施貴寶 (BMY) 2009 Q4 法說會逐字稿

Greetings and welcome to the ZymoGenetics fourth quarter and year end 2009 financial results. (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 Miss Specht, you may begin.

Good afternoon, everyone. Welcome to our fourth quarter 2009 conference call. Before we begin, I would 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. Now, I'll turn the call over to our CEO, Doug Williams.

Thank you, Susan. And good afternoon to everyone joining us on today's fourth quarter 2009 earnings call. Besides myself, I'm joined by Jim Johnson, our Chief Financial Officer who will give you a recap of fourth quarter 2009 and guidance for 2010. Also, here for Q&A are Stephen Zaruby, our President and Lennie Ramos, our Chief Medical Officer. Looking back on 2009, we took a number of steps to reshape the Company and position it for success going forward. We've changed our business model to a focus on developing and commercializing a smaller portfolio of assets in which we will maintain a significant ownership stake.

Our efforts will be focused on our commercial product RECOTHROM and three immunology assets either in the clinic or moving to IND filing soon. This shift in strategy came about after an extensive review of our business and identification of the assets that we believe have the greatest value generating potential in relationship to the investment required. The change resulted in reducing our operating expenses by approximately $40 million annually and reducing the size of the work force by more than 40%.

RECOTHROM is an important part of the strategy going forward. As you'll hear from Jim in a moment, we've more than tripled sales of the product from 2008 to 2009. It is expected to achieve cash flow positive status by year end and begin to contribute cash to the rest of the business. This has always been the vision for RECOTHROM. A source of capital to be invested in the truly transformational pipeline programs. Which leads me to our immunology pipeline.

PEG-Interferon lambda, it's a potential blockbuster that we believe will become the interferon of choice for use in combination regimens for Hepatitis C Virus. The preliminary data shows that this molecule has a strong safety profile and has potent antiviral activity across a broad dose range. Addressing the poor tolerability of interferon-alpha with a potent, well-tolerated one is our aim with this program. With our partner Bristol-Myers Squibb, we initiated our Phase 2 program in October. ZymoGenetics will have a significant financial stake in the US market and will receive double digit royalties on sales outside the US.

IL-21 is also a clinical candidate for which we maintain worldwide rights and addresses another large underserved market, metastatic melanoma. Our preliminary data released in May on the first 24 melanoma patients from our on-going Phase 2 study showed that the drug had impressive activity and was tolerable on an outpatient dosing regimen.

Last and certainly not least is an antibody directed against IL-31, a novel cytokine discovered at ZymoGenetics. We maintain worldwide rights on this molecule as well and it addresses another very large, unsatisfied market. Severe atopic dermatitis. Current therapies are limited to steroids and topical calcineurin inhibitors and are largely ineffective in the over five million patients in the US with this disease. IL-31 shows a striking correlation with human atopic dermatitis and causes the intense itching in the skin that's the root cause of this disorder. Neutralizing this cytokine is a novel and highly focused strategy to address this significant unmet medical need.

We focused our business and our work force around the highest value assets in the portfolio. We have a growing commercial product in RECOTHROM and three immunology assets which have significant commercial value to ZymoGenetics. Success with one or all of these will be transformational for our Company.

Just a recap the year that was, 2009, I thought I would run through what we consider to be the major accomplishments for the year in terms of business transactions and structural changes to the Company which support our revised business strategy. In January of 2009, we announced an alliance for development in marketing of PEG-Interferon lambda with Bristol-Myers Squibb. This is the largest Phase 1 deal by value ever executed and provided ZymoGenetics with $200 million of signing and milestone fees in 2009. Also in January of 2009, we regained the Ex-North American rights to IL-21 from Novo Nordisk in a cashless transaction.

In April, during the first phase of our restructuring, we reduced the work force and our expenses by approximately $30 million annually and focused research and development on immunology programs. In May, we presented final data from our Phase 2 renal cell carcinoma trial with IL-21 in combination with Nexavar showing that the drug appeared active and tolerable as an outpatient regimen. Preliminary data from our melanoma Phase 2 study was presented in May and showed that IL-21 appears to be active against this tumor as well. Accrual to the study was completed in August. And final results will be available later this year.

In October, we initiated a Phase 2 dose ranging trial of PEG-Interferon lambda in treatment naive HCV patients. This triggered the receipt of a $70 million milestone payment from BMS. Our final Phase 1b study results of PEG-Interferon lambda were also presented at the AASLD meeting in November.

In December of last year, a lot of activity took place. First, we concluded our corporate restructuring effort and further reduced expenses in head count to eliminate another $10 million of annual expense. We focused our activities on RECOTHROM sales and marketing and on the support of the three immunology programs mentioned previously, our most valuable assets.

Second, we finalized an agreement with Novo Nordisk to grant them North American rights to our anti IL-21 monoclonal antibody for autoimmune and inflammatory conditions. Novo already had Ex-North American rights and this transaction consolidated the rights with a committed partner. We received a $24 million up-front payment for this preclinical molecule and expect to receive another $10 million in 2010. The deal also allows ZymoGenetics to decide whether to co-fund Phase 3 development based on phase 2b proof of concept data for an increased royalty rate and the option to co-promote the product in the US. Thus preserving future upside value without added near term costs.

Finally, in late December, we announced a restructuring of our relationship with Bayer for RECOTHROM. We regained sole control of marketing and sales for the US and reduced our expected payments to Bayer. We expect this change will result in greater profitability for RECOTHROM and a more rapid achievement of cash flow positive status for the franchise. Bayer also returned the rights to RECOTHROM outside the US with the exception of Canada to us. The product is approved in Canada and we'll receive royalties on Canadian sales as well as have the opportunity to find new committed licensees for the product outside the US and Canada.

While 2009 was a year of fundamental change and significant accomplishments, 2010 will be a year focused on execution. With PEG-Interferon lambda, we plan to present results from our Phase 2a study with PEG-Interferon lambda at the AASLD meeting this year. Including RVR, EVR and safety data on all patients enrolled. I'm pleased to say that enrollment is now complete to the lambda Phase 2a study and we're on track to initiate the blinded Phase 2b study midyear.

For IL-21, we've submitted an abstract to ASCO with the results from our Phase 2a melanoma study. Assuming the abstract is approved, we'll present the data at that meeting. We'll also initiate a randomized Phase 2 study of IL-21 versus DTIC in the second quarter of this year working with the NCIC in Canada. We'll continue to search for a partner to commercialize IL-21 outside the US. On the RECOTHROM front, we continue to gain market share and in January, we published pooled safety and immunogenicity data across eight different clinical studies in the Journal of the American College of Surgeons. This data further supports the safety and differentiation of RECOTHROM as a topical hemostat.

We've recently been notified by FDA that they will require more time to analyze the merits of the citizen petition we filed in August which was in line with our expectations for their actions. Less visible but no less important will be the GMP manufacturing of the anti IL-31 monoclonal antibody and the initiation of IND-enabling toxicology studies to support a first half 2011 IND filing. So, I'm pleased with where the Company is today. And with our plan going forward, and now let me turn it over to Jim Johnson to discuss our financial performance in Q4 and guidance for 2010. Jim?

Thank you, Doug. The Company posted a $13.6 million profit for the quarter which resulted from a one-time recognition of deferred revenue related to restructuring of the Bayer agreement. It was a positive quarter financially with increased RECOTHROM sales, further reductions in on-going operating expenses and $94 million of cash inflows from license and milestone payments. We met all of our financial goals for the year ending with a strong cash position strengthened further by the additional $91 million raised last month. Net sales of RECOTHROM increased to $10.6 million for the quarter including $1.4 million sold to Bayer to supply the planned launch in Canada.

For the year, sales of RECOTHROM were within our range of guidance whether or not the sales to Bayer are included. At the hospital level, we continued to see increasing demand in Q4. We estimated the growth at approximately 18% compared to the third quarter. Collaboration and license revenues for the quarter were $51.2 million and the largest component of this total was the acceleration of $34 million related to the amended Bayer agreements. This represents full recognition of all deferred revenue related to those agreements. We recognized approximately $9 million under our interferon lambda collaboration with Bristol-Myers Squibb and another $5 million related to the IL-21 monoclonal antibody deal with Novo Nordisk that was signed during the quarter.

On the expense side, costs of product sales totaled $3.5 million and of this amount, $1.3 million relates to the products sold to Bayer and the remaining $2.2 million relates to US sales. R&D expense for the quarter was $24 million which included $3.9 million of costs related to the December head count reduction. Excluding this one-time charge, we saw a continuing declining trend in R&D expense from quarter to quarter. Stock-based compensation expense was $2.9 million for the quarter. $1.5 million was R&D and $1.4 million was in SG&A. We ended the year with $174 million of cash and investments. During the quarter as Doug mentioned, we received a $70 million milestone payment from BMS related to the start of Phase 2 for interferon lambda. Plus we got another $24 million of up-front money in the IL-21 monoclonal deal with Novo Nordisk.

So, now, let's look ahead to 2010. And our financial guidance for the year. These estimates reflect our current expectations based on the information we have available to us today. We expect to continue to build the market for RECOTHROM in 2010 much like we did in 2009. Converting existing users of bovine thrombin to RECOTHROM. We project that net sales for the year will be within the range of $48 million to $54 million. Total revenues for 2010 should be in the range of $125 million to $140 million. Besides RECOTHROM sales, the other major components of this amount are revenue recognized under our interferon lambda collaboration with Bristol-Myers Squibb and from our license of the IL-21 to monoclonal to Novo Nordisk. Of the total, we expect to recognize $45 million to $55 million of revenue under the BMS lambda collaboration.

None of this represents cash inflow in 2010. It is solely recognition of amounts that were recorded as deferred revenue or collaboration obligation when we receive the cash in 2009. And the amount we recognized for the year can vary depending on the amount of expenses we incur during the year. We expect to recognize approximately $31 million of revenue from the Novo Nordisk IL-21 monoclonal license transaction. $20 million of this amount was received in 2009 and deferred into 2010. $10 million is from milestone payments that will be triggered by IND filing and initiation of Phase 1 testing which we currently expect will occur in the second half of this year. The $1 million balance is reimbursement for our tech transfer costs. Royalties will be minimal in 2010 and we haven't assumed any license or milestone revenues from new transactions.

Now, turning to operating expenses, we expect cost of product sales to be 28% to 30% of net product sales in 2010. Over the course of the year, we expect costs of product sales to trend upward for two reasons. First, we expect to begin selling product in the second half of the year. That will include all related costs. Recall that certain manufacturing costs primarily for bulk active drugs were expensed prior to FDA approval. Up until now, we've been selling product without this bulk drug cost element.

The second reason is that we have minimum payment obligations to our fill and finish contractor and these are impacting the cost of product that will be sold in 2010. R&D expense for the year is expected to be within the range of $75 million to $85 million. The 15% to 25% reduction versus 2009 reflects cost savings from our 2009 restructuring effort, partially offset by an increase in the cost of the interferon lambda program. In fact, we expect lambda program costs to be at least half of the total 2010 R&D expense. SG&A expense should be in the range of $55 million to $60 million. Approximately half of this amount represents sales and marketing expenses and the other half is G&A. Just to clarify, SG&A expense will not include any commissions payable to Bayer. We will pay Bayer a maximum of $12 million in total commissions over the two years 2010 and 2011. But we have established a liability that will be relieved when those payments are made. Accordingly, there will be no P&L impact.

Overall, we expect our net loss for the year to be in the range of $20 million to $35 million or from $0.23 to $0.41 per share. These per share amounts are based on approximately 86 million outstanding shares which includes the 16.1 million shares issued last month. We've strengthened our cash position significantly. Taking into account the $91 million of net offering proceeds, our pro forma beginning cash and investment balance is approximately $265 million. It is important to note, however, that about $76 million of this amount is earmarked for the lambda program. That is the amount remaining on our $100 million funding obligation as of the end of 2009.

We expect to satisfy most of this obligation in 2010 with a small amount carrying over into Q1 of 2011. Capital expenditures are expected to be minimal in 2010 and our total inventory should be fairly flat over the course of the year. We expect to end 2010 with at least $140 million of cash and investments and looking beyond to 2011, the amount of cash needed to fund our operations will be significantly less than in 2010. We expect a substantial decline in lambda R&D expenditures as we transition from funding 100% of the overall program costs to 20%. Furthermore, RECOTHROM should reach higher sales levels that will generate more cash flow toward funding of operating expenses.

And assuming we're successful in moving lambda into Phase 3, we will receive a substantial milestone payment from BMS. So, in summary, our financial outlook is solid. The expense reductions we've made in 2009 together with the added cash we brought in have strengthened our financial position significantly. We have the resources we need to get through the critical data points that have potential to generate substantial value for the Company and it's shareholders in 2010 and 2011. So with that, I'll ask the operator to begin the Q&A session.

(Operator Instructions) Our first question comes from the line of Howard Liang with Leerink Swann. Please proceed with your question.

Thanks very much. First question on RECOTHROM sales in Q4, I guess if we take out the sales to Bayer, for Canada, seems like the ramp is a little bit slowing. I was wondering if that's a real trend or is that a -- a quarter to quarter bump.

I think it is an 18% quarter over quarter increase in actual hospital demand versus 24% in Q3. I think you're seeing a little bit of the seasonality take place. Obviously with Thanksgiving and with the Christmas holidays occurring when you're looking at actual hospital demand which is what that number represents, certainly, the number of elective surgeries is going to drop off during that period. So, I think that has something to do with the sort of modest change in the growth rate. We don't expect that to continue.

Okay. And in your full year guidance, were there any sales to Bayer for Canada included in that?

No, there are not.

Okay. Great. I have a question for Jim regarding R&D expense guidance. I think you said that -- almost sounds like you're going to spend most of the $76 million for the lambda program in 2010. I don't quite understand why the R&D is only $75 million to $85 million.

Yes, hi, Howard. This is -- it is a complicated issue but I guess the simple answer is that what flows through our P&L as R&D expense are the amounts that we actually spend in the program and the money that BMS spends, we reimburse them for and that just comes directly out of the liability we accrued on our balance sheet. So, overall, we're expecting -- if you look at our balance sheet as of December 31st, I think the current amount that we've estimated for the collaboration obligation is about $62 million. So, that's how much we will -- we expect to pay in total either to BMS or for our own costs.

Thank you very much.

Our next question comes from the line of Brian Abrahams with Oppenheimer. Please proceed with your question.

Hi, thanks very much for taking my question. Do you expect to see any data for lambda top lines prior to AASLD?

It is a possibility. I think we're still discussing that with Bristol-Myers, our partner. We're certainly going to initiate the Phase 2b study prior to the AASLD meetings and we haven't made a final decision yet. That's obviously based on a determination of the materiality for us and discussions with BMS as to whether or not we'll have a top line release before that. Certainly, our expectation will be full data release at the AASLD meetings. As I said, that would include RVR, EVR and safety data for patients through that point in time. So, I think there will be a very large body of very meaningful data at AASLD and obviously we want to preserve in whatever we do, our ability to have a presentation at that meeting. And wouldn't want to do anything to stand in the way of that with any prior release of information.

Okay. Makes sense. But is there any reason we might not see the RVR data. It seems like in the enrollment has been completed in the Phase 2a, at least the four week data, should be available in time for easel abstract.

We made the determination that we didn't have a sufficient number of patients enrolled at that point. To get an abstract in. We never really expected we would be in a position to have an easel abstract from the 2a study. And that's, in fact, the way it turned out. We've actually just completed the accrual literally this week. With the last patients being randomize to the study. So, the study is very much still in process right now and we don't have the RVR data on all of the patients at this point.

Okay. That makes sense. One last question regarding RECOTHROM. Could you just give us a sense as to the status of the sales force, how it is currently structured and whether you've seen any impact at all during this quarter of the transition with the Bayer sales force leaving and you guys building up your own sales force. Thanks very much.

Yes. Hello, this is Stephen Zaruby speaking. We are, as we indicated in December, we're in the midst of scaling up our sales force to cover the market place. And our projection is that we'll have everything filled and in place and up and running at the close of the first quarter. We do have some people in line and in terms of the number, we are scaling up accordingly to satisfy the market and to cover the opportunity. And we're on track to do that. So, we do not see any deficits or deficiencies with Bayer stepping out. The way we were structured before, geographically, we had overlap between the Bayer reps and the ZymoGenetics reps, so we do have people on the ground so, in effect, there is no white space and there has not been any white space.

Our next question comes from the line of Paul Latta with McAdams Wright Ragen. Please proceed with your question.

Thanks for taking my questions. Actually, just a little follow-up on the RECOTHROM. Just trying to look at the shape of 2010. It sounds like there's not really any reason to believe (inaudible - technical difficulties) that there will be perhaps a soft patch in Q1 and I guess on a related matter, we saw maybe a little bit of seasonality in Q4. Is that something to think about for Q4 of 2010 or should we just sort of straight line 2010?

Well, I think there is a number of different ways that you all and we certainly forecast and we do look at the markets a number of different ways. Maybe speaking more personally, we try not to respond to our look at fluctuations week to week or month to month. Yes, sometimes in this market, you will see it come off in its entirety a little bit in the fourth quarter. But we're looking at growth trends as we've arrived, I'm going to say through four prior quarters. And we stand by our guidance and think that it is a good direction in terms of where we should hit by the close of this year.

Great. May I ask a question for Doug on lambda. It sounds like enrollment just finished up here just this week. Can you comment, was that in line with your expectations, ahead of your expectations? How did you feel about the enrollment process?

Actually, it was a little bit ahead of schedule. So, I think we're feeling pretty good about investigator enthusiasm for the molecule and our ability to get patients into the study, either as quickly as we think or faster.

I guess the big presentation at AASLD later this year, that predominantly would be on the Phase 2a, I would assume. The Phase 2b is probably next year?

I think that's right, yes. I think that the Phase 2a study is what you can expect to see with RVR, EVR and a full dose of safety data as well for all of the arms of the study.

Lennie Ramos, just a quick add on to that. 2b is a blinded study so we need to preserve the integrity of that study. So most of the data at AASLD will likely be on the 2a portion of the study.

Our next question comes from the line of David Miller with Biotech Stock Research. Please proceed with your question.

Hi, thanks for taking my questions. First question is can you give us some -- some of the delta and the product margin between nine and ten given that there's quite a bit of movement between with Bayer gone and some additional expenses your way?

I'm not sure I've got the question completely, David. Can you elaborate a little more on that?

Can you just talk about what the differences between the margins you saw in 2009 and 2010 for RECOTHROM.

Are you talking about just the gross margin?

Yes.

Well, I mean, the biggest factor is really this kind of anomaly of the accounting treatment for drugs that was manufactured prior to our FDA approval. So, basically, we were required to expense that drug cost and if you want to think about it this way, what we've been selling in 2009 was sort of an incomplete cost of goods. Because we were --

Right.

We were including both drug in the vials that had already been expensed through the P&L. So, that's the biggest difference between 2009 and 2010. In the second half of 2010, that will be in there in full.

Okay. So, let me ask this a different way. What would you expect the direction of the cost to the hospitals of RECOTHROM to go flat, up or down in 2010?

Yes, we're basically assuming that from a pricing perspective that there will not be any changes. We don't intend to change our pricing. And as far as the other element of our net sales computation would be the discounts that we're providing. We don't -- we believe that as of the fourth quarter of 2009, the current discount program is fully reflected in the net sales number. I mean we don't expect a higher realization of those discounts. So, I think basically we expect it to be a good baseline for 2010.

Okay. Can you give us some additional data on the IL-21 randomized study design. Would you consider this an approvable design for accelerated approval or are you going to do it under an SPA and end points and those kinds of things?

No, I think it is unlikely that it would have that sort of power associated with it as we're envisioning it right now, David. I think we see it as -- the study design is fairly straightforward. It is going to be a head to head comparison between DTIC, which is the current standard of care versus IL-21. Single agent in both arms. But it would be a head to head comparison study that, from our perspective, would significantly derisk the molecule.

There is a substantial amount of manufacturing costs that would be incurred to take this molecule forward to commercialization and so we're looking at an 80 patient study head to head comparison that will give us additional comfort in a randomized setting to really move forward and to spend that additional incremental $100 million to get the product approved.

Okay. What would the end points on the study be?

It is a progression-free survival.

How should we think about the chances or timing for any new Ex-US RECOTHROM deal?

I think the reality is having just gotten the product back in the not too distant past, we're really just beginning the process of having discussion with potential licensees. It is hard to predict how those discussions will go. But I think as you know, it takes time to identify a partner and get a contract written. I will say, however, that there has been interest expressed in terms of cold calls that have come to us as a result of the announcement.

So, I think there is interest out there. And we certainly think there is an opportunity to license those rights to another third party that will be committed to moving the program forward in whatever territory they license it for. But it is going to take us some time to line that up.

All right. Last question is do you have any new date from the FDA on the citizens petition?

No. Other than the fact that they won't make the deadline for the sort of 180 days statutory requirement. They've simply indicated that they need more time which candidly is what we expected would be the response from them.

Okay. Great. Thank you very much.

(Operator Instructions) Our next question comes from the line of Jeff Elliott with UBS. Please proceed with your question.

Thanks. Could you just tell me again what your strategy is with IL-21 and when you would optimally like to partner that with the Ex-US rights?

What we're doing right now, Jeff, is having some conversations with Ex-US potential partners in those territories. Our expectation is that under any circumstances, we would be looking for an Ex-US licensee. And as far as the timing of that, I think we've put ourselves in a position with -- the recent cash infusion from our equity offering to carry forward through the Phase 2b program.

I think that that data will provide a basis for a strong partnership deal of the structure that we're gravitating toward which is something more akin to the structure we have with BMS around lambda where we can maintain a substantial commercial presence as far as the US market is concerned. So, I think our view is that the likely scenario is that barring an Ex-US deal, that the likely timing of a partnership would be when we have the Phase 2b data in hand.

Okay. And -- sorry, I might have missed this. When are we expecting the Phase 2a data from IL-21 again?

Should be at ASCO. We've submitted an abstract for hopefully for presentation at the upcoming ASCO meeting this year.

And you're going to have progression-free survival and overall survival data from that, right?

Yes and an estimate of overall survival. So, again, I think suffice to say that we're sufficiently encouraged by the data we've seen so far that we have decided to initiate the Phase 2b study.

I guess my question would be -- if you have relatively robust data from that in progression-free survival, I think there is a relatively robust data set for DTIC, at least from the Genta trial. What does the Phase 2b get you that you're not sort of already going to have in hand?

I think it is a good question. I think what it does is it significantly derisks the program in a direct head to head comparison fashion. I mean, I think single arm studies are notorious for providing some guidance but perhaps not the level of comfort that one would want to pull the trigger on $100 million commitment for manufacturing and clinical studies.

What happens if something -- some data comes out between now and when you want to start that trial that maybe suggests DTIC isn't the front line standard anymore? Like what if the Ipilimumab data turns out to be good, or something like that.

That again is a strong rationale for running the Phase 2b study because it assures that when it is time to start a Phase 3, we'll actually be running against the appropriate comparative agent at that point in time. It was another factor that went into our thinking about running the 2b study rather than launching directly into a Phase 3 program that may or may not have an appropriate comparative arm in it.

Okay. You're not concerned about enrolling if that happens? That it will be tough to enroll into a DTIC arm or even an IL-21 arm if something else is out there that is reasonably approved or positive?

I think the timing that we're expecting for accrual in this 2b, we'll get through that window. And accrue prior to what we would expect to be an approval for Ipilimumab under even the most aggressive of circumstances. So, I think we have a window of opportunity here that we can take advantage of.

Okay. Thanks. Just one last question I think I've beaten that one to death enough. I think you said your guidance doesn't include any other milestones from lambda this year. Are there any other potential milestones from lambda like do you have any anything on the start of the Phase 2b or anything from the Phase 2a?

Phase 3 initiation is the next milestone.

Okay. Perfect. Thank you.

Okay. Thank you.

There are no other questions in the queue. I would like to turn the floor back over to management for closing comments.

I would just like to say thank you to everyone participating today. We'll look forward to speaking with you again in our next quarterly call.

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