施貴寶 (BMY) 2009 Q3 法說會逐字稿

Greetings, and welcome to the ZymoGenetics Third 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, everyone. Welcome to ZymoGenetics' Third Quarter 2009 Conference Call. Before we begin, I'd like 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 than we predict. Please look at our SEC filings, including Form 10-K, for more information. And now I'll turn the call over to our CEO, Doug Williams.

Thank you, Susan, and thank you, everyone, for joining us on today's third quarter 2009 conference call. A number of significant events have occurred since our last quarterly call. I'll review the progress we've made during the next several minutes and then turn it over to Jim Johnson, our CFO, for some comments about our financial performance. Then we'll be happy to take your questions.

Let's start with a review of the substantial progress made during the quarter on PEG-interferon lambda, being developed in partnership with Bristol-Myers Squibb. We believe that this molecule will become the Interferon of choice in combination drug regimens to treat patients with Hepatitis C virus, or HCV.

Interferons are the cornerstone of current standard-of-care regimens for HCV and the registrational studies of all the direct-acting antivirals are being conducted as an add-on to ribavirin and Interferon alpha. This will solidify the importance of an Interferon as part of the next wave of three-drug regimens.

With respect to the long-term role of Interferons in the treatment of HCV, there is no data to support the removal of an Interferon from combination regimens. In fact, many KOLs in the HCV arena believe this will not be possible while still achieving durable viral eradication due to the high mutability of HCV and the well-documented role of the immune system in the control of this virus.

At this point, the notion than an Interferon-free regimen is achievable is based on hope. Hope wins presidential elections, but it doesn't change medical practice. The availability of a better-tolerated Interferon, which we believe is what Interferon lambda will prove to be, will allow patients to overcome the major dose-limiting toxicities of Interferon alpha and will allow greater flexibility to combine with the emerging direct antivirals, all of which have tolerability issues of their own.

Two days ago, we presented our final Phase Ib data. These results were presented by Dr. Andrew Muir at the AASLD meeting in Boston. We explored a broad dose range in Phase Ib and the results show very clearly that Interferon lambda has potential antiviral effects across the entire dose range we tested, in treatment relapse and treatment-naive patients, both with and without ribavirin.

It's important to highlight here that one of the question marks raised with our Phase Ib study in relapse patients was whether we had selected a more responsive patient population. The comparable results we've seen on viral suppression in both relapse and naive patients removes that question mark.

We saw mean values of three plus logs of viral load reduction in relapsed and naive patients after 28 days of treatment. These results appear better than any of the published results we've been able to find with Interferon alpha in comparable patients for the same dosing duration.

On the tolerability side, Interferon lambda appears to have the target product profile we had hoped for with minimal constitutional symptoms and no hematologic suppression. We've observed transient reversible changes in liver enzyme levels in a few patients consistent with those reported for Interferon alpha. Note that the Pegasus label has recommendations for dose modifications when liver enzymes rise.

This is how HCV-treating physicians in the real world already use Interferons, so we're not changing the status quo in terms of how they'll monitor and treat their patients with respect to blood tests during treatment. Our Phase Ib protocol did not allow for dose modifications, but the Phase II program will, and we're confident that we've identified doses with robust antiviral activity which have not resulted in liver enzyme elevations. In addition, during the Phase Ib study, we noticed that subjects experienced increases in liver enzymes tended to have high serum drug exposure.

We also observed more variability in PK than expected from our healthy volunteer or animal studies and we suspect that this may be related to the two-step dilution required to prepare dosing solutions. Our analysis of recovered dosing solutions indicated there was variability being introduced by the dose preparation method and that some patients received more drug than expected, leading to higher drug exposure.

Patient who had elevated ALT and AST along with bilirubin had these high levels of exposure to drug. Having observed this, we went back and retrained the sites and none of the 22 patients treated since then have shown elevated liver enzyme levels. The fixed dosing solutions in Phase II and beyond will not require any dilution and will thus completely remove this source of variability in exposure.

Let me reiterate before moving on that the profile we're seeing with Interferon lambda so far is achieving our original aims. We've not seen the acute tolerability issues that Pegasus and PEG-Interferon are known for and that result in patients refusing to start treatment or to be unable to endure a full course of treatment. In fact, at our breakfast meeting this week Drs. Schiffman and Muir remarked that their patients receiving Interferon lambda, many of whom had previously received Interferon alpha, tolerated therapy so well that they thought they were receiving placebo.

Last week we announced the initiation of our first Phase II study known as EMERGE. That announcement triggered a $70 million milestone to ZymoGenetics from our partner Bristol-Myers Squibb. EMERGE is a two-part study in treatment-naive patients beginning with an open-label Phase IIa exploring fixed dosing in genotypes one through four HCV-infected subjects with an emphasis on genotype one.

We will enroll 55 patients in the Phase IIa study, exploring four doses of Interferon lambda versus the label dose of Pegasus, all in combination with ribavirin. Data from this open-label trial will inform dose selection for Phase IIb based on tolerability and antiviral activity during the first four weeks of treatment. The open-label design of the Phase IIa allows earlier access to data and will drive initiation of the Phase IIb study.

The Phase IIb study will be a randomized, blinded study to directly compare the safety and efficacy of up to four doses of Interferon lambda plus ribavirin with Pegasus plus ribavirin. Up to 600 patients will be enrolled in the study at approximately 120 sites worldwide. Primary endpoint of the Phase IIb study is the percentage of patients with undetectable HCV RNA after 12 weeks of treatment, also referred to as cEVR. SVR will also be assessed as a secondary endpoint. We anticipate the Phase IIb study to start in mid-2010.

During the last quarter, there's also been a flurry of publications which have identified specific genetic polymorphisms which correlate strongly with the SVR rates for HCV patients treated with the current standard-of-care regimens. These genetic associations to treatment outcome mapped through the Interferon lambda family, specifically to IL-28b. The less favorable alleles appear to be associated with lower levels of IL-28b expression, further suggesting the importance of the lambda family to antiviral responses and strengthening the case for pharmacologic administration of lambda.

ZymoGenetics has the dominant intellectual property positions around the entire Interferon lambda family, composed of IL-29, IL-28a, and IL-28b. We chose IL-29 as our clinical candidate because all three lambda family members signal through the identical receptor and because IL-29 was of comparable or superior potency to IL-28b and IL-28a and due to the superior manufacturability of IL-29.

Moving now to RECOTHROM sales, we've continued to see increasing market share gains quarter-over-quarter. Hospital demand for RECOTHROM increased 25% from the prior quarter. We now have approximately a 15% market share at the end of September, compared to 8% at the beginning of the year.

We believe these gains over the last few quarters are the result of our more focused messaging and educational efforts. Account conversions, we believe, are occurring as more and more customers see the benefits of a recombinant human thrombin product. I'm sure you're also aware that King has filed suit against ZymoGenetics alleging false advertising, unfair competition, and related claims in federal court in Tennessee.

We received notice of the case on November 2 and on November 3, following a hearing we did not have the opportunity to participate in, the judge issued temporary restraining orders that restrict certain of our activities until a full hearing can take place on the merits of the case scheduled for November 16. We filed a motion seeking to vacate those temporary restraining orders.

It's important to note that there has been no substantive ruling in this case. We believe King's claims are without merit and we will vigorously defend ourselves in this matter. King has petitioned the FDA regarding the allegations in their suit at least six times since 2006. We have consistently provided factual information to healthcare providers in-line with our labeling for RECOTHROM and the label for bovine thrombin.

ZymoGenetics believes that it has abided by all applicable laws in the marketing of RECOTHROM. This law suit is another example of King's efforts to stifle competition and to prevent ZymoGenetics from communicating important factual information to customers and we will fight those efforts.

We're also making progress with IL-21 and have data now in both renal cell carcinoma and melanoma, which documents that we have an active agent in both diseases with an acceptable tolerability profile to allow for outpatient dosing. We believe that the real near-term opportunity for IL-21 is in melanoma. This is clearly a disease with an unmet medical need and a definable market opportunity.

During the quarter, we completed accrual to our Phase II melanoma study. We have accrued 30 patients with stage four metastatic melanoma at the 30 microgram dose and will have additional data on response rate, PFS, and an estimate of overall survival in early 2010. We've provided preliminary data from this study and seen response rates by RECIST criteria of 29%, comparing very favorably to other agents in development.

The next step in our program will be a randomized study, which we're currently in the process of planning. This study would be expected to start in the second half of next year. We believe that this asset is increasing in value based on the emerging data and a renewed interest in immunotherapy in cancers such as melanoma. We're carefully evaluating our plans for the timing and scope of any partnering transaction to assure that we retain significant value for our shareholders.

We've also defined two new antibody therapeutics that are scheduled to be IND ready in 2010 and 2011. Our 2010 IND candidate is a fully-human anti-IL-21 monoclonal antibody targeted for major autoimmune and inflammatory diseases. This agent is unique because it will target both autoantibody-producing B cells and inflammatory cytokine-producing T cells.

Our 2011 IND candidate is a humanized antibody against IL-31. We will be targeting atopic dermatitis with this antibody, where treatment options are severely limited and the need is great for effective new therapies in this very large market. Data shows clearly that IL-31 drives the itch response and epithelial changes so characteristic of this disease. This is one of the most compelling correlations between human disease and expression of a specific cytokine that I can recall in my years in this area.

Finally, before handing it off to Jim Johnson to discuss our financial performance, let me say that we continue to refine and focus our spending on the most valuable assets in our portfolio. We've maintained substantial ownership positions in the assets I've highlighted above and we're continuing to shift away from the model of licensing many assets at the research stage to one where we've selectively licensed after-value creation and retained substantial ownership and upside interest in the asset.

We've been cutting costs throughout the year and continue to do so to focus spending on these important pipeline assets. With that, I'll turn it over to Jim to describe our financial performance in the third quarter. Jim?

Thanks, Doug. The Company had a strong quarter financially with increased revenues from both RECOTHROM sales and collaborations and substantially lower operating expenses. Net loss for the quarter improved to $11.4 million, or $0.17 per share. Net sales of RECOTHROM increased to $8.5 million for the quarter, compared to $1.8 million in the third quarter of 2008.

Net sales for the quarter increased by approximately 40% versus the $6 million reported for the second quarter of this year. Net sales for the quarter were not significantly impacted by changes in wholesaler inventory levels. At both the beginning and the end of the quarter, wholesaler's held inventory roughly equal to three weeks of sales.

Looking forward, we expect to see continuing growth in our net sales and barring any unusual year-end wholesaler stocking patterns, we expect our net sales for the year to be in the range of $28 million to $30 million.

Collaboration and license revenues for the quarter were $18.5 million, compared to $8.5 million in Q3 2008. The increase was primarily driven by recognition of deferred revenue under the Bristol-Myers Squibb collaboration for Interferon lambda.

During Q3, we received a $25 million milestone payment under the agreement, which was added to the same deferred revenue pool as the up-front license fee. Similarly, the $70 million milestone payment receivable later this month will also be added to deferred revenue. This deferred revenue is being recognized over approximately 3.5 years in proportion to our costs incurred.

On the expense side, the actions we've taken to reduce our operating costs are producing a substantial downward trend. R&D expense for the quarter was $21.3 million, which was 29% lower than in the third quarter of last year. This reflects reduced expenses resulting from the April corporate restructuring as well as the discontinuation of costs under the atacicept collaboration, which was restructured in August of 2008.

SG&A expense was $13.7 million, declining by 9% versus the third quarter of last year. This reflects reduced costs from the restructuring and lower legal expenses, partially offset by increased selling commissions to buyer due to the increase in RECOTHROM sales. Stock-based compensation expense was $2.6 million for the quarter. $1.5 million of this was recorded as R&D expense and $1.1 million was recorded in SG&A.

We ended the second quarter with $103 million of cash and investment, but this does not include the $70 million milestone payment from BMS which we should receive this month. We continue to expect to end the year with a cash and investment balance in the range of $140 million to $160 million. And until January of 2010, we have $75 million available to us under a line of credit with Deerfield, which provides strategic flexibility.

So in summary, we're continuing to make progress both on the top-line and with expense reductions. We expect this to continue in coming quarters, which should translate into further improvement in the bottom-line. So with that, operator, we're ready to begin the Q&A session.

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

Hi, thanks. Good afternoon. Thanks for taking my questions. The first one's for Jim. What was the net cash used in quarter and used year-to-date?

Hi, David. Actually, when you look at our quarter and year, or especially the year, I guess is what I've been focusing on, we're actually cash flow positive. We started the year with $90 million of cash and investments and we expect to end the year with somewhere in the range of $140 million to $160 million.

Now obviously included in that is a total of $200 million that will have come in from Bristol-Myers Squibb under the lambda collaboration. So if you're asking what's it like ignoring that, you can back calculate an estimate and that would indicate that over the course of the year the cash we've used will range somewhere between $130 million to $150 million. And I think it's also clear that it's declining as we go through the year due to the restructuring efforts that we undertook in April.

Okay. Can you talk about why you're doing more dosing work in the Phase II lambda trial?

Sure. This is Doug; I'll handle that one. This is the first time that we will be doing what we call fixed dosing, or flat dosing, which is the way in which we want to approach the market, which is essentially prefilled syringes that have the drug already diluted and ready to go. That is the way the sort of current products in the market are presented and we want to have like-for-like in terms of market presentation of our product as well.

So since this is the first time we will have done fixed dosing, that's why there's a lead-in phase to the Phase IIb --.

Right.

To help us pick the doses to go forward with.

That makes sense. When would you expect data from this trial?

Well, it depends on which data you're expecting. I think certainly if we're planning to start the Phase IIb study in mid-2010, you can expect that there'll be some data flow between now and then. The open-label nature of the Phase IIa study will allow us to see RVR, EVR, and eventually SVR sort of in real-time, so I think you'll be seeing data at upcoming major medical meetings focusing on HCV right along as that study progresses.

Okay. And then last question, and I'll jump back into the queue, is can you talk about the progress on the Citizens Petition?

Nothing to report in that regard. The timing of that is a statutory requirement on the part of the agency to respond, I believe, sometime in February.

Okay, great. Thank you very much.

Thank you. The next question is from Chad Messer with Piper Jaffray. Please go ahead.

Hi. Thanks for taking my question. In one of your comments, you eluded to the increased payments that are going to Bayer for the increased RECOTHROM sales. I was wondering if you could just give us a few more details, a little more color, on how that arrangement has been going with Bayer helping you sell in the US, when it ends, and any plans to extend or not extend it? Thanks.

This is Jim. So the original deal was for three years and it also carried a provision that depending on sales levels, if we did not meet certain targets, that an additional year could be added at Bayer's option. So I guess at this point what we can tell you is that the active phase is scheduled to run either three or four years. Then there's also a two-year tail period where there's a reduced commission paid after Bayer ends their active participation in co-marketing in the US.

So that's the structure of the agreement. Maybe I'll ask Stephen Zaruby just to comment on the other part of the question, which is really the status of the co-promotion activity.

Yes. As you well know, the co-promotion continues on utilizing a sales portion with Bayer as we speak. We are not to the point yet where we are actively talking with them about whether we would extend or not. But we continue to have a constructive relationship with them and we work the market cooperatively and that will continue on through the course of the contract, as Jim outlined.

Thank you.

The next question is from Brian Abrahams with Oppenheimer & Company. Please go ahead with your question.

Hi, guys. Thank you for taking my question. This is actually Ryan (inaudible - microphone inaccessible)

Brian, you're very faint. We can hardly hear you.

Hi, guys. This is Ryan. I'm in for Brian Abrahams today. Thanks for taking my question.

Sure.

Looking at RECOTHROM going into the end of the year, are there any catalysts that you guys have that you guys are looking forward to that could help with the trajectory going forward into 2010?

First of all, we have not given any guidance on 2010 and Jim just restated our guidance for this year, to finish the year at $28 million to $30 million net. And I think that achieving that is our focus at the time and we don't see any major deviations beyond some of which we're temporarily constrained around, but our objective is to reach the end of the year and to deliver on our guidance in that regard.

Great. Thank you very much.

(Operator Instructions). The next question is from John Chadwick, a private investor. Please go ahead with your question.

Hi, there. I am back to the Bayer, or as the Germans say, the "buyer", co-marketing venture. My understanding is that the FDA equivalent over in Europe is still assessing the RECOTHROM product for approval for sales over there. What's the status of that?

That's correct. I think you stated it as I would state it, which is the EMEA is actually still reviewing the file and it's working its way through the review process. It's a different process, obviously, than the FDA, but it is still proceeding.

Any forecast of when that's supposed to be actually finished with the review?

I can't give you an exact date. I think likely if an approval were to come it would be sometime, under ideal circumstances, early next year.

Oh, not before the end of this year. So what is this claim by King? Is that going to affect anything of the marketing attempt in Europe?

No, it is focused on the US.

Their attempt to stifle competition is only on US soil?

Well, their product is not sold in Europe, so it's a different market situation over there.

Okay, thank you.

You're welcome.

The next question is from David Miller with Biotech Stock Research. Please go ahead with your question.

Thanks for taking my follow-ups. The IL-21 trial that you talked about, the randomized trial, is that going to be a pivotal trial?

It could be. I think that's going to be dependent up on our interactions with the agency and robustness of the data.

Okay. And then last question is, in the poster that you presented recently at the AASLD conference implied that you're going to be enrolling more patients in the naive arm of the trial. Is that the case or are you done at the seven that you have already reported?

No, the Phase Ib is complete, but the Phase II program will be focused on treatment-naive patients.

Okay. So the seven we've already seen are the only data -- that's the final data from that?

That's right. That's the final data set.

Okay, great. Thank you very much.

Thanks, David.

The next question is from Jeff Elliott with UBS Securities. Please go ahead with your question.

Thanks. I was just wondering what impact the injunction has on your sales force and what detail you can give me on what you can and can't do? And then I know you said in the disclosure you didn't think it would have a material adverse impact on your results. I was wondering, is that based on an expectation of the injunction being vacated or is it assuming in any case it won't have a material adverse impact?

I think based on our assessment of the situation right now, that's where we come down in terms of not having a material impact. Obviously, depending upon what transpires in the courts, that could change. But I think our expectation is that once we have the opportunity to get before the judge and present our case, that it will be compelling and we will be free to go back to the normal operating procedures that we have carried out over the last several quarters.

And again, I would reiterate that we are complying with the judge's orders. We take that very seriously and there are some aspects of our promotional activities that we have had to reign in out of an abundance of caution. But we feel that with a near-term date of November 16 for a hearing to get in front of the judge and the potential for these temporary restraining orders to be vacated prior to that, that it won't have a material impact.

And is it marketing materials in particular or -- I'm just trying to understand a little bit what the sort of nuts and bolts of what you can and cannot do at this point are.

I think I'd prefer to stay away from the specifics at this point, just given the fact that it's what I'd characterize as somewhat fluid at this point. But I think you can access the actual restraining order claims --.

Yes.

-- and there are three of them, two of which are very straightforward from a compliance perspective and the other, which is making express or implied claims of superior safety, again we are complying with that. All of our marketing materials have always complied with that and so we feel that when we have the opportunity to get in front of the judge that that will be seen and recognized.

Okay, thanks. I guess my interpretation of that is given that they have a warning and you don't, that's where things are a little bit complicated for you, but I will not press you anymore to try and get details. Thanks.

Thanks, Jeff.

There are no further questions in queue. I'd like to turn the call back over to management for closing remarks.

I'd just like to say thank you for those of you participating in the call and we'll speak with you again in our next quarterly update. Thank you.

This concludes the teleconference. You may disconnect your lines. Thank you for your participation.