施貴寶 (BMY) 2009 Q2 法說會逐字稿

Greetings and welcome to the ZymoGenetics second quarter 2009 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, Susan Specht, Director of Corporate Communications for ZymoGenetics. Thank you. You may begin.

Good afternoon. Welcome to ZymoGenetics' second quarter 2009 conference call. Before we begin, I'd like to remind you 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 than we predict. So please look at our SEC filings, including Form 10K, for more information. And now, I'll turn the call over to our CEO, Doug Williams.

Thank you, Susan. And welcome to everyone on our Q2 earnings call. We began 2009 with three major initiatives for the year, and I'm pleased to say we are make going progress on all three. First, is progress on Interferon lambda development, with initiation of the Phase II program in the second half of the year. Second, is achievement of our RECOTHROM guidance of between $25 million and $35 million of net sales. And third, is our commitment to reduce our cash consumption through both cost-cutting and additional partnering activities to generate additional cash, ultimately positioning us to reduce the need for raising capital in the markets.

Let me now walk through some of the significant achievements in Q2 and highlight our progress in these three areas, as well as additional accomplishments worthy of mention. A key priority for ZymoGenetics is the development of Interferon lambda in collaboration with our partner, Bristol-Myers Squibb. We believe that this molecule is the most differentiated Interferon, and can become the cornerstone of combination regimens to treat patients with Hepatitis C virus. Lambda is the only type three Interferon in development. And with strong intellectual property protection, a committed development partner in BMS and an emerging profile of better tolerability with very robust antiviral activity, we believe this molecule has the potential to transform the Company. We've now completed enrollment to our Phase I B. study, and have submitted an abstract to the AASLD meeting, which will be held in late October in Boston.

This study explored a broad range of doses to support the Phase II program, and includes treatment [naive] as well as relapsed patients, as previously reported. The molecule continues to show us strong antiviral effects across a broad dose range, and the tolerability profile continues to support our notion that this molecule will offer better tolerability than the current Interferon offerings. All in all, we are well-positioned by this study to move ahead into Phase II, and we continue to expect to initiate patient dosing in Q4 of this year. In January of this year, we announced our partnership with Bristol-Myers Squibb for the development and commercialization of this molecule. Important for ZymoGenetics in this transaction, is the substantial up-front cash component as well as the opportunity for significant participation in the commercial upside should the molecule be approved. Thus far, we've received a total of $130 million in 2009, with the receipt of a $25 million milestone payment this quarter to recognize program progress. And we expect to receive another $70 million later this year related to the Phase II program.

RECOTHROM is our Recombinant Human Thrombin, which we believe is best-in-class in the topical Thrombin marketplace. We remain confident that RECOTHROM will become the market leader. We achieved net sales in Q2 of $6 million, up by 33% from our Q1 2009 number. We have initiated and continue to implement a series of initiatives highlighted by our President Stephen Zaruby on our last quarterly call. We are continuing to differentiate RECOTHROM with refined marketing messages and tactics in the field to convert and maintain accounts. We have good visibility on end-user demand and wholesaler trends, and this quarter we saw an increase in end-user demand of 24% versus the previous quarter. More hospitals are converting to RECOTHROM, and order frequency continues to increase in our existing accounts. And we saw market share move from 8% at the beginning of the year to approximately 13% by the end of Q2. So we are making progress. We continue to stand by our net sales guidance for the year of between $25 million and $35 million.

We've also been making progress and are encouraged by the results on the development of IL-21 in melanoma and renal cell carcinoma. We presented the final Phase II data on IL-21 in combination with Nexavar in renal cell carcinoma at the ASCO meeting. Our data showed that this combination achieved an objective response rate of 21%, a disease control rate of 82%, and progression free survival of 5.7 months. These results compare very favorably to other agents tested in similar patients. We also released preliminary data from our single-agent study in metastatic melanoma, and while survival data is not yet available, the 29% percent objective response rate was encouraging. We expect to have final response rate and survival data for the melanoma study available early in 2010. We believe these results will drive our partnering activities for this molecule.

Recently, a series of papers in science defined another potential therapeutic use for IL-21 in chronic viral diseases. These studies suggest that IL-21 is the key cytokine for maintaining effective levels of antiviral cytotoxic T Lymphocytes or CTLs. In chronic viral diseases, these virus-specific CTLs become exhausted and ineffective. And administration of IL-21 could restore effective antiviral immune-mediated responses. These observations add additional additional value to IL. 21, and suggest future directions outside of oncology for this molecule. Looking further into the pipeline, we've developed a fully human antibody that is a potent neutralizer of IL.-21, poised to be the next IND candidate to enter Phase I. The aberrant production of IL-21and/or its receptor, has been implicated in several autoimmune and inflammatory diseases. What is unique about inhibition of IL. 21 is that it targets the specific inflammatory cytokine-producing cells in the tissues, the so-called TH 17 cells, as well as targeting B cell auto-antibody production. We have successfully produced drug products to support early clinical testing, and the toxicology program is underway to support an IND filing in the first half of next year.

During the quarter, we restructured the Company and cut approximately 32% of the workforce, which was part of an effort to reduce cash use, focused on assets with the potential to generate the greatest value for shareholders and reduce the need to raise capital. We project an annual savings of $30 million from this restructuring. As a result of this effort, our R&D group is now a more lean organization and is focused on immunology, which has long been the core strength of the Company. With that, I'll turn it over to Jim for a review of our Q2 financial performance.

Thanks, Doug. Financial highlights for the quarter included increased revenues from both RECOTHROM sales and collaborations, and reduced operating expenses. The decline in expenses would have been even greater if not for the severance costs incurred in our corporate restructuring. RECOTHROM sales were $6 million for the quarter, compared to $1.4 million in the second quarter of 2008 and $4.5 million in the first quarter of 2009. Here are a few important points to highlight.

First, as Doug mentioned, underlying hospital demand for RECOTHROM increased in the second quarter by approximately 24% compared to the previous quarter. Second, net sales for the quarter were impacted by a continued reduction in wholesaler inventory levels, which were down to slightly over three weeks of sales at the end of the quarter, lowering our reported net sales for the quarter. And, third, adjustments from gross sales to net sales increased versus the previous quarters, reflecting our newer customers qualifying for higher levels of discounts. But just to be clear, our discount and net pricing schedule hasn't changed since October of last year. But a higher percentage of customers are qualifying for the higher discounts.

Other revenues for the quarter were $16.6 million compared to $11.2 million in the second quarter of 2008 and $20.3 million in the first quarter of 2009. The fluctuation versus Q1 of this year is largely due to a $3.5 million milestone payment from Novo Nordisk related to IL- 20 that was received and fully recognized as revenue in the first quarter. During the second quarter, together with Bristol Myers Squibb, we finalized the 2009 plan and budget for the Interferon lambda program. The final budget shows the cost for 2009 will be less than what we originally estimated. This is good for our 2009 cash position. However, because revenue under the agreement is recognized using a percentage of completion model based on our costs incurred, we now expect to record less collaboration revenue than we did based on our original estimates. I'll come back to our revised expectation and guidance in a few moments.

On the expense side, we reported R&D expense for the quarter of $29.1 million, which included $7 million of severance-related cost. Excluding these costs, R&D expense would have been 33% lower than the second quarter of 2008. This reflects reduced expenses in May and June resulting from the corporate restructuring, as well as the discontinuation of costs under the Atacicept collaboration, which was restructured in the third quarter of 2008. SG&A expense was also impacted by severance-related cost to the tune of $1.8 million. Without these costs, SG&A would have declined by 6% versus the second quarter of 2008. This reflects reduced costs from the restructuring and lower legal expenses, which were both partially offset by increased selling commissions to buyer due to the increase in RECOTHROM sales.

Stock-based compensation expense was $3.5 million for the quarter. $2.1 million was recorded as R&D expense and $1.4 million was recorded as SG&A. The end of the second quarter was $118 million of cash and investments, but this does not include the recently reported $25 million milestone payment from Bristol-Myers Squibb, which we received in July. As Doug mentioned, we believe we are on track to receive another$ 70 million from Bristol in the fourth quarter. And until January 2010, we still have $75 million available to us under a line of credit with Deerfield. This gives us strategic flexibility, particularly related to collaboration discussions expected to progress over the remainder of the year related to do IL-21 and certain other preclinical stage product candidates.

So before closing, I want to revisit some of our financial guidance for the year. I mentioned earlier that our projected costs and revenues for Interferon lambda are lower now than we started the year. For that reason, we are changing our guidance as follows. Revenues other than RECOTHROM sales are now expected to be lower, in the range of $80 to $85 million. R&D expense is also expected to be lower, in the range of $95 million to $105 million. We now expect net loss will be in the range of $60 million to $75 million, or between $0.87 and $1.09 on a per-share basis. We expect to end the year with a cash investment balance within the range of $140 million to $160 million. In summary, we expect to see continued year-to year increases in revenue and reductions in operating expenses in the coming quarters, which should translate into further improvement in the Company's bottom line. So with that, we will turn it back over to the operator to begin the q-and-a session.

Thank you. We will now be conducting the question-and-answer session. (Operator Instructions). Our first question is from David Miller with Biotech Stock Research. Please go ahead.

Hey, good morning, or afternoon actually. Can you provide some timelines for when we might see data for Atacicept and SLE?

Hi, David, this is Doug. I think that the data for the SLE studies, you will need to contact Merck Serono in order to get better guidance on that. Obviously, as we've said before, the disclosure regarding clinical trial activities now is firmly in the hands of Merck Serono, given the conversion to a passive royalty-bearing position on our part. I can say that we are still accruing to the general SLE study at this point. That's a 500-patient study that we've described in some detail in the past. But for more updates on timing of disclosure, I need to point you in the direction of Merck Serono.

All right. Are you -- would you move IL-21 forward in the next stage without a partner? Or do you need to partner that first before you move forward?

I think we have -- our anticipated path forward at this point is to move it ahead in a partnership situation. As you may recall, we re-acquired the ex-North American rights from Novo Nordisk. And we believe that in order to adequately take advantage of this molecule and to develop it on a worldwide basis, that it probably behooves us to do that in partnership.

Okay. You also talked about a new drug that was an antibody to IL-21 that you are going to be moving into the clinic next year. Are you going to be moving that into autoimmune patients, or are your going to be moving it into healthy volunteers first?

That's a question that we will discuss with the FDA in the pre-IND meetings. There are pros and cons of both approaches, and either approach is a viable way for development and identification of the dose and schedule in the early-stage studies. But that will be finalized with regulatory interactions along the way.

All right. And then the last question I have is the $70 million milestone that you are expecting in Q4, is that just triggered with the start of the trials?

The specifics we can't disclose in terms of the trigger, but suffice to say that as we initiate that study, we would expect to receive the milestone.

All right. Thank you very much.

How's that for close enough for you?

I think that's close enough. Thanks. I appreciate it.

The next question is from Ryan [Totoharo] with Oppenheimer. Please go ahead with your question.

It's actually Brian Abrahams here. How are you?

Hi Brian, how are you?

I'm well, thanks. I apologize if I missed this. I hopped on the call late. I was wondering if you could maybe walk us through some of the mechanistic differences between Atacicept and Golimumab, and what those could theoretically mean for the relative efficacy and safety profiles. And wonder if you had any sense of how the additional inhibition of APRIL could impact Atacicept's profile.

Well, the major difference between Golimumab and Atacicept is, as you point out, the ability of Atacicept to inhibit APRIL in addition to the inhibition of BLyS. I think we have always maintained, and I think the data that's available thus far, both pre-clinically and clinically, would suggest that neutralizing both BLyS and APRIL may provide some potency advantages vis-a-vis the inhibition of late-stage B cell activity. And obviously, we believe that that is the mechanistic basis, the production of auto antibodies and the innappriate activity of these mature B. cells, that that is part and parcel of the SLE process. I think the good news from the first BLyS study is that it really validates the pathway as being important in general Lupus. I think that's the exciting news that comes out of that study. I think our perspective is that we actually may have a more potent molecule, and therefore may be able to see greater disease control activity in treating patients. Obviously that remains to be seen. I think some of the other potential advantages that we bring to the party are the ability to dose subcutaneously, which is clearly a patient convenience issue and one that, because we are developing a soluble receptor as opposed to an antibody, we've been able to create a formulation that lends itself to [subcutaneous] administration. So I think the [HGS] data was great data for Lupus patients. Very exciting to see a drug finally work in Lupus. As you know, the debate has always been, are the drugs no good or are the measures whereby we measure disease activity ineffective? And I think we may finally have an answer that it's an issue of not having had potent enough drugs in the past. And I think that's very encouraging for us because we believe we have an even more potent drug in the form of Atacicept that hopefully with time, we will be able to demonstrate that.

Great. And then just shifting gears a bit, there's been a lot of focus on regulatory issues related to manufacturing for several other companies, and I know that outsourcing certain aspects of your infrastructure was one of the major priorities for the recent restructuring. Would you remind us where you stand with respect to manufacturing? And just walk us through some of the changes that have been undertaken on that front since the recent restructuring?

I think in our case, our manufacturing capacity was always geared towards simply the early-stage clinical supplies, not the commercial supply. We've outsourced the manufacturing for commercial RECOTHROM, and we have very capable manufacturers in place in that regard. Merck Serono has the responsibility for manufacturing Atacicept, and they always have had that. And obviously, they are a very capable manufacturing organization as well. So in essence, what we've done is simply decided to access the capacity that's available on the outside to now make our clinical supplies for the early stages of our clinical programs instead of carrying that infrastructure internally. That's the change we made with the restructuring a few months ago.

So just to understand, would the changes in RECOTHROM manufacturing, if I understood that correctly -- Are there --

There were no changes in the RECOTHROM manufacturing.

Okay. I understand. It was all the early stage program.

It's all future products that would go into the clinic. We will be making those through third-party contract manufacturers for the initial clinical supply in the future.

Got you. That's very helpful. Thanks for the clarification.

Sure.

The next question is from Alex To with Cross Research. Please go ahead with your questions.

Hi, good afternoon.

Hi Alex.

With your new financial guidance, assuming you are also getting -- exceeding in getting an IL-21 partner, is it realistic to think you have enough cash flow to fund yourself at least through Phase III in lambda?

I think I got -- I missed part of the question Alex, but I think the answer is, yes. I think we believe that we have adequate cash to continue to move forward without having to go out and raise additional capital much as Jim said, we are looking at I think it's $140 [million] to $160 [million] at the end of the year that we still have available to us, the Deerfield line of credit. And we have a number of other transactions that we are discussing that we expect to come to fruition over the course of the next several quarters. So that along with the increasing RECOTHROM sales, we feel position us for, again not needing to go back to the market. But importantly, as you point out, being able to continue to fund our obligations around lambda and therefore being able to maintain our ability to co-promote or profit split that.

Great. Thank you.

The next question is from Matt [Duffy] with BDR Research.

Hi, thanks for taking my question. I wonder if you might give us a little additional color on the data that we are going to see at AASLD and your presence there?

It will be the complete data set from the phase I B study, which will essentially be all of the single agent dose cohorts, all of the Ribavirin-containing dose containing cohorts. And those two cohorts are in relapse patients, as well as a cohort of naive patients that have also been treated with lambda plus Ribavirin. So that data will all be available at the time of the AASLD meetings. And obviously, that assumes that the abstract will be accepted for presentation.

Okay. Thanks very much. Looking forward to that.

I'm showing no further questions in queue. I'd like to turn the call back to Management for closing remarks.

I'd like to thank everyone for participating in today's call, and we will look forward to seeing you at future meetings. Thank you. This concludes the teleconference. You may disconnect your lines. Thank you for your participation.