施貴寶 (BMY) 2008 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the ZymoGenetics Second Quarter 2008 Financial Results Conference Call.

(OPERATOR INSTRUCTIONS) It is now my pleasure to introduce your host, Susan Specht, Director of Corporate Communications.

Thank you.

You may begin.

Good afternoon, everyone.

I'd like to welcome you to our 2008 second quarter conference call.

Before we begin, I need to remind you that we will be making forward-looking statements as part of our prepared remarks and in answering your questions.

These statements are subject to many risks and uncertainties that could cause actual outcomes to be much different that we predict, so please look at our SEC filings, including our Form 10-K, for more information.

And now I'll turn the call over to our CEO, Bruce Carter.

Thank you, Susan.

Good afternoon, everyone.

Thank you for joining us for the second quarter update.

I'll begin by giving you an update on RECOTHROM and then Doug Williams will give you an update on our pipeline and you will hear more from Doug in a few minutes.

But we are pleased to say that interferon lambda continues to excite us and I should remind you that interferon lambda is a type III interferon and as such, it is structurally very different from all the interferons on the market and in development, which are all type I interferons.

Interferon lambda in hepatitis C patients is showing better-than-expected antiviral activity, in the absence of the side effects associated with the use of all the type I interferons.

Atacicept, as you will hear, is now in registration trials for both generalized lupus and lupus nephritis and it's also in Phase II trials in rheumatoid arthritis patients and in multiple sclerosis patients.

We'll also update you on interleukin 21, which continues to progress in Phase II trials in both renal cell carcinoma and melanoma.

And after Doug has spoken, Jim Johnson, our CFO, will review financial results for the quarter.

Turning to RECOTHROM, we are encouraged by the clinical and commercial progress we have made this year.

As we have said before, we did not expect to see meaningful sales until the second half of the year.

For the second quarter, net sales were $1.4 million.

As we have said before, the process of selling into the hospital involves many steps and takes time.

First we have to enlist the support of surgeons, nurses and pharmacists.

Then we have to get RECOTHROM on the agenda for upcoming pharmacy and therapeutics committee meetings.

Then we need to get the P&T committee to endorse RECOTHROM, either as an addition to the formulary or a commitment to completely convert to RECOTHROM.

Then we have to work with hospital pharmacists and surgical departments to process conversions and circle back to surgeons and nurses to encourage the use of RECOTHROM.

At a typical hospital, this can take six months or longer to work through this process and get RECOTHROM on the pharmacy shelf.

For example, a local Seattle hospital has only this month approved RECOTHROM for its formulary.

We've learned during our time on the market that, in many cases, the process can become longer through postponement of meetings, getting bumped from agendas, or lack of decisions or clear follow-up actions.

We've also found that it can take several months after a positive committee decision for regular purchasing to begin.

We believe that our commercial strategy addresses the challenges of selling to the hospital and we've done several things to prepare the way for increasing sales in the second half of the year.

In late May, FDA approved the RECOTHROM 20,000 unit vials, both alone and co-packaged with a spray kit.

In June, we shipped to wholesalers, I think it was June 10th, and so now we have a full line of product presentations consistent with that offered for bovine thrombin.

As you know, most hospitals purchase drugs through group purchasing organizations and we've been negotiating pricing and contracts with six key group purchasing organizations.

We have now completed four of these six GPO contracts to date and we are continuing to work on the remaining two.

Together with our previously disclosed contracts with the government and hospital networks, we believe that we now have approximately 75% of our target market covered by effective pricing agreements and these contracts should make their mark in the second half of the year.

During our first quarter call we provided indicators of our progress through late April and I'll update those metrics for you now.

It's important to note that these new metrics reflect just two months of additional activity, in other words, May and June.

169 P&T committee meetings have taken place through late June and 340 additional meetings have been scheduled.

As I mentioned before, one reason for the long selling cycle is that P&T reviews are frequently delayed, in some cases multiple times, and when they do take place decisions are not always made.

Of the 169 meetings that have taken place as of late June, decisions were made at 103 meeting, with 66 where a decision was still pending.

Of the 103 meetings with decisions, 77 approved either complete conversion to RECOTHROM from bovine or addition of RECOTHROM.

26 P&T committees declined to add RECOTHROM at this time, but many of those, of course, occurred before the GPO pricing agreements were in place and before we had a full line of products.

So we need to circle back and get more surgeon advocates at these hospitals.

So, through late June, the decisions were 30% to completely convert so RECOTHROM is the only approved product, 45% of the time to add, and 25% declined at this time.

As of mid-July, 130 hospitals have now purchased RECOTHROM and we're pleased to say that approximately 60% have reordered and a third are already doing so on a routine basis.

So to reiterate, RECOTHROM is being well received by surgeons, consistent with our expectations and I think this is evidenced by a 75% positive response from decisions made to date.

The selling process in this market is long and in some cases, it is taking longer than we anticipated.

We have put GPO contracts covering a large portion of the market in place and we now have a full line of RECOTHROM products, which will help build sales in the second half of the year.

And we are confident that RECOTHROM will become the market leader in the coming years and that our commercialization strategy is sound.

And now I'll hand the microphone to Doug Williams to talk about our pipeline update.

Well, good afternoon, everyone and thank you very much, Bruce.

This afternoon I want to highlight some of the very significant progress being achieved by our research and development teams.

Its important to highlight the breadth of our programs and the significant markets they address.

In addition to RECOTHROM, we have atacicept in registrational trials in autoimmune diseases, IL-21 in Phase II for renal cell carcinoma and melanoma and interferon lambda in Phase Ib for hepatitis C, as well as two partnered and two wholly owned candidates slated to enter the clinic in the next two years in autoimmunity in cancer.

The partnered molecules are the IL-17RC soluble receptor and the anti-IL-31 monoclonal antibody, which were collaborations with Merck/Serono.

In addition, we have our anti-IL-21 monoclonal antibody and the first of our dual pathway antagonist antibody molecules directed against PDGF receptor in VEGF.

Our research team continues to consistently deliver innovative IND candidates that will meet our needs over the long-term.

Our research engine is a time proven asset to the Company.

As I've stated previously, our emphasis is on creation of a sustainable pipeline of assets that ZymoGenetics retains ownership of in order to retain the flexibility to partner when and with whom we feel will maximize the value of all of our assets.

Let's start with a review of our progress on interferon lambda.

ZymoGenetics owns worldwide rights to this unique molecule.

This is not just another modified interferon alfa, as Bruce has already commented.

Interferon lambda is a type III interferon and as such, is an entirely different molecule from the type I interferon alfa, yet it has comparable antiviral activity against a host of viruses, including hepatitis C.

We are currently treating patients with hepatitis C genotype 1 who previously responded to an interferon containing regimen but relapsed.

You may recall that this is a two-part study where we're conducting a single-agent dose-escalation portion, with every other week we're weekly dosing with pegylated interferon lambda during a 28-day period, to be followed by a second part of the study in combination with ribavirin.

We're extremely pleased with the results to date.

In order to proceed to part two of the study, we pre-specified that we must see at least one log of viral load reduction at a given dose, with an absence of acute adverse events such as fever, flu-like symptoms or cytopenias, which are commonly associated with interferon alfa.

A few conclusions can be reached already based on our results in the first three cohorts.

First, we've already obtained data, which warrants moving to part two of the study.

We've seen significant reductions in viral load at all doses and schedules tested thus far, with an absence of the aforementioned adverse events one would associate with interferon alfa.

Second, it's clear that viral load decreases are cumulative with dose.

We've seen viral load reductions of multiple logs in individual patients with two or four injections of interferon lambda.

Further dose escalations with weekly dosing are planned and we expect even greater activity against HCV in the final planned dosing cohort or part one of this study.

Third, we've received agreement from the FDA to accelerate our evaluation of PEG-interferon lambda in combination with ribavirin and we'll now go ahead to part two, while in parallel completing the monotherapy cohorts.

This is good news for the program timetable.

And finally, fourth, our abstract, which describes our results in part one of this study, has been accepted for oral presentation at the AASLD meeting in November.

We believe that interferon lambda could be a game-changer in terms of the interferon component of HCV combination regimens.

If the data continues to support our target product profile of a molecule with at least comparable antiviral activity to interferon alfa, but with superior tolerability, we believe this could become the interferon of choice.

The improved tolerability will be an important advantage, allowing more flexibility to combine with the direct antivirals, many of which have their own tolerability issues.

It's safe to say that there's substantial partnering interest in this asset.

Let's turn now to interleukin 21 where we've made significant progress this year.

Our team has just completed patient enrollment in the Phase II study combining IL-21 with Nexavar in patients with renal cell cancer.

In late October, we plan to present interim results for this Phase II study at the EORTC NCI Symposium.

We're also testing IL-21 in another tough-to-treat indication that represents a clear unmet medical need, that is metastatic melanoma.

In collaboration with the National Cancer Institute of Canada, we're continuing to enroll and treat patients with metastatic melanoma in a Phase II study, with IL-21 as the single agent and we're on track to complete enrollment around the end of the year or early next year.

We expect to discuss interim results from the Phase II melanoma study late this year.

We'll have final data on these IL-21 studies in renal cell cancer and melanoma in the first half of next year, after which we'll decide whether to take this molecule forward into Phase III.

If we do reach a go decision, then we plan to partner or license the molecule to facilitate late-stage development and commercialization of this asset.

Now let's move on to atacicept.

We believe this molecule has the broadest mechanism of action of the b-cell directed therapies.

In addition to its action on mature b-cells, atacicept is unique in its action on plasma cells, which produce autoantibodies associated with autoimmune diseases.

This is a broad clinical program, which addresses a number of autoimmune indications, including lupus, rheumatoid arthritis and multiple sclerosis and is partnered with Merck/Serono.

We're continuing to enroll and treat patients in Phase II/III registrational trials for lupus, in both lupus nephritis and general SLE and both of these studies are being conducted under a special protocol assessment with FDA.

Atacicept is also being tested in large, well controlled Phase II clinical trials in rheumatoid arthritis and relapsing multiple sclerosis.

We expect that this program will produce topline data in Phase II RA and MS programs in the second half of next year.

Atacicept is a broad development program, pursuing a number of parallel indications.

We believe its an important late-stage asset and offers tremendous promise as a potential treatment for multiple autoimmune diseases.

Here are the key clinical development events that we expect this year.

An oral presentation of the PEG-interferon lambda hepatitis C data at the AASLD meeting on November 3rd of this year; presentation of IL-21 Phase II interim data with Nexavar in renal cell carcinoma at the NCI EORTC meeting in late October; presentation of IL-21 Phase II interim data in metastatic melanoma at our Investor Day meeting in New York on December 11th; and in November we plan to start GLP toxicology studies for our antibody directed against IL-21 as preparation for moving it into the clinic in 2009.

To conclude, our R&D team is making great strides in the lab and clinic and we're fortunate to have a very productive team.

We continue to evaluate all of our R&D assets to ensure responsible spending and maximization of value.

We look forward to reporting continuing progress in the coming quarters.

That completes my remarks and now I'll turn it over to Jim Johnson, our Chief Financial Officer.

Thanks, Doug.

Our overall results for the second quarter were in line with our expectations.

Net loss was comparable in amount to the second quarter of 2007.

However, both revenues and expenses were higher this year.

Revenues were $12.6 million for the quarter, compared to $4.2 million a year ago.

Revenues for the quarter consisted of $1.4 million of RECOTHROM net sales, $1.7 million of royalties and $9.5 million of collaboration and license revenues.

There were two factors responsible for the increase in collaboration and license revenue, $5.2 million of revenue under our recombinate thrombin collaboration with Bayer and a $2.5 million milestone payment from Novo Nordisk related to rFactor XIII.

The $1.4 million of RECOTHROM net sales included ongoing sales plus wholesaler inventory billed related to the launch of the 10,000 unit vial and spray kit.

Our cost of product sales reflected only the packaging and distribution costs incurred after FDA approval.

Most of the costs of manufacturing this product were previously expensed to R&D in 2007.

Research and development expense totaled $33.1 million for the quarter, which was about 3.0% higher than in 2007.

Compared to the previous quarter, it was 16% lower.

Generally, our R&D expense related to RECOTHROM has decreased, but this affect has been largely offset by increased atacicept expenses consistent with the expanded clinical development program that Doug referred to.

Selling, general and administrative expense for the quarter increased to $16 million, compared to $10.1 million in the second quarter of 2007.

Most of the increase was related to the launch of RECOTHROM, including costs of the salesforce, marketing and related administrative infrastructure.

We recorded $5.1 million of stock-based compensation expense in total for the quarter.

$3.2 million was included in R&D expense and $1.9 million was classified as SG&A.

We ended the quarter with $117 million of cash and investments.

In addition to these funds on hand, we now have access to $100 million under the funding arrangement completed with Deerfield Management in late June.

We've not yet drawn into the facility and we have no imminent plans to do so.

The funds are available to be drawn in $25 million installments between now and January 2010.

As we pursue partnering opportunities for interferon lambda and other potential transactions, this facility should provide strategic flexibility.

Together with our cash and investments on hand, we believe it provides adequate funding to take the Company well into the future.

So, with that, I'll turn things over to the operator and we'll be happy to take your questions.

(OPERATOR INSTRUCTIONS) Marshall Urist, Morgan Stanley

Thank you.

Hey guys, good afternoon.

Good afternoon.

So, first of all, could you give us a sense of what you guys are planning on doing differently from the formulary placement process, going forward, in the back half of the year, as we expect to start to see follow through on sales?

And then, second, what are you seeing early on in terms of share or order patterns from the formularies that you're sharing with, with bovine thrombin?

I can't give you an answer to the second half of the question.

But with respect to the first half of the question you have to remember that it was only in the middle of June that we had the 20,000 unit in the spray kit available and really, it was only post the period in which we're reporting that we have all the GPO contracts filed.

Three of those are effective in July and the fourth was effective on the 1st of August.

But I think what we have to do as we continue to going forward is bring forward the advantages of a plasma-free RECOTHROM and we have to bring forward the advantages that coag -- if I wish I could say it -- clotting problems -- are not just a theoretical issue.

That there are many instances and its probably under-reported.

And we have to bring that and make that alive to hospitals.

Alright and then just one other follow-up.

When you say you have 75% of your target market covered, can you give us a sense of -- obviously that the GPO government purchasing agreement.

Then can you give us a sense of that 75% how much, how far are you on the formulary placement part of it, to drill down to the hospital level?

I'm not sure I can answer that, I mean, when I say 75%.

Our target hospital is 1,200 hospitals.

Okay.

Han Li, Stanford Group

Yes.

Good afternoon, everyone.

Hi.

Hi.

Questions on RECOTHROM.

Now you have a full quarter of sales of RECOTHROM, can you give us some color on the price dynamic on the market for a standalone thrombin?

Is this a price-sensitive product or market?

Do you have to give a significant discount to gain market share?

The question of that -- it varies.

It's not price sensitive.

Any hospital who's seen a clotting problem, there is no price sensitivity at all.

Once they've seen it, they say to themselves, "never again", so there's no price sensitivity there.

And then you go to the other extreme where people say, "this is just a theoretical list, we've never had a problem in our hospital" and then it does become price sensitive.

We believe that it's been important to have those GPO contracts in place so that we have a competitive pricing.

It will still be at a small premium, but we think a premium that's worthwhile.

Okay and then the second question is on the interleukin-21 cancer program.

I remember you mentioned that the Novo Nordisk is, at a certain point, looking for a (inaudible - heavily accented language) program and looking for a new partner.

Can you give us update on the potential partnership transition on the interleukin 21 cancer program?

Han, this is Doug.

We are obviously coordinating our activities with Novo Nordisk, as far as thinking about the prospects for partnering the molecule, so we're in close contact with them.

As you recall, we had a data sharing agreement in place, but the programs that are being conducted here in the U.S.

by us are actually being led by us and will generate the data that I think will really dictate whether the molecule goes forward.

And of course, if there is a partnering deal to be had at that point, we'll coordinate our activities with Novo Nordisk to do that on a worldwide basis.

Alright.

Thank you very much.

Kevin DeGeeter, Oppenheimer

Hey, a few questions this afternoon, first a couple for Jim here.

Can you kind of give us a sense, a little more quantitative sense of what the inventory build in the quarter was?

Yes, hi Kevin.

This is Jim.

It's difficult to say precisely, but we estimate that about half of the sales represented additional wholesaler stocking.

Okay, perfect.

Thanks so much and at what point will you be prepared to provide some sales guidance on RECOTHROM?

I guess we're six, seven months into launch now.

Is it reasonable to begin to think about that?

Well, I think that, as Bruce said, we're finding that the process of going through the P&T review can take longer at some hospitals.

I think we're still in a position where, by the end of this year, we may have enough data, enough sort of a big enough data set where we feel that we'll be able to create some reliable input for 2009.

But at this point it remains to be seen.

I think there's still a lot of data to be generated over the next six months, but clearly its our plan, once we feel we have enough information to support a quality estimate, that we will share that with the Street.

Okay and then maybe two more quick questions, if I may?

It looks like we continue to see about 45% of these P&T committees putting -- leaving bovine on formulary, basically putting both products on formulary, which I think is very different than what everyone was expecting previous to launch.

I think we expected hospitals to either be bovine or human or recombinant.

Yes, I'm, first, I guess do you expect -- is that your sense that that's the way we should think about the overall market?

Or is there something different in these early adopters that may suggest they have a different attitude towards single product on formulary versus multiple?

And if it's going to be that half the market, give or take, going to have multiple products on formulary, how does that change the sales message here?

I think that what we believe, as you've seen, is that some people fully convert.

Others and I think don't think its at all surprising, say, "look, you guys are new, we'd like to put you on the formulary, we're going to try you out on the formulary, we want to make sure that you can consistently supply us, so we don't want to remove the other product till we feel comfortable that you can consistently supply us".

And we believe that, over a matter of time, people will convert to just one and we believe that will be RECOTHROM.

As we've said before, we see this is a ratchet mechanism.

In addition, of course, remember that a number of these people are putting us on the formulary at a time when we didn't have the full compliment.

We didn't have the 20,000 unit.

We didn't have the spray.

So they would feel that converting completely to RECOTHROM was not appropriate at that protocol point in time.

So we're not surprised.

We would also, as I've said once before, expect full conversion eventually.

Okay thanks.

That's very helpful, Bruce.

And then maybe one, if I can Doug in here, if you'll indulge me.

On PEG-interferon lambda, I mean, I guess Pegasys is really taking a lot of share from Schering, being able to offer a sort of fixed dose as opposed to a weight and titrate it dosing regimen.

Any opportunity here to go for more of a fixed dose, dosing schedule, with PEG-interferon or should we think about it with the current Phase I dosing as weight-based?

Hi Kevin, its Doug.

No, I think there is still the opportunity.

The program is early enough to be able to consider something like that, but I do think that our aims are a little more lofty than just trying to provide the market with another sort of slightly more convenient incremental benefit.

I think the product profile that we're looking for and that, at least so far seems to be holding up, is one that will provide the market with something that is very, very differentiated from the existing interferon offerings and we hope we'll be a much better tolerated and much more flexible agent to use in these combination regimens in the future.

Fair enough.

Good luck, guys.

Lucy Lu, Citi Group

Hi guys.

This is Kinam Hong on behalf of Lucy Lu.

I just wanted to ask a couple of questions.

Out of the 25% of the meetings that were the decisions were not quite taken or outcomes are still pending, can you share with us what percent, maybe, of those that flat out said not interested versus ones that are waiting?

And if you could also share with us some of the feedback you're getting and what are some of the reasons they are taking a little bit longer to decide?

Thanks.

Can you -- what was exactly the last sentence?

I didn't catch the last sentence.

Yes.

I was just wondering if you can kind of share with us some of the feedback you're getting from the P&T meetings and why they're holding out in making decisions?

Okay.

When we're getting declines, remember we're getting declines at the time, as I said a couple of times before, we didn't have our GPO contracts in place until July.

We didn't have the full 20,000-unit range.

But there are some hospitals that have declined and said to us, "look, we have never seen a problem, this is a theoretical issues, we've never seen a problem and we don't want to pay any premium".

So that decline we see as a temporary setback.

We mustn't go back on the next P&T committee meeting and irritate them, but when we find that we have to sort of get more surgeon advocates and educate those and get those to advocate for us.

Sometimes the declines are when our surgeon advocate is actually in the surgery at the time the P&T committee takes place, so we don't have him there at that particular time.

Okay and I believe in your last quarter, about 18% of the -- were not decided.

I was wondering if any of those 18% come around and either added RECOTHROM?

I don't have that piece of information in front of me, but most assuredly some will have done and some will have declined, but I quite honestly can't tell you the answer to that.

Okay, great.

Thank you.

[Paul Lee, Crown Advisors]

Hi.

I have a question regarding the cause of manufacturing RECOTHROM.

It comes down to the price.

You have to match the price in order to get the traction in the marketplace.

Do you have the cost -- do you think that you're in the cost disadvantage in terms of manufacturing or do you think your cost is very competitive with the bovine thrombin?

Now I would guess -- I don't know, because I don't know the precise costs associated with the production of bovine thrombin.

But I would guess that it would be difficult for us to match the cost of goods of bovine thrombin.

However the other, when it comes to human thrombin and collecting plasma from humans, then I think that's a different issue.

That's going to be much more, much more expensive.

At the moment, our cost of goods is less than it would be because of our prior production of bulk material and people have asked in the past what do we consider to be our cost of goods and we've repeated it is a sort of standard cost of goods that you'd expect for a biopharmaceutical product.

Sure.

That depend on the price?

Yes.

Anyway, the other question I have is for interferon lambda, at what stage you will seriously consider partnering the product.

(Inaudible - background noise) at clinical (inaudible - background noise).

So we're currently in Phase Ib testing right now, as I indicated.

We will present the data at the AASLD meeting.

We have presented data previously at a couple of other of the liver meetings and have already started to get expressions of interest from potential partners.

I think there are a number of companies with experience in this space who've seen our data and who are intrigued by the prospects of really having a very differentiated interferon offering and so we're having some conversations.

But always it comes down to whether or not any sort of transaction would be appropriate for us.

So, at the present time, we're running our own studies.

We have worldwide rights to the molecule and we'll only partner if we feel that it's in the best interest of both the Company and the product, on a going forward basis.

Alright, thanks.

I'm showing no further questions in queue.

I'd like to turn the call back over to management of closing remarks.

Thank you.

That ends our call.

Please contact corporate communications if you have questions.

Thank you.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.

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