot sell what they don't have to sell.

I understand. Thanks very much guys, I really appreciate it.

Our next question is coming from David Miller with Biotech Stock Research.

Hi, just a quick follow-up. When we have the conference call for the FDA approval for rhThrombin, is that the time when we can expect some sales guidance or are you going to want to wait for a little while longer after that?

I'm going to get Jim to answer that--.

He's the one who's keeping that sort of clamps on us.

I think the reality is over the course of this year leading up to approval we will gain a lot more information about the market. I mean, we've done some market research up to this point, I think you are familiar with some of them, I think, we presented from those studies -- but we are going to be doing more. We are going to be doing I think a greater level of depth to give us a better understanding of what it will take to convert the major -- current major users of bovine Thrombin. We will also be hiring a lot of people who are experienced who've been out on the field selling into those particular hospitals and to know the players on the other side much better than we do today.

So I think with those two dynamics at work, between now and then we'll develop a much better sort of granularity with our understanding of the market and our ability to predict what might happen when we launch the product. I don't know that I can say exactly when, but we clearly -- we are building a body of information that will help us get there and I think it's reasonable to expect that by then there will be some more meaningful guidance from us.

Okay. As we expect you to dominate the market, we are just kind of want to know when we are going to find out what the domination means in terms of dollars. Thanks and once again great year.

Let me just clarify, I don't think we ever said that we'll dominate the market the first day when we're out there selling, I think we've said that over a period of 3 to 4 years we expect to do that.

Okay, understood.

[OPERATOR INSTRUCTIONS]. Gentlemen, there appear to be no further questions.

Thank you all for your interest in ZymoGenetics and I hope that we can continue to retain your interest by performing.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.