施貴寶 (BMY) 2010 Q1 法說會逐字稿

Greetings, and welcome to the ZymoGenetics first quarter 2010 financial results. 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, Senior Director of Corporate Communications for ZymoGenetics. Thank you, Ms. Specht. You may begin.

Thank you. Good afternoon, everyone. Welcome to the first quarter 2010 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. And now I will turn the call over to our CEO, Doug Williams.

Thank you, Susan, and welcome to all of you on today's call. I'm joined today by Stephen Zaruby, our President, and Leni Ramos, our CMO, as well as Jim Johnson, our CFO, who will review Q1 financial performance for you. Let me start with a corporate review, and then Jim will summarize the financials, and we will be available to answer your questions after that.

During 2009 we transformed the Company, focusing on four key programs with the greatest near- and long-term potential to generate value for our shareholders. If you look back at our 2008 and 2009 financials, and compare these years to our guidance for 2010 and now the first quarter, the Company looks very different. Revenues are up substantially year-over-year. Our costs have been progressively reduced. And we believe our cash position after our successful equity offering in January provides us with sufficient capital to reach significant value-creating milestones for all of our programs.

I would like to quickly recap progress during the quarter on our key assets. On the RECOTHROM front, net sales for the quarter was $9 million. This is a doubling of Q1 sales for 2009. January in particular was a very weak month across the hemostat segment, and RECOTHROM was no exception. That said, for the quarter, actual hospital demand, that is units moving from the wholesaler inventory to hospital end-user, increased by 14% compared to the fourth quarter of 2009. RECOTHROM market share in dollars continued to increase in Q1 to approximately 19%, versus 17% the prior quarter.

Jim will discuss the factors that influenced our reported net sales for the March 31 quarter, but demand in market share continue to grow, and based on momentum we see in the marketplace, we are comfortable with our full year guidance of $48 million to $54 million of net sales.

Our Interferon lambda program continues to move forward as described in our 8-K filed today prior to the call. We are on track to start the blinded controlled Part B about portion of the study mid-year. As we said previously, this would be a dose-finding Phase 2 study in approximately 600 patients and will provide a direct comparison of lambda plus ribavirin with a labeled does of PEGASYS plus ribavirin. This will provide the dose selection for Phase 3 studies, as well as future exploratory studies being contemplated.

An important aspect of the Phase 2 program is the inclusion of genotyping for IL-28B polymorphisms to correlate with treatment response. As part of the process for selecting doses are for Part B of the study, we have recently completed a preliminary assessment of data from the open label Part A portion of the Phase 2 program, focusing on safety and four week viral response. And I would like to share with you an early glimpse of that data as was summarized in the Form 8-K. Before I do that, however, I want to point out that it is our intent to present the full results from the study at AASLD in the fall, and for that reason we will limiting our disclosures now to topline outcomes.

As I will describe in more detail in a moment, all four dose levels, with 45 subjects divided among four dose cohorts, were safe and showed dose-dependent antiviral activity. With respect to antiviral efficacy, we observed dose-dependent effects on viral load at four weeks in genotypes 1 through 4 patients, comparable to our Phase 1B observations. To remind you, after four weeks of dosing in Phase 1B we observed from 1.8 to 3.8 logs reduction of HCV RNA. As we saw in Phase 1B, a number of patients achieved undetectable levels of viral RNA at four weeks.

Our safety observations are based on a data cutoff in mid-April when the median duration of treatment for subjects of ten weeks for genotype 1-4 and 18 weeks for genotype 2-3. On the safety front, there were no new safety signals observed with longer periods of dosing than the four weeks in Phase 1B, and there were no dose-limiting toxicities of any kind. A safety monitoring committee determined that all doses met the safety criteria for inclusion in Part B of the study. The incidence of flu-like symptoms was consistent with our observations in Phase 1B, and lambda had a notable absence of effects on the blood cells.

We observed a decreased incidence of liver enzyme elevations compared to Phase 1B, and in the few cases where the elevations were thought to be treatment-related, they were effectively managed with a dose reduction algorithm similar to that described in the PEGASYS label. We observed three patients with moderate liver enzyme elevations, two at the high dose and one at the next highest dose level. There were no concomitant elevations in bilirubin levels in any of the three. All three patients were successfully managed with dose reduction. The data also -- the data so far support our theory that any elevations of liver enzymes attributable to treatment with Interferon lambda are likely to be transient in nature and can be effectively managed with dose modifications.

Patients on Part A of the study continued to be treated, and we anticipate reporting data on RVR, [EDR] and safety at AASLD in November. As I mentioned earlier, we are on track to start Part B of the study in the next few months. We are encouraged by the safety and efficacy data in the Phase 2 program to date and look forward to disclosing more details in the fall.

With respect to IL-21 and melanoma, we have had an abstract accepted for oral presentation at ASCO on June 5. We will present the results of the 40 patient open-label Phase 2A study, including response rate and survival data. The encouraging results from this study have positioned us to initiate a randomized Phase 2B study comparing IL-21 to DTIC in first-line stage four metastatic melanoma patients. We expect that study to begin in the second quarter of this year, with topline results expected from the study at the end of 2011.

Finally, we have begun scaling up the manufacturing process for our anti-IL-31 antibody to provide drug product to support IND-enabling toxicology studies in the second half of this year. We anticipate filing the IND for the novel treatment for severe atopic dermatitis in the second half of 2011. Let me now turn it over to Jim to walk you through the financial performance for the quarter. Jim?

Thanks, Doug. The Company had a strong quarter financially, both with increased revenues and substantially lower operating expenses resulting from our 2009 restructuring. Net loss for the quarter declined to $2.4 million, or $0.03 per share, compared to $18.1 million, or $0.26 per share, a year ago.

Net sales of RECOTHROM were $9 million for the quarter, doubling from $4.5 million a year ago. Net sales were approximately the same as the fourth quarter of 2009, even though we had positive trends in units sold to hospitals and market share that Doug described earlier. There are two primary reasons for this,both of which are related to differences between the timing of hospital purchases and when we record revenue based on sales to wholesalers.

First, decreases in wholesaler inventory levels had a significant impact. We estimated there were about 2.4 weeks of sales in the channel at March 31 compared to about 3.2 weeks at the beginning of the quarter. Second, the way that the weeks fell in the calendar had a significant impact in that there was about one week fewer sales included in the three months ended March 31 compared to the three months ended December 31. Together, these two factors caused our reported net sales to be lower than one would expect based on underlying hospital sales trends.

Collaboration and license revenues for the quarter were $26.2 million, compared to $20 million in Q1 2009. The current quarter amount was mainly the recognition of revenue from two transactions. We recognized $13.3 million under the Bristol-Myers Squibb collaboration agreement for Interferon lambda, and $12.7 million under the IL-21 antagonist license with Novo Nordisk. It is important to note that we only have about $8 million of deferred revenue remaining from the Novo Nordisk transaction to be recognized this year. So all other things being equal, this item will generate a declining trend in collaboration and license revenue in the coming quarters.

On the expense side, as expected, our restructuring in 2009 has reduced our operating costs in 2010. R&D expense for the quarter was $19.7 million, which was 20% lower than in the first quarter of 2009. The financial benefit from the restructuring was actually greater than this, but it was partially offset by increased costs related to the ramp up in the Interferon lambda development program. SG&A expense was $14 million, declining by 7% versus the first quarter of 2009. And besides the benefit from the restructuring, the decrease reflects the elimination of expense from selling commissions paid to Bayer, and the decrease was partially offset by increased patent and legal costs in 2010.

Stock based compensation expense was $2.3 million for the quarter. $1.2 million recorded as R&D expense, and $1.1 million as SG&A. And as Doug mentioned, during the quarter we strengthened the Company's financial position significantly with the equity offering completed in early January that brought in about $91 million, and we ended the first quarter with $228 million of cash and investments. With that I will turn it back over to Doug.

Thanks, Jim. Just to sum up quickly then. We are on course with our plans for each of our key assets this year. For PEG-Interferon lambda, the Phase 2A data generated so far has really reinforced our belief in the potential of this molecule, and with the start of the Phase -- Part B portion of the Phase 2 program imminent, we expect the interest level and awareness of lambda to build.

For IL-21, the publication of the ASCO abstract in a few weeks, along with the presentation in early June, should help to establish IL-21 in one of the leading candidates to positively impact the treatment of late-stage melanoma. And with RECOTHROM we are seeing a number of positive trends in the market that we believe will lead to higher levels of growth and market penetration over the remainder of the year.

And finally, our anti-IL-31 monoclonal is continuing to progress towards the clinic and represents the next IND candidate in the pipeline. So with that, I will open it up for questions.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions). Our first question comes from the line of Howard Liang with Leerink Swan. Please proceed with your question.

Hello, this is [Jonathan Eckard] in for Howard. I just had a quick question on the RECOTHROM. For the cost of goods I believe it worked out to be around 21%. Is this a good base to work off of? I know it is supposed to be increasing over the course of the year, but is this a good base to start with for the remainder of the year?

Hi, this is Jim Johnson. So, our guidance for the year was in the range of 28%, and we continue to expect that for the year in total our cost of sales will be in that range. So we expect it to continue to increase over the course of the year.

And then on the Interferon lambda I was going to ask, with regards to the cases of the elevated enzyme levels, is there any color you can provide about how long a patient had been treated since -- after the dose reductions? Is there a duration of time that they have been treated since then.

Yes, this is Doug. They have been on now for a range of 16 to 20 weeks after the initial elevation. So they are well out past that initial rise and are doing fine.

That's great. Thank you very much.

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

Hi, guys. Thanks for taking my questions. This is [Ryan] in for Brian. Can you give us any updates on the progress of the sales force build out? Has that completed now?

This is Stephen Zaruby speaking. We are all done. We are fully staffed and the people are operating as we speak.

Great. And can you remind us how is RECOTHROM reimbursed, and what impacts from healthcare reform would you expect?

As it is reimbursed and it is captured in the cost of any surgery, we don't see there will be any impact on the reform side at all in terms of our pricing and how we capture. So, I guess we are fortunate in that we are one of the few maybe who are not affected by that.

Great. Thank you for taking my questions.

You're welcome.

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

Just some additional detail on what the Phase 2B trial will look like for lambda, like number of patients and timing of start, enrollment, completion and data?

Hi, David, this is Doug. Yes, I think it hasn't changed from essentially what we have described. We will obviously give you more specific color around the study itself once we dose the first patient, but it is a dose ranging Phase 2 where we will be looking at up to four doses of lambda plus ribavirin versus PEGASYS plus ribavirin. So a direct head-to-head comparison running 24 weeks for patients with genotype 2-3 and 48 weeks for genotype 1-4. And the primary end point of the study is going to be cEVR, and we expect it to be in the range of 600 patients in total.

And just to complete that response, we anticipate completing the study by the end of this year.

And when you say --

At least enrollment.

At least enrollment, yes. Enrollment, excuse me.

Okay. Now, switching to RECOTHROM for a moment, can we expect -- the kind of continued slow grind we have seen for RECOTHROM sales on a quarter-over-quarter basis going forward, or is there some kind an event that we can look forward to that would provide an inflection where you would be replacing more of the JMI sales out there?

This is Stephen Zaruby again. Well, I think, as Doug said, we are encouraged by the momentum that we have seen. But moving forward, obviously we are active in the marketplace at all different kinds of touch points and levels, be it through sales force, our national accounts, people dealing with GPOs and so and so forth. And as Doug said, we remain confident in our annual guidance. And so it depends how you might forecast us or allocate our sales quarter by quarter, but we expect to see continued growth, and the growth certainly comes largely or entirely at the expense of Thrombin-JMI.

Okay. Last question I have is can you give us a quick update on the King litigation and your FDA petition?

Sure, there is nothing new to say about the King lawsuit right now other than the trial has been scheduled for late 2011. We are in the process of discovery-related activities, and again we expect that to continue through and until 2011. We did, just to remind you, prevail at the preliminary injunction, and we continue to believe King's claims are without merit. But that is really the update as of now.

And --

David, did you ask about the Citizen Petition as well?

Exactly.

I think, as we announced in the last call, the agency had sent us a letter requesting more time, and so that is essentially where it sits that the point. There is not a statutory requirement at this point for them to act on a specific time table at this point. So, I can't really give you any guidance as to when to expect any specific action from the agency related to that, except to tell you that it is still active and they have requested more time.

Okay. Just curious if they asked additional information or anything else. Thanks for taking my questions.

Thank you.

(Operator Instructions). Our next question comes from the line of Ted Tenthoff with Piper Jaffray. Please proceed with your question.

Great, thank you very much. Looking at just a little bit of housekeeping on the amount of money owed from Novo, should we expect that to be mostly falling in the second quarter, or will that be spread throughout the deferred revenues throughout 2010?

Hi, Ted, this is Jim. It is likely that most of that will fall in the second quarter.

Great.

It is dependent on essentially when we complete the transition activities, but I think it is safe to say that most of it will be in Q2.

Now, what should we be thinking of from Bristol in terms of reimbursement in that collaborative line as well for 2010?

Well, I think generally we are standing by the guidance that we put out in the -- in our February call. So no change there.

So total revenues of 125 to like 140?

I don't have it handy.

Yes.

Yes. But it hasn't changed, yes, that's right. 125 to 140.

Okay. Good. And then a quick question. You mentioned net sales. Can you say what the portion was? I mean, how is Bayer being paid here? Is that kind of subtracted from the net sales, so is there a gross sales number that is higher or how is that RECOTHROM one being reported?

When we say net sales, we are basically -- we are talking about taking the gross sales price less discounts, GPO fees, an allowance for returns, that sort of thing. The Bayer commission that we are paying now is actually not appearing anywhere on our P&L. As you may recall, when we restructured the deal in December, we agreed that we would continue to pay them 12 -- up to $12 million in commissions over the next two years. And we set up a liability for that amount, so the payments that we are making on that are being essentially relieved from that liability.

And there from the balance sheet directly then?

Correct.

And that is $12 million per year or $12 million over two years.

$12 million total over two years.

Great. Awesome. That's it. Thanks so much.

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

Thanks for taking my call. Question about the Phase 2A data here on the liver enzyme issue. Sounds like three out of 45 patients had elevated levels, which seems pretty good. How does that compare to the Phase 1? It is lower, but just for recollection purposes (inaudible - multiple speakers) --

Hi, this is Leni Ramos. So the Phase 1 study had six subjects out of 54 who had liver enzyme elevations that either led to dose discontinuation or dose limiting toxicity. So in essence, it is half to what we have seen so far in the Phase 2A.

And recall we didn't have the ability to dose modify patients in Phase 1B, so that along with the prefilled syringes and eliminating the variability that was intrinsic in making the dilution step in the Phase 1B study we think has led us to the point we are at now, where, as we said, we feel like we can manage this issue , and it is not an issue for us.

Is there any commonality to the three patients or perhaps the six patients, either genotype or severity or ethnicity, or anything in common with the patients that had elevated liver enzymes?

No, not really, except to say that the three subjects were on the -- were on the higher doses of Interferon lambda, which is consistent with what we saw with 1B.

Okay. Maybe one other question, too, on RECOTHROM. You mentioned that the hemostat market was a little soft in January. Any thoughts as to why?

Hard to say. I think it was an observation we made looking at the totality of the market. If you recall, Paul, we actually saw a similar situation with our fourth quarter to first quarter situation last year, so I don't know how much of it is seasonally related. But I think beyond the metrics that Jim sketched out in terms of one less week and drawing down the wholesaler inventory levels, those are really the firm facts we can throw out. And beyond that, I think it would just be speculation as to what was happening in the market there. But quite clearly January for everyone in hemostat area was a soft month.

Is that a year end budget flush possibility, too?

Again, it is hard to say. You could relate it to everything from bad weather on the East Coast to general economic conditions, but I think fundamentally we don't really have a clear-cut answer for you as to why January was soft.

Okay, great. Thanks for the questions.

Our next question comes from the line of [Jeremiah Shepard] with Wedbush Incorporated. Please proceed with your question.

Good afternoon, and thank you for taking my questions. Most of my questions have been answered, but one follow-up question is,have you seen any seasonality before for RECOTHROM in any of the months in Q1 in the past.

Hi, this is Steven speaking. Could you repeat that? I didn't quite hear your question.

Yes. Have you see any seasonality in for any of the months in Q1 in the past for RECOTHROM sales?

Well, it is difficult to say. I imagine you either purchase [Walter Clore] or IMF data, and you can look back month by month to see how the market is performing. As we look at it and as you get into ever smaller increments of time, the fluctuations you are likely to see is greater. But as we look back, for example, over the quarters for the prior four quarters, six quarters, the amount of fluctuation in terms of units actually sold as captured by IMF probably fluctuates up and down plus or minus 1%. So the market as we look it at it in that context seems to be fairly stable right now. So I wouldn't speak to any particular deviations. And Doug just tried to reiterate, we need to be cautious about speculating about one month versus another.

Okay. Thank you for taking my questions.

There appear to be no further questions at this time. I would like to turn the floor back over to management for closing comments.

This is Doug. I would just like to say thank you to everyone who participated in the call, and we will look forward to speaking with you next quarter.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.