施貴寶 (BMY) 2010 Q2 法說會逐字稿

Greetings, and welcome to the ZymoGenetics 2010 second quarter financial results conference call. (Operator Instructions.) It is now my pleasure to introduce your host, Susan Specht, Director of Corporate Communications for ZymoGenetics. Thank you, Ms. Specht. You may now begin.

Good afternoon, everyone, and welcome to our 2010 second quarter 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 the Form 10-K, for more information. And now I'll turn the call over to our CEO, Doug Williams.

Thanks, Susan. And good afternoon to everyone. Thank you for joining us today for our second quarter earnings call. We're very pleased with our performance during the quarter with continuing revenue growth in RECOTHROM, progress moving our development candidates forward towards important data events, and ongoing benefits in our cost structure due to last year's restructuring.

Besides Susan, I'm joined by Stephen Zaruby, our President; Lenny Ramos, our CMO; and Jim Johnson, our CFO. I'll begin by updating you on progress on our clinical development programs, then I'll review progress with our commercial product RECOTHROM, which provides a nice segue to Jim, to discuss the Company's second quarter financial performance.

I'm pleased to report impressive progress in the development program for Interferon lambda. As you know, we and our partner Bristol-Myers Squibb see this molecule as having the potential to become the Interferon of choice for the treatment of HCV. The Phase IIA study is progressing according to plan, and we continue to observe safety and antiviral activity consistent with our expectations. We committed a total of four abstracts to the AASLD meetings on lambda. All four abstracts have now been accepted and we'll present four-week and 12-week viral response data in genotype 1, 4 and genotype 2, 3 patients, along with safety and tolerability.

We also plan to present our early data IL28b genotype and examine the relationship to antiviral response, including viral kinetic modeling. Despite the relative small sample size of the Phase IIA study, these data will provide important insights into the market potential for this molecule.

Moving now to the ongoing Phase IIB study, we're enrolling patients very rapidly in this study. We began enrollment in this 600 patient, blinded randomized Phase IIB study in late May, with the expectation to complete enrollment by the end of the year. We're accruing well ahead of expectations and we now anticipate completing enrollment in this quarter. Top line data on the primary endpoint of the study, 12-week viral response, or cEVR, will be available to us in the first quarter of 2011. As a reminder, this study is a head-to-head comparison of PEGASYS plus ribavirin at the labeled dose versus three doses of lambda plus ribavirin. Each cohort will be composed of 120 genotype 1,4 treatment-naive patients and 30 treatment-naive genotype type 2, 3 patients. IL28b polymorphism data is being collected, and patients will be treated for the standard 48 or 24 weeks depending upon viral genotype.

The very rapid enrollment to this study is a testament to both the talents of our clinical team and the enthusiasm of the HCV-treating physicians for this exciting new Interferon.

Another important development is our decision to initiate a Phase II study of Interferon lambda in hepatitis B virus in the fourth quarter. Since Interferons can potentially lead to a cure in hepatitis B patients, and our partner BMS is a recognized leader in this area, we see this as an attractive additional market to pursue. To remind you, there are 350 million people infected with hepatitis B worldwide.

Interferons are dosed for 48 weeks, and tolerability of Interferon alpha is just as much of a problem in HBV as HCV, making lambda an attractive potential alternative. Furthermore, by conducting a trial in HBV, where ribavirin isn't routinely used, we can generate direct comparison data between lambda and alpha without the inherent tolerability issues of ribavirin. The decision to proceed in this indication is important to ZymoGenetics because it opens the way to additional milestones beyond those for HCV, as well as expending the revenue opportunity for this drug by moving into a second potentially large global market.

We've also made substantial progress in advancing our IL21 program in frontline metastatic melanoma. We hold the worldwide rights to this asset and have a very strong intellectual property position. Our collaborators from the National Cancer Institute in Canada made an oral presentation at the recent ASCO meetings on our Phase IIA data. We reported impressive response rate, disease control and progression-free survival results from the study, which looked better than prior study results with DTIC or ipilimumab. The results showed more than a doubling of PFS compared to matched historical controls at NCIC in both BRAF positive and negative patients.

The safety data supports moving forward with the 30 microgram per kilogram dose as an outpatient dosing regimen with observations to date suggesting a manageable and reversible side effect profile. We'll be conducting a survival assessment of patients this month, which marks the one year anniversary of the last patient entering the study, and expect to be able to report median overall survival in Q4.

In the meantime, we've initiated a Phase IIB randomized study of DTIC versus IL21 as a single agent in stage 4 first line melanoma patients. Study sites are activated, and we expect to begin treating patients soon, and we anticipate having top line results available in the second half of 2011 for the PFS primary endpoint. We believe that PFS is an appropriate endpoint for a rapid acting drug like IL21, and we anticipate improvements in PFS should translate to improvements in overall survival.

Of the objective responses we've seen in Phase IIA, six of nine occurred in the first cycle of treatment, and two more in cycle two.

This study should provide important insights into the design of a commercially appropriate Phase III study while allowing us to understand the market impact of other new agents in late stage development.

Finally let me finish with our marketed product, RECOTHROM. Net sales of RECOTHROM were up substantially compared to Q1 of 2010, and were nearly double the net sales in the same quarter last year. Hospital demand for RECOTHROM is continuing to increase steadily, as is our market share. Consistent with our business plan, we're now successfully converting large hospital groups over to RECOTHROM and in parallel have put in place programs to accelerate the actual conversion process inside an institution once this decision has been made. We began to see the positive impact of these programs in June.

Based on our expectation for continuing steady growth, augmented by these large account conversions, we continue to believe that our net sales for 2010 will be in the $48 million to $54 million range. I'd now like to turn it over to Jim Johnson to talk about the financial aspects of our business, and then we'll take your questions.

Okay. Thanks, Doug. The Company's second quarter was strong from a financial perspective. Compared to the second quarter of 2009 we had substantially higher revenues and lower operating expenses. As a result net loss for the quarter declined to $3.8 million or $0.4 per share compared to $27 million or $0.39 per share a year ago.

Net sales of RECOTHROM were $11.9 million for the quarter, nearly doubling from $6 million in the second quarter of 2009. And compared to the first quarter of this year, net sales were up by 32%. The increase was driven by positive trends in hospital demand and market share, plus two other important factors. One was wholesaler inventory patterns. There was no significant change in wholesale or inventory levels in the second quarter, but there was a decrease in the first quarter that reduced our reported net sales and contributed to a higher percentage increase in Q2.

The other important factor was a temporary program designed to accelerate customer conversion, instituted in June, which added approximately $700,000 to our second quarter net sales. Collaboration and license revenues for the quarter were $25.6 million compared to $16.6 million in the second quarter of 2009. The amount this quarter was largely the recognition of revenue under two agreements. $15.7 million from our Interferon lambda collaboration with Bristol-Myers Squibb. And $9.8 million from the IL21 antibody license with Novo Nordisk.

The Novo Nordisk revenue included a $1.5 million milestone payment related to filing of a clinical trial application in Europe, as well as full recognition of all remaining deferred revenue from the upfront license fee. Over the next two quarters, we expect the revenue decline related to the IL21 antibody agreement to be offset by increased Interferon lambda revenue and an $8.5 million milestone payment from Novo Nordisk triggered by the start of Phase I testing for the IL21 antibody.

We continued to see lower operating expenses in the second quarter of 2010, resulting from our 2009 restructuring. R&D expense for the quarter was $23.7 million, which was 19% lower than in the second quarter of last year.

The reduction related to the restructuring was actually much greater than this, but it was partially offset by a substantial increase in costs for the Interferon lambda Phase II program. In the second half of this year, Interferon lambda Phase II clinical costs will continue to increase, particularly given the accelerated completion of patient enrollment. SG&A expense was $12.6 million, declining by 25% versus the second quarter of 2009.

And besides the impact of the 2009 restructuring, the decrease reflects the reclassification of selling commissions to Bayer and reduced legal and other professional fees. Stock-based compensation expense was $2.4 million for the quarter, with a roughly equal split between R&D and SG&A expense.

Looking forward to the second half of 2010, we expect that the accelerated timeline for the Interferon lambda Phase IIB study will have a significant impact on our financial results for the year, and therefore we're updating our guidance as follows.

R&D expense is now expected to be in the range of $90 million to $100 million for the full year. This is an increase of $15 million from our earlier guidance, which largely represents a shift of Interferon lambda clinical costs from 2011 into 2010. This increase will flow through to our total expenses as well, increasing the expected range by $15 million. Total revenue for the year is now expected to be in the range of $155 million to $165 million.

The entire $25 million to $30 million increase versus our previous guidance is related to Interferon lambda license and collaboration revenue, which we record in proportion to our costs incurred. There's no change to our RECOTHROM sales guidance. Net loss is now expected to be in the range of $10 million to $20 million for the full year, which is a $10 million to $15 million improvement from our previous guidance. Net loss per share is expected to be between $0.12 and $0.23. There's no change at this time to our cash flow guidance. We continue to expect to end the year with cash and investments totaling $140 million or more. Back to you, Doug.

Thanks, Jim. To summarize for you, we've had a very strong quarter on both the financial and operational fronts. Revenues are up. Expenses are down. And our product RECOTHROM continues to gain market share with an expectation that in Q4 we'll achieve cash flow break-even status for the product on a standalone basis.

Interferon lambda is moving more quickly through the randomized Phase IIB study than we'd anticipated, and we expect top line data from this important study in Q1 of 2011. We're also expanding the Interferon lambda program into hepatitis B. Finally we're encouraged by our melanoma data with IL21, and have initiated a randomized study to build off the impressive outcomes reported at ASCO from our Phase IIA study.

I'll now be happy to take your questions along with Jim, Stephen and Lenny.

(Operator Instructions). Our first question comes from Brian Abrahams from Oppenheimer & Company.

Thank you very much for taking my questions and congratulations on the progress. Couple questions on lambda, on the Phase II trial. Just wondering if you could talk us through the factors that went into your decision to choose the three higher doses in part A to look at in part B? Was that primarily based on efficacy? Was it primarily based on safety? I guess, how did you think about choosing the doses?

Yes. The doses were chosen based largely on the basis of efficacy. When we looked at the lowest dose that we tested in the Phase IIA study, it was clear that the kinetics of the decline in HCV RNA were not as good at the 80 microgram dose as what we were seeing with the PEGASYS control arm, and so we dropped out the lowest dose in favor of moving forward with the top three doses, all of which met our preset safety criteria for moving forward.

Got you. And then you mentioned that safety and efficacy have been tracking in line with your expectations. Is that for did you mean for lambda only or for both lambda and PEG Interferon alpha control?

I'm speaking specifically in terms of lambda. Again, sort of looking back at our Phase IB experience, what we're seeing in terms of both safety and efficacy is largely in line with what we've seen before. So no real surprises there.

Great. And then just a quick housekeeping question, I guess for Jim. It looked the COGS this quarter declined substantially versus your historicals. I mean, how should we think about those going forward? I apologize if you had mentioned this already. What are the factors that caused that this quarter? Thanks.

Okay. Yeah, I think, for the quarter, our COGS are running at a similar rate to what they were in the first quarter. But we continue to expect that for the year in total our cost of sales as a percentage of net sales will be closer to 28%. We expect COGS are going to increase in the third and fourth quarter because we basically relieve inventory on a specific identification basis. And the lots that we'll begin selling in Q3 and in Q4 will be the first ones where we'll include the full cost of manufacturing. Which includes the costs of bulk drug, which had been expensed previously, because it had been manufactured prior to FDA approval.

The other factor that will be coming in, in the fourth quarter most likely is that under our fill and finish contracts we had some minimum purchase commitments that temporarily will result in some higher per unit costs for drug while we work through that manufactured in the years where there are commitments.

Got you. Thanks. That's very helpful.

Our next question comes from Edward Tenthoff from Piper Jaffray.

Thanks very much. I was on the wrong line for part of the early call. I apologize for that. If you could repeat what you were saying about the acceleration of the IIB. I think this is very exciting. And what will we be seeing at AASLD in particular? Will we some IL28b data broken down?

Yes, hi Ted, this is Doug. At AASLD you can expect to see four-week and 12-week data from the Phase IIA study. We will also have the correlation with the IL28b polymorphism. We will be correlating that obviously with the four and 12 week data as well as some viral kinetic modeling that's been done. We've got a couple of other abstracts, one that relates to the PK of the molecule.

Again, another one that relates to the viral kinetic modeling. And then there's a study that was submitted by some Bristol investigator to look at the in vitro effects of lambda in combination with some direct antiviral agents. So those are the four abstracts you'll see at the AASLD meetings. And then with respect to the acceleration of Phase IIB accrual, I think it's really -- it speaks to the fact that investigators are very enthusiastic about getting their patients on the drug.

We expected it would take us until close to the end of the year to complete accrual. And I think based on what we've seen since the end of May when we started the study, it's clear that we should be finished with accrual in this quarter. So we're very pleased with the way this study has gone. And obviously it accelerates the time to the primary endpoint by about a quarter.

Yes. So when should we be getting -- so I guess in terms of RVR, EVR data, and ultimately SVR data, what would be your timeline expectations?

Well, you can probably do some calculations. If we finish up the accrual in this quarter, we should have the data available on the primary endpoint, which is cEVR, the 12-week data, in the first quarter of next year.

Right.

So that obviously allows you to calculate from that point on the timing for RVR and also for the SVR endpoints in the two different viral genotypes.

And would likely-- last question. Would you likely keep the RVR data until you report cEVR or do you think you would do them separately?

I think -- it's a blinded study, so we will wait and --

Yes.

Obviously we'll have the primary endpoint. We'll have to make some sort of public release about that data at that time.

Perfect. Thanks for reminding me.

Thank you. Our next question comes from Jonathan Eckard from Leerink Swann.

Hello. Thanks for taking the questions. I just had a quick question. Could you remind us what the regional -- what regions the Phase IIA and Phase IIB are being conducted in?

I'll let Lenny answer that.

Hi. The IIA study was primarily in North America. So that's US and Canada. And the 2B study is a global study being conducted in North America, Europe and Australia.

That's great. And with regard to the RECOTHROM conversions, it seems like that was a successful program you had initiated late in this quarter. Do you have a waiting list of other centers that are ready to convert? Should we expect acceleration of this in the second half, or is it just something that happens from time to time?

Yes. Hello. This is Stephen Zaruby speaking. I'll answer that for you. I mean, it was -- the issue of conversion, it's always one really that confounded us insofar as any given institution would sign a contract with us to convert. And we'd know that they would only have two, and in some cases four, weeks of inventory, yet the entire conversion process might take up to 12. And so we thought of different ways where we could help accelerate that process from the time where they would sign a contract with it through until they actually start using the compound. And it entails a whole number of different aspects, including at very much at the customer level we go in and aggressively work with them to help their institutions or that hospital to convert. This is, as was stated, a temporary program, it was conceived of during the middle of last quarter, and we expect it to run at this point in time no further than the middle of this quarter.

Ok. Thank you. Then the last question is regarding the IL21 survival data? Sorry if I missed it, but what kind of form or what kind of disclosure of that data would you choose? Would you do a top line and then present at a meeting or save it all to a meeting?

Yes. I think the likelihood is we would release the top line data sometime in Q4 when we have it.

Great. Thank you very much.

Thank you. Our next question comes from John Sonnier from William Blair & Company.

Thanks for taking the question and congratulations on all the process, especially the rapid accrual into the lambda study. And my question's really about lambda. I'm trying to get a sense of what happens next, Doug and Lenny, we get into January. How fast can Bristol move? In other words, is the 12-week data enough, assuming the profile is consistent with what we've seen, for them to advance into Phase III? Or are they going to wait for longer-term data?

Well, the working assumption that both of us have, that the joint team has, is that cEVR, that that primary endpoint data will drive the activities that would allow for the initiation of the first Phase III study. So we're both working with that as an assumption, with the working hypothesis now that that would be initiated sometime in the second half of next year. So we're both on the same page with respect to the data that we would have available to us being what we need to drive the process of initiating the first of the Phase IIIs.

Okay. That's helpful. And you may have said it, I apologized if I missed, but the hepatitis B study, can you give us any more granularity on how big that trial is and when it starts?

Hi John, it's Lenny. The B study is about a 200 patient trial that will be initiated in the fourth quarter of this year. It will be looking at, we think, about two doses of lambda with a control arm of PEGASYS. And it will be traditional 48-week therapy with Interferon and a 24-week follow-up.

(inaudible - overlapping speakers) AL nucleotide analogs?

I'm sorry?

Are these people -- would these be Baraclude or Viread failures? (inaudible) I'm trying to get a sense of what type of treatment population it is.

These will be treatment-naive subjects.

These are treatment-naive. Okay.

Yes.

That's perfect, thank you.

Okay.

Thank you. Our next question comes from Nicholas Abbott from Barclays Capital.

Good afternoon, everyone. Thanks for taking my questions. Doug, can you let us know whether any of the abstracts that have been accepted for presentation at AASLD are going to be oral?

No. They're all going to be poster sessions as we understand it. I think three of them on the Sunday, and the in vitro abstract I believe is on the Tuesday morning.

Looking a little bit more on the IL28 polymorphism data. And if I look at the intact study, obviously that was used to generate a lot of this data, and I look at the frequency of the TT genotype I would estimate there would probably be about ten or fewer patients that were TT in your IIA study. So about two per group. So am I in the right ballpark there?

Yes. You know, I think based on what we know about the distribution of the different alleles, and given the sample size of about 55 subjects, we will have obviously relatively small proportions of each of these subtypes. But we will be presenting as much data as we can, that we were able to gather in terms of the polymorphism at the meeting at the AASLD.

Will that come just from the 2IIA data or from other?

Oh, it will be from the IIA data, because the IIB, the ongoing IIB, as you've heard, is a blinded study.

I didn't know if you had data maybe from the Phase I. That was all.

Yes. You know, we were interested in gathering information from the IB, but I think retrospectively to try to get patients' informed consent, and so forth, it was a bit of a challenge. So really the data we'll have is the IIA.

Okay. My last question really relates to sort of how you view treatment of hepatitis C in four or five years' time. And I guess sort of predicated upon the fact that, as Mark Twain would say, that the death of Interferons has been greatly exaggerated. And I'm also going to refer to a recent publication from a Los Alamos group who we doing computational modeling based on the telapravir data. And they had a very interesting point at the end, which was that if you did an Interferon lead in, it would tell you whether you would need, say, two direct antivirals or maybe four direct antivirals based on the log drop. Assuming these things are going to be rather expensive, that might be a way to avoid overtreating patients, but also it sort of reemphasizes the well-tolerated Interferon likely will remain the core of treatment. So I'm wondering what your thoughts are about how you think the treatment landscape will develop.

Yes. So, Nick, these are all good points. I think there's a couple of things that we should understand about how the field is evolving. I think the 28B polymorphism will probably be, we believe, playing a significantly role down the road with respect to whether all patients will require triple therapy, including a DAA. It's very conceivable that TT subtypes would only need Interferon with ribavirin, therefore double therapy alone. And then even those subjects who will be candidates for triple therapy, not everybody responds.

So it not -- as you said, it's not black and white. There will always be subsets of patients that will require Interferon. And lastly, I think of all the viral diseases that we know of today, the major viral diseases, HIV, HBV, HPV, the only where we can see a cure is in HCV. And that's probably because of the amino-modulating effect of an Interferon. So I think until that's proven, that you do not need Interferon to achieve cure, there's a significant burden of proof to be able to say that Interferons will not be needed in the future.

Okay. Thanks for answering my questions.

Thank you. Our next question comes from Chad Messer from Piper Jaffray. Mr. Messer, the line is live.

I apologize. Yes. Thanks for taking the question. A lot of what I would ask has been covered, but I did want to ask a couple of things. As I try to think of R&D spend going past 2010 and into 2011, obviously with the increased activity on Interferon lambda, more is going to be getting spent there. But I also believe the shift of the burden after $100 million in spend goes down on your side to 20%. So I was just wondering how we should think directionally about R&D spend in 2011.

Sure. This is Jim. I'll take that question, Chad. Clearly a big inflection point is going to be when we complete payment of the first $100 million of funding. And right now we expect that will be in the first quarter some time, first quarter of 2011.

So we'll have less than a full quarter of costs in 2011 where we're paying the full amount. At that point we shift to 20% funding obligation, and I think it's difficult for me to actually quantify that and give you a sense of what that means in terms of absolute numbers. I can tell you that in our 10-Q, in the MD&A, we reported about -- through the first six months of this year, about $18.5 million of -- I'm sorry, I think that's the wrong number. Almost $19 million of costs related to Interferon lambda.

And that's not fully loaded. Plus generally speaking we expect over the course of this year, I think I mentioned earlier that we expect costs to continue to go up in Q3 and Q4. So even if you took that and doubled it, you'd still be coming in quite a bit below what our expenses are going to be in 2010. So I think you can get a sense it's a pretty big number in 2010. It's probably more than half of our R&D spend. That basically drops down to -- by 80% for most of next year. So clearly both in terms of our expenses next year and our cash burn, there's going to be a dramatic shift.

Thank you. That's very helpful.

Thank you. (Operator Instructions). Our next question comes from Paul Latta from McAdams Wright and Ragen.

Thanks for taking my question. Was hoping that you could give just a little bit more detail about the IL21 Phase II that just started in June here, in terms of patient counts and timeline targets.

Yes. Hi, Paul. This is Doug. Very straightforward study design. It's 40 patients per arm. And what we're anticipating is that we would complete accrual some time in the middle of next year and have top line data for the primary endpoint, which is PFS, available in the second half of next year.

Okay, okay. Also, one other question, too, with the AASLD approaching here, probably quite a lot of us will look toward comparable treatments, and I know there's always pitfalls when you do that, because they're not head-to-head studies, but is there anything that we need to bear in mind with regard to some of the data, for those of us that may go through that exercise?

Well, I think it's tough to find anything that is really comparable to lambda in the sense that unlike alpha, where there are a number of alpha-like molecules in development that I think you can make some reasonable comparisons to, we're the only lambda game in town, if you will. And so it's difficult to make those comparisons. I think this is likely to be a very data-rich AASLD meeting with a lot of emphasis on late-stage data from some of the direct antiviral agents. So I think it's going to be an important meeting in terms of really kind of benchmarking in a comparative sense a number of the small molecule drugs that are in the later stages of development, and really giving us a sense of how the market is going to evolve, I think, a little bit better than we've seen in some of the previous meetings.

So from a comparative perspective, I think lambda sort of stands on its own, and we think is really a unique asset that will occupy sort of a cornerstone place in combination regimens. But I think the drugs to which lambda will be added will start to, I think -- it will be a little more apparent who the winners and losers are going to be, I think, perhaps starting at this AASLD meeting.

Okay. Great. Thanks for taking the questions.

Thank you. At this time we have no further questions. I'd like to turn the call back over to Doug Williams for any closing comments.

Just I'd like to thank everyone for participating in the call, and we'll speak to you again in our next quarterly call.

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