施貴寶 (BMY) 2007 Q3 法說會逐字稿

Greetings, ladies and gentlemen. Welcome to the ZymoGenetics financial results conference call. (OPERATOR INSTRUCTIONS) It is now my pleasure to introduce your host, Bruce Carter. Thank you Dr. Carter. You may begin.

Thank you. Good morning and thank you for joining us today. We will be making forward-looking statements during this conference call so please consult our SEC filings to see our best estimates of the important risks and uncertainties of our business. We'd like to talk about the stages of the FDA's review of the Recombinant Thrombin control of surgery bleeding. We're happy to report that ongoing discussions with FDA are proceeding well. The review is moving ahead smoothly and we believe we're on the path to approval.

We believe that Recombinant Thrombin would be best in class, and would come to dominate the Thrombin market. I would again remind you, that Recombinant proteins always displays proteins made from human or animal sources in the marketplace. We do expect history to repeat itself with Recombinant Thrombin. If the choice is Recombinant Thrombin or Thrombin made from human blood or Thrombin made from cow blood, which would you choose? We intend to build a profitable Hemostasis franchise.

We will be bringing forward other complementary presentations and other formulations of Recombinant Thrombin and this business will provide a strong foundation for our company for many years to come. We've been praying for some time for the launch of Recombinant Thrombin. We hired the six regional directors and the 48-person sales force and completed their training. And with our US co-promotion partner, Bayer, we intend to dominate the market. The combination of buyers, hospital-based sales force with ZymoGenetics' own experienced sales team, will make up the largest hospital sales force for Hemostasis in the United States. Our sales people are eager to begin selling what we, and I suspect many, if not all on this phone call believe is the superior product.

Investors have focused so much on Recombinant Thrombin that our pipeline has not been given the attention by investors that it deserves. We have a number of truly noble proteins in our pipeline and we think there is significant value in our other product candidates. Three of which are in clinical development. Atacicept, Interleukin 21 and PEG-Interferon Lambda. And Doug Williams, President of ZymoGenetics will give you an update on our progress with these programs.

Thank you Bruce, and good morning to everyone. This quarter we made important progress towards the development goals we set for ourselves at the start of the year. This includes Regulatory milestones, initiating clinical trials, bringing clinical trials to completion and reporting on clinical data. Despite all the focus on Thrombin, we've worked hard to strengthen and expand the pipeline during 2007.

Let me give you a brief summary of the highlights beginning with Atacicept. As a reminder, this product candidate is being developed in collaboration with Merck Serono. Our lead indication is Lupus, where we plan to initiate two Phase 2/3 registrational studies. One in Lupus Nephritis, one in general S.L.E. We recently received approval from the FDA for a Special Protocol Assessment or S.P.A., for the study on Lupus Nephritis, which we expect to begin shortly. That study will enroll, approximately, 200 patients who have active Lupus Nephritis and have a flare at the time of screening. The objective will be to evaluate the activity of atacicept compared to placebo. Both groups will receive background therapy with M.M.F. and Corticosteroids, two standard treatments for flare in this patient population. The primary end point will be the proportion of subjects with a confirmed C.R.P.R. or no response at 52 weeks. We're very enthusiastic about this study and see it as an excellent fit with Atacicept's mechanism of action. In addition, we're pursuing a second Lupus study and general S.L.E. Along with our partner, Merck Serono , we're seeking an S.P.A. for that study as well. Results of the two Lupus pivotal trials are intended to be used to file for marketing approval from the FDA.

We're also pursuing phase two studies in Rheumatoid Arthritis and Multiple Sclerosis. We see those as two additional potential indications that can add significant value to what we hope to demonstrate in the Lupus program. During the past quarter, we initiated a second phase two study in Rheumatoid Arthritis in patients that have not previously been treated with T.N.F. inhibitors. We continue to accrue patients to the ongoing study in R.A. patients with inadequate response to anti-T.N.F. drugs as well. And we expect to start our first phase 2 study in relapsing remitting M.S. before year end. We've designed a robust Phase 2 program for Atacicept. Two potential follow on indications will complement the Lupus registrational trial. This should enable us to maximize the value of the Atacicept opportunity.

Let's turn now to Interleukin 21. We're conducting a number of clinical trials with IL-21 either directly or with our collaborator Novo Nordisk. Novo has rest of world rights, while we retain North American rights. At the AACR-NCI-EROTC meeting in San Francisco about a week ago, we reported positive Phase 1data from a study combining IL-21 with Nexavar in patients with Renal Cell Carcinoma. All ten patients in the study showed tumor shrinkage and four patients had partial responses. This is encouraging, given the paucity of such responses in the next of our Phase 3 pivotal study. Obviously we're very excited about this early outcome and the prospect of establishing clear proof of concept in the Phase 2 portion of the trial which should start by year-end. In Phase 2, we plan to look at response rate and progression-free survival and that will be an important step in determining whether we move to a full Phase 3 registrational program in this indication. We also see an opportunity for bringing forward IL-21 as a single agent in Metastatic Melanoma and we're about to open a Phase 2 study at the N.C.I.C. in Canada to explore a higher dose than what Novo has used in its Phase 2 Melanoma study.

By going to this higher dose, we think there's a chance of seeing a better response rate while keeping a manageable side effect profile. The results of this study will determine whether we'll initiate registrational studies for IL-21 and Melanoma. We have additional studies underway that are exploring the possibility of enhancing antibody-dependent cellular cytotoxicity, which is the mechanism Rituximab works by and many other future antibodies would work through this mechanism as well. So we see the combination with IL-21 and Rituximab as not only an interesting strategy with an approved drug but as a proof of concept model for future combinations involving IL-21 to enhance A.D.C. We've completed enrollment in the study. In December at the Ashe meeting, we'll present Rituximab and Non-Hodgkins Lymphoma. Our clinical trials is a Recombinant Naturally Occuring Human Interferon which is a distant relative of Interferon Alpha called PEG-Interferon Lambda. It modulates the specific antiviral activity that targets cells. What we're hoping with this molecule is to see a comparable antiviral effect to Interferon Alpha with better tolerability. Because the receptor for PEG-Interferon Lambda is not as widely expressed as the Interferen Alpha receptor. This target product profile has been confirmed in preclinical studies and the clinical studies will better define whether PEG-Interferon Lambda has the potential to move into Phase 2 studies. The Phase 1a study in healthy volunteers is complete now. And we plan to present that data at the ----- meeting in December. We've completed the protocol for our Phase 1b multi-dose study which we hope to start by the end of this year. We'll be treating patients who've relapsed after responding to Interferon Alpha therapy. Our goal is to show the potential effectiveness of the drug, with reduction of viral load, as the key measure. We will evaluate the acute tolerability of Interferon Lambda both as a single agent and in combination with Ribavirin by measuring flu-like symptoms and effects on hermaphoetic cells.

So you can see that our clinical development programs are moving forward according to plans. We're poised to generate data on PEG-Interferon Lambda and IL-21 during the next 12 months which could have a substantial impact on the value of these programs. We also have a number of what I call stealth programs going on in the research group. These programs are making great progress and focus on high value proprietary pathways. Our research team has identified several candidates that should create a steady stream of novel pipeline candidates for the foreseeable future. We recently announced that a soluble receptor which neutralizes IL-17A.L.F. has moved into development in collaboration with Merck Serono. We have two other antibody lead molecules that I hope to discuss, as well as other opportunities, at our Analyst and Investor Meeting on Thursday, December 13 in New York. Overall, I can assure you that we intend to continue to focus on becoming one of the leading players in therapeutics for cancer, autoimmune, and inflammatory diseases . Now I'll turn over the microphone to Jim Johnson, our Chief Financial Officer to discuss third quarter financial results. Jim?

Thanks, Doug, and hello, everyone. The increase in our net loss this quarter was consistent with our plan for the year. The main factor driving the increase was preparation for the commercial launch of Recombinant Thrombin, both in sales and marketing and in building launch inventory. Our revenues for the quarter were $8.5 million compared to $5.6 million a year ago. There were a couple of major items responsible for this increase. Revenue from our Recombinant Thrombin collaboration with Bayer and also, a milestone payment from Novo Nordisk related to the development of IL-21. The increase from these two items was partially offset by two major decreases, one in option fee revenue, and that was due to the expiration of our option and license agreement with Novo Nordisk in late 2006, and the other in royalties due to the expiration of our US manufacturing patent. R&D expense totaled $34.5 million for the quarter, which was about 14% higher than the third quarter of last year. The cost of the Recombinant Thrombin program increased due to manufacturing costs. Specifically we expensed $5million for commercial inventory costs in the third quarter. Our costs for the Atacicept program also increased due to clinical trials underway or starting in R.A. and Lupus. SG&A expense for the quarter increased to $13.6 million compared to $8 million in the third quarter of last year. Most of this increase was driven by preparations for the launch of Recombinant Thrombin. And this included both sales force cost and prelaunch marketing costs. SG&A expenses continued--expected to increase further in the fourth quarter which will be our first full quarter of costs related to the sales force. We recorded $5.2 million of stock-based compensation expense in total for the quarter. $3.4 million of this was reflected as R&D expense and $1.8 million was included in SG&A.

We ended the third quarter with just under $200 million of cash investments, slightly more than we had at June 30th. And this was made possible by the receipt of the $30 million upfront payment from Bayer during the quarter. So with this cash balance and the $40 million milestone payment due from Bayer upon U.S. approval of Recombinant Thrombin, we should have enough cash on hand to take us well through the product launch and into 2009. With that I'll turn things back over to Bruce.

Thank you, Jim. We're ready to try to answer any of your questions. I should point out that in addition to Doug Williams and Jim Johnson, we also have at the table, Nicole Onetto, Head of Development at ZymoGenetics and Michael Dwyer, Head of Sales and Marketing. So moderator, we're ready to answer some questions.

Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. (OPERATOR INSTRUCTIONS) Our first question is from Jim Birchenough of Lehman Brothers. Please state your question.

Hi, guys. Just wondering if you could provide any further detail on, I guess, the request from FDA for further information on manufacturing, whether there's been a site visit, whether you feel that any questions have been satisfied, and if you could provide further detail on what specifically FDA's looking for here on manufacturing, whether it's stability or something else?

Good morning, Jim. I'm going to put you over to Doug.

Jim, I think the simple answer to your question is that we have provided all of the information that was requested by the agency. Most of the information as we've indicated before was related to our firms Finnish facility and a lot of that was simply related to the fact that the FDA chose not to go and do a preapproval inspection. So they requested information that would have normally been seen by an FDA inspector had they been there and sitting in the room. Mostly documents related to S.O.P.s, validation reports and we provided all of that information that has triggered essentially no additional rounds of questioning. So we feel that we've satisfied the request for information and they're moving forward with the review as a result of that.

And, just as a follow-up, just in terms of, there being a bit of a delay for the Recombinant Thrombin and a bit of a headstart for the Onyx product. Can you describe any measures you've taken on the commercial side to try and offset that head start,if you've made some efforts to have conversations with P&T committee, that sort of thing?

Good morning, Jim. This is Mike Dwyer, Head of Sales. That's a great question. Since the middle of September, we've had our 48 Surgical Sales Managers out, doing some preapproval dialogue and account profiling with the top Bovine Thrombin accounts. So we've been able to talk to various clinical pharmacists throughout the United States. Many of them are very aware of Bovine Thrombin and extremely aware of Recombinant Thrombin. They have limited knowledge basically of the Thrombin that's on the marketplace. We begin to talk about our product being approved and have been waiting to produce for January of 2008. Many of them say that they will wait to do reviews until our product is on the market.

Great. Thanks for taking the questions.

The next question is from William Sergeant with Banc of America Securities. Please go ahead with your question.

Hi. Thank you for taking my question. Quick question for Doug on the Lupus trial. Could you talk at all about the powering, or the finding of complete or partial response for Lupus Nephritis trial?

We haven't provided probably the level of granularity around that, that you're probably going to want. We feel like that's information that has some competitive significance to us, but I can tell you that the definition of a C.R. and a P.R. are close to what has been reported in the Gisler paper that was published in the New England journal. I believe it was in November of 2005, which related to some work that was done with M.M.F. But in essence, we're looking at, I guess, three laboratory parameters: preliminary filtration rate, hematuria and prematoria as the major end points. That would be looked at to comprise the C.R. or a P. R.

Would we expect more granularity than, not in the R&D data potentially at some point in the future?

I think, you know, again, I would encourage you to read the paper to get a better sense of the definitions around that. I think, again, it's something that we've negotiated with the agency but don't feel compelled to provide all of the numbers around at this point. Obviously for competitive reasons.

Okay. and then, so far as enrollment on the nonresponder R.A. trial, has that enrollment pace picked up? When do you anticipate completing enrollment for that trial?

I think the enrollment has started to pick up. Some of the steps that have been taken have started to pay off. I think the reality is that you can't make up for lost time completely. I think we're probably looking at a completion sometime in the second half of next year, and in terms of enrollment, and, you know, again, there's an opportunity with some other steps that are in process right now to potentially accelerate that. But I think for planning purposes, I think accrual will run into the second half of next year.

Okay. Great. I'll go back to the queue. Thank you for taking my questions.

The next question is from Han Li with Stanford Group of Companies Please state your question.

Good morning. Now when they launched the Johnson&Johnson at a premium to King's Bovine products and King reacted by reducing price. Can you comment on the pricing dynamic in the market, how do you thinking of going where you get approval for your product in general.

Clearly, pricing is a very, very important issue for us and we're watching things very, very closely. And we do have the advantage of seeing what the pricing is going to be available to. But we haven't stated what price we're going to sell at yet.

Yes Han, this is Mike Dwyer. Our sales people have not been actually able to confirm that Johnson & Johnson's product is available to the marketplace nor have we been able to confirm this premium pricing just yet.

Okay. The other question is for the Phase 3b enrollment. What's the update on that study?

Would you mind asking the question one more time, sorry?

Yes, the phase 3b study in the vascular spinal surgery study for Recombinant Thrombin.

What's the question about the Phase 3b study?

Yes, where are you at with the pace of enrollment?

Where are we at with enrollment?

Right.

Hang on. Nicole?

We are exactly where we are projecting to be and we are expecting completion of accrual by mid 2008.

So the pace already started and you expect to complete by mid-'08?

Yes.

Correct.

All right. Thank you.

The next question is from David miller with Biotech Stock Research. Please state your questions.

Good morning. The first question I have is, do you have any idea about when you might have data for the Lupus Nephritis trial? Doug?

I think it's difficult to project right now, David. I think we'll be able to give you a better sense of that once accrual begins and we see what the pace looks like. Certainly we're going to be working as quickly as we can to accrue those 200 patients into the study. But as you know, the treatment duration is going to be a 12-month treatment duration as well. So this is going to be a study that will last for some period of time partly because it'll take time to accrue and partly because the treatment duration is long.

Do you think the accrual will be around the same pace as the Rituxan trial in this disease which started back in January of '06 and haven't completed yet, or do you think you will be able to accrue it faster?

I think the big difference you are speaking about is the logistics of the study which is basically a North American study. Our study is going to be worldwide title. And I guess the last title that has been completed in this disease which wasn't a national study is a M.M.S. study by Trevor. So you can go back and look there or ask around to give you sense. I think in this disease, if you have to restrict the crop in the U.S., it's going to make the study more challenging. And it's not a case to ask.

Okay. Good. Can you provide some details on the naive Rheumatoid Arthritis trial?

Some details on that.

Yes.

It's about a 260-patient trial, and it's what I would characterize as a fairly straightforward study where we're looking at A.C.R.20 at 26 weeks. So fairly plain vanilla study design to essentially look at a traditional response, if you will.

Okay. And the last question I have is the initial manufacturing run for rThrombin, have you predicted how long that's going to last and could you share that with us?

Hi, David. This is Jim Johnson. Actually, we have been manufacturing rThrombin in 2007 for about two quarters, and we expect to have pretty significant campaigns ongoing every year into the future that will gradually become longer and longer. So we, you know, as you know, we are very bullish about the Recombinant Thrombin opportunity. We expect sales to be substantial and therefore we're building inventory aggressively already. As I mentioned, we spent about $5 million on inventory costs in the third quarter, and it could be in the range of $8 to $9 million in the fourth quarter.

And I actually do have one more question. The IL-21 where you're rolling into Phase 2, if I understand this correctly, you are going to be looking at patients in the second line study more than the mix that you did in Phase 1. Could you roll that into something big enough to where you might be able to look for accelerated review and approval on that?

So the first part of your question is Phase 1 study [unintelligible] The Phase 2 part is going to focus on second line which is basically patients that are [unintelligible]. So the first part. The second part, I think the current study as it is, is too small to have an approval because we are targeting 35 patients in the second part of the study. You know, we need to see which studies we love and which we take exceptional hazard we will take with you. It depends on the data that we are going to be generating.

Great. Thank you very much.

The next question is from Hari Sambasivam of Merrill Lynch . Please go ahead with your question.

Yes, thank you. Just a follow-up question on the Atacicept. Just looking at how the Salfsa studies were done, sorry, the Atacicept was actually compared in comparison to, you know, chemotherapy in an induction-phase study. And I'm just wondering in terms of your design, is this an induction study or maintenance study or there is no such differentiation? I'm just wondering as it comes into market, how do we expect the product to be used vis-a-vis protocol?

The study was a two-stage study as you described. The first stage and because of the duration of treatment, using the N.I.S. regimen that is six months. The first point is Basically response of six months comparing M.M.S. and the second stage is a study, they are collecting data, is a maintenance phase where they are comparing M.M.S. We asked Basically for response and we don't have to stop our evaluation of six months because a traditional M.M.S. was used when it is single agent is usually used for a 12-month duration. So our study, to a certain extent, is focusing only on that response and is going to be improvement of M.M.F. alone versus M.M.S.[unintelligible].

All right. That's great. Thank you.

The next question is from Kevin Degeeter with Oppenheimer company.

Thanks, guys. Most of my questions have been answered but perhaps you can give a little more clarity on the Interferon Lambda program. Doug, based on the 1a data, does it look like this is a once weekly or any optimism here we can get this to once every two weeks on the schedule?

I think we're going to be looking at both, once weekly and every other week in the Phase 1b study. So we'll be able to answer that question directly with the viral load that comes out of the single agent data that we collect in Phase 1b. So, you know, stay tuned. We'll be able to give you a clear sense of that the middle of next year.

Okay. And just sort of, I guess, in that vain, could you just quickly run through what the actual arms are going to be in the 1B. study?

We have not yet completely disclosed that. The thing that we can say is that our first study was the single-dose in a volunteer, to get a sense of the chronological activity of the agent as well as the safety of single-dose administration. And we definitely needed the next stage to generate data on the safety and efficacy of the treatment. And ultimately, we will also save the safety combination because we know this is the way it will be used when it's going to be used in this study.

I think the duration of treatment, though, Kevin, is going to be a 28-day treatment duration. So that gives you a sense of what to expect in terms of the degree of viral load reduction in this type of study.

Okay. That's helpful. And perhaps could you provide a little more clarity or just some color on what some of the outstanding issue may be on getting the S.P.A. in general?

I think, you know, the two S.P.A.s were initiated not at the same time, so, you know, we're still in process with the general S.L.E. study in terms of reaching final agreement with the agency. So, you know, it's a somewhat more complex trial in terms of the end points. And we're still in the process of having that dialogue with the agency. And once we get the S.P.A., we'll certainly announce that.

And are you reasonably optimistic that the Nephritis data looks positive, that there is at least an avenue that's been discussed for filing on that result without necessarily seeing the full data set for the other?

So I think there's a theoretical possibility, Kevin, but as you can imagine, the agency is somewhat loathe to commit to that sort of a pathway. I think it always comes down to the strength of the data and how compelling the data set is, once you finally have it in hand and can take a look at it. Certainly, I think we would try to be aggressive with the data if, in fact, it showed to be quite stellar and show to have a good safety profile. I think you can be sure that we would be very aggressive in that case, but ultimately it comes down to how good is the safety and efficacy in that study as to how aggressive you can be in terms of seeking registration on the back of a single study.

Okay. Terrific. Maybe one housekeeping item for Jim. Don't want to leave you out here. I'm assuming that you didn't give additional financial guidance for '07 that you're sticking with what was disclosed on the call after the FDA setback. Can you just sort of remind us of, you know what the guidance for on the operating expense side is for '07 and maybe, you know a little bit more color and how that may have qualitatively shifted around a bit.

What I can tell you is that there is still a lot of moving pieces in the fourth quarter, both on the revenue side and on the expense side particularly Thrombin-related costs. So I guess, what I can tell you today as far as our net loss for the year is that we're looking at a range of on the low end, $140 million and on the high end $160 million.

That's a pretty big spread for going into the fourth quarter. I mean, can any -- I mean, at $20 million, help me understand what the variables that, you know would still have us looking at a $20 million spread for three months.

Primarily as I mentioned, part of it is Thrombin inventory and the timing of actual release of various lots. But the biggest factor are revenue items. I can't get into it specifically, but there are three different milestone payments that may or may not be received in the fourth quarter, earned in the fourth quarter.

And does some of those pertain to items you identified as being disputed milestones previously or are those all related to execution, to future events?

I don't have any information for you on that today. Sorry.

Fair enough. Thanks, guys.

[Operator Instructions] The next question is from Steven Harr with Morgan Stanley. Please state your question.

Hey, guys it's actually Marshall. I have a question on the Bayer side of the agreement and whether or not you guys have had any conversations with them or they've had any issues related to everything that's been going on with their Aprotein, their other major O.R. product and if that's going to have any impact on their plans to, you know, to promote Thrombin?

We see --

For the style in which they're going to do that?

Mike actually spent the entire week with the Bayer team last week as we were finalizing the different accounts that the different sales forces had.

Right, exactly.

Did I not answer your question?

Sorry, it just cut out for a while. I might have missed. All I heard was something about last week.

Last week, Mike spent the entire week with the Bayer team because we were finalizing the split of accounts.

Okay.

And we see no concern on Bayer's side at this point in time. And I would also, you know, just make sure that you know, that we have contractual obligations in any event for them to sell for us for three years.

Right. Okay, thanks.

At this time, I'm show nothing further questions in queue. I'd like to turn the call back over to management for closing remarks.

Well, thank you for your questions. And thank you all for the interests you show in ZymoGenetics by attending the phone call today. We are extremely excited because we are about to launch Recombinant Thrombin. And really, when we split out from Novo Nordisk, that was our dream, to go from discovery to putting together, discovering, developing and manufacturing and selling our own product. So we're on the verge of that so we're very excited. At the same time, as you're here, Interleukin 21, we are getting interesting preliminary results. A very interesting result. The Interferon Lambda, if we can prove that drops viral load without the side effects, we have a very interesting drug on our hands. And of course Atacicept has all the hall marks of an interesting molecule, but we have to keep our fingers crossed. So, thank you all for listening today.

Ladies and gentlemen this does conclude today's teleconference. Thank you for your participation.