Curis Inc (CRIS) 2005 Q1 法說會逐字稿

Good morning ladies and gentlemen and welcome to the first quarter 2005 Curis earnings conference call. My name is [Michelle] and I’ll be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today’s conference. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to the host for today’s conference, Mr. Dan Passeri, President and CEO of Curis. Please proceed, sir.

Thank you. Good morning and thank you for joining us. I’m Dan Passeri, president and chief executive officer of Curis. Welcome to Curis’ Q1 2005 conference call.

Before we begin I would like to remind you that any remarks we might make about future expectations, plans, and prospects for Curis constitute forward-looking statements for the purposes of the Safe Harbor Provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors including those discussed in Curis’ most recent Annual Report on Form 10-K, Quarterly Report on Form 10-Q, and any subsequent report filed with the Securities and Exchange Commission. Forward-looking statements discussed on today’s call represent our views only as of today, April 26, 2005, and we caution you that we may not update any of these forward-looking statements in the future as a result of future events, changed circumstances, or otherwise.

Any redistribution, retransmission, or rebroadcast of this call in any form without the express written consent of Curis, Inc. is prohibited. A telephone replay of today’s conference call will be available through May 10, 2005 at 5:00 p.m. Eastern time, and information about how to access the telephone replay is available on our website at www.curis.com.

On today’s call I will discuss our first quarter operational highlights and then Mike Gray, our chief financial officer, will review our financial results for the past quarter.

I am pleased to report that we made important strides with our collaborator, Genentech, in the first quarter of 2005. We advanced our basal cell carcinoma program through Genentech’s filings of an Investigational New Drug application. We are currently developing this product candidate with Genentech on an equal cost and profit sharing basis in the U.S. marketplace. We also signed a new deal with Genentech related to the discovery and development of small molecule modulators of an undisclosed pathway, and Genentech extended its funding of our Hedgehog inhibition cancer therapeutics development collaboration.

In March, Genentech filed an Investigational New Drug application (IND) with the FDA to initiate human clinical investigation of a drug candidate for the topical treatment of basal cell carcinoma. Assuming the acceptance of the IND by the FDA and the successful advancement of the basal cell carcinoma product candidate through Phase I and Phase II clinical trials, we anticipate the completion of Phase II clinical trials in mid 2007.

Earlier in the first quarter we exercised our co-development option with Genentech to develop this basal cell carcinoma product candidate. We believe that this represents a potentially substantial commercial opportunity for Curis given that basal cell carcinoma is the most common form of cancer with approximately 800,000 to 1 million new cases every year in the U.S. alone.

Under the terms of the co-development option, Curis and Genentech will share equally in U.S. development costs and any future net profits or losses derived from U.S. sales of this product candidate. In addition, we are entitled to clinical development milestones upon the achievement of certain development, clinical and regulatory approval objectives, and royalties on future sales outside the U.S.

In April, we announced our second major collaboration with Genentech. This collaboration involves the discovery and development of small molecule pathway modulators. Although we can’t reveal the pathway, we can tell you that the pathway of the key regulator of tissue formation and repair in its abnormal activation is associated with certain cancers.

Under the terms of this new collaboration, Genentech is committed to pay us an up-front license fee of $3 million and up to an additional $6 million over the next 2 years to support Curis’ research dedicated to the collaboration. The agreement also provides for Genentech to make additional cash payments to us that are contingent upon the successful achievement of certain developmental, clinical, and drug approval milestones. Genentech will also pay a royalty on the net product sales if product candidates derived from the collaboration are successfully developed. Assuming that the agreement continues to its full term and that specified research development and regulatory approval objectives are achieved, the total potential payments to Curis could exceed $140 million if two products are commercialized in two indications each.

In addition, we reserve the right to use small molecule modulators of the pathway that are discovered as a result of the collaboration for ex vivo cell therapy and research purposes in areas outside of oncology and hematopoiesis. This right is similar to our right to use Hedgehog agonists for research purposes as defined under our agreement with Wyeth. The ability to use the Hedgehog agonists for research uses enables us to generator motor neurons through drug discovery and development. In turn, our ability to create motor neurons was critical in enabling us to secure our 3-year $5.4 million research grant from the SMA Foundation. Through this example, it’s clear that these retained research rights have proven important in our efforts to continue to build our research pipeline. We are hopeful that our retained research rights under our new Genentech collaboration may be helpful in further bolstering this pipeline.

In April we also amended our first agreement with Genentech to extend their funding of the Hedgehog inhibition cancer therapeutics development collaboration between the two companies. Genentech will pay us $2 million in December 2005 to support the further development of the Hedgehog inhibition technologies for the treatment of solid tumor cancers. We feel that the extended funding demonstrates recognition of the valuable contribution that our scientists have made in advancing the systemic hedgehog inhibition drug candidates toward clinical testing.

As this program continues to progress, it is our estimation that Genentech will file an IND in 2006 for a compound for the systemic treatment of a solid tumor indication. FDA acceptance of an IND covered under this program would result in a cash milestone payment to Curis. This IND timeline is our estimate and Genentech has the primary responsibility for determining if and when human clinical trials will begin.

I would like to now turn to our Hedgehog agonist collaboration with Wyeth. In March, we announced that we had achieved a development milestone under our collaboration with Wyeth. This milestone is based on both companies’ continued progress in preclinical development of Hedgehog pathway agonists for the treatment of stroke, neurological, and other disorders. The achievement of this milestone, under which we earned a modest payment of $250,000, is an important next step in our goal of brining our Hedgehog agonist drug candidates towards clinical trials and ultimately to market.

Under our agreement with Wyeth, we estimate that Wyeth could file an IND in 2006 for a compound for the treatment of stroke, which would result in a cash milestone payment to Curis. Similar to our IND estimates under our collaboration with Genentech, it is important to note that the IND estimate is Curis’ internal estimate and that Wyeth has the primary responsibility for determining if and when clinical trials will begin.

Curis’ collaboration with leading pharmaceutical companies such as Genentech and Wyeth speak to the kind of Company we are and the work that we’re doing. As a small, early-stage Company, the fact that we continue to attract high-caliber collaborators is, I believe, a testament to Curis’ scientific expertise, core technology, and our unique approach to identifying novel product candidates.

While our collaborations with Genentech and Wyeth have resulted in significant financial investments in Curis, we have also been able to advance our own internal programs. Curis and third-party researchers presented and published data supporting our internal programs in the first quarter.

In February, our scientists presented data at the annual meeting of the American Academy of Dermatology. The data revealed that a small molecule Hedgehog pathway agonist drug compound could induce hair growth in a preclinical model. In this study it was shown that a topically formulated Hedgehog agonist that is applied to the skin results in a pronounced stimulation of hair growth. The study authors concluded that this application might be effective in treating hair disorders such as male pattern baldness and female pattern hair loss.

Our Hedgehog agonist technology was broadly licensed to Wyeth in 2004. However, as part of this license we retain certain rights, including the right to use Hedgehog agonists for hair growth regulation. Prior to our use of Hedgehog agonist compounds in our hair program, Wyeth had at first determined that they were not-- that these compounds were not optimal compounds for its own neurological disorders program and then had to in return-- or revert such compounds for our use. In December of 2004, Wyeth reverted several compounds for our use in the further development of our hair growth program. We have since re-synthesized these compounds and are currently performing additional preclinical studies on these compounds.

Based largely on our financial commitment to co-development of our basal cell carcinoma product candidate, we have determined that we’ll seek a collaborator for further development of the hair growth program. We also have consummated a hair collaboration during the next 12 months.

In addition to advances in our hair growth program, the March online issue of the Journal of the American Society of Nephrology contained a preclinical report by a third party demonstrating that treatment with BMP-7 protein results in the improvement of two major complications of chronic kidney disease. It is renal osteodystrophy, which is a bone disorder, and vascular calcification. A second third-party study in another publication showed that BMP-7 treatment of acute kidney disease resulted in improved kidney function and a reversal in tissue damage and scarring.

This quarter Curis was also awarded a United States patent entitled Novel Therapies for Chronic Renal Failure. The claims of this patent recite methods for improving kidney function by activation of the BMP pathway through the administration of BMP-7 protein or a related protein. The patent also specifies a method for delaying the need for or reducing the frequency of chronic dialysis treatment associated with end-stage renal disease. This patent has been licensed to Ortho Biotech products pursuant to the terms of our November 2002 license agreement.

So with the signing of another significant collaboration with Genentech and being in a position to move our first product in the clinic since our 2002 corporate restructuring, the beginning of 2005 has been very productive for Curis. We look forward to continuing this momentum and providing you with updates on our progress throughout the year.

I would now like to turn the call over to Mike Gray, our chief financial officer. Mike?

Thanks, Dan. I will begin my remarks by reviewing our financial results for the first quarter of 2005. In the first quarter of 2005, we reported a net loss of $5.1 million or $0.11 per share as compared to a net loss of $4 million or $0.10 per share for the prior year period.

Gross revenues, which are those revenues generated under our ongoing collaborations with Genentech and Wyeth, as well as our grant with the Spinal Muscular Atrophy or SMA Foundation, were $2.8 million for the first quarter of 2005 as compared to approximately $900,000 for the same period in the prior year, an increase of $1.9 million.

Our gross revenues for the first quarter of 2005 were as follows-- Genentech $1.3 million, Wyeth $900,000, and the SMA Foundation $600,000. A comparison of gross revenues for the same period in 2004 were as follows-- Genentech $500,000 and Wyeth $400,000. There were no revenues related to the SMA Foundation during the first quarter of 2004 since this grant was not received until September of ’04. As these numbers indicate, we experienced significant growth in our gross revenues when comparing the first quarter of 2005 to the same period in 2004.

In addition to our gross revenues, we have added a new line item to the revenue section of our statement of operations for costs incurred during the first quarter of 2005 in connection with our co-development of the basal cell carcinoma product candidate with Genentech. During the first quarter of 2005, we recorded $3.3 million as contra revenue related to these costs. The total of our gross and contra revenues resulted in negative net revenues of $500,000 for the first quarter of 2005, as compared to net revenues of $900,000 for the same period of 2004, a decrease of $1.4 million.

I would now like to spend a few minutes explaining the accounting treatment relating to this new contra revenue line item. We followed applicable accounting rules as outlined in Emerging Issues Task Force No. 01-9 in accounting for our co-development costs. This rule deals with the accounting for payments made from a vendor to a customer. The rule is very broad. It’s now if the vendor/customer relationship exists then the rule applies. In our case the rule is applicable since we as vendors sold to Genentech, our customer, a broad license to our Hedgehog antagonist technologies in June of 2003.

The rule states that any payments made from a vendor to a customer must generally be treated as contra revenue. The rule cites two exceptions where such payments may be recorded as an expense instead of as contra revenue. For payments to be recorded as an expense both exceptions must be met. The first exception is a fair value test that asks is the vendor paying in excess the fair value for the services. In our case, we believe that we passed this first test since we’re reimbursing Genentech only for our share of co-development costs. There is no profit element built in for Genentech, so, if anything, we believe we’re paying below fair market value for these services.

The second test deals with the ability of the vendor to receive the same goods or services from another third party. We failed this test since Genentech is the only third party that can perform this service for Curis. This is based, again, on Genentech’s broad license to the Hedgehog antagonist technologies.

Because we failed the second test, the rule states that we must account for our costs incurred in connection our co-development of the basal cell carcinoma product candidate as follows--

Co-development payments are first recorded as contra revenues so long as the cumulative revenue recorded under the collaboration exceeds the co-development costs. From the Genentech collaboration’s inception in June 2003 through March 31, 2005, we have recognized approximately $3.8 million in cumulative revenue. During the first quarter of 2005, we incurred co-development costs of $3.3 million. Since our co-development costs incurred were less than the total cumulative revenues recorded under the collaboration, we recorded the entire $3.3 million as contra revenue. This charge to contra revenue resulted in negative revenue for the first quarter of 2005.

When co-development costs exceed our total cumulative revenues under the Genentech collaboration, we will continue to record contra revenues against any future revenues recognized. Any co-development costs in excess of these future revenues will be offset first against amounts recorded on our balance sheet as deferred revenue related to Genentech, and once deferred revenue has been reduced to zero then to research and development expense. As of March 31st we have recorded approximately $6.8 million in deferred revenue under our Genentech collaboration.

In future periods we expect that any revenues recorded under our Genentech collaborations will likely be offset by co-development costs resulting in no net revenue from Genentech until either we start receiving our share of operating profits from the commercial sale of the basal cell carcinoma product candidate should any sales ever occur or until significant milestones from royalties occur.

By the way, I would just like to say that it’s important to note the classification of our co-development costs as contra revenue had no impact on our earnings per share of cash balances. It’s a matter of how the co-development costs are classified on our statement of operations as required by accounting rules. The net effect is that while this accounting treatment results in a reduction of our gross revenues, I believe that it should be regarded as a classification issue only.

For investors to whom Curis’ revenue is an important metric, we expect to continue to present contra revenue as a separate line item so that period-to-period comparisons can be made to our gross revenues. In addition, we plan to include transparent disclosure regarding our basal cell carcinoma co-development costs, particularly in future years when a portion of the co-development costs will likely be recorded as either an offset to deferred revenue on our balance sheet or included within research and development expense in our statement of operations.

I would like to now turn to operating expenses. Operating expenses for the first quarter of 2005 were $4.8 million as compared to $5 million for the first quarter of 2004, a decrease of $200,000. The changes in our research and development and general and administrative operating expense categories are as follows--

Research and development expenses were $3.1 million for the first quarter of 2005 as compared to $2.8 million for the same period in the prior year, an increase of $300,000. The increase was primarily attributable to an increase in spending related to our SMA program. This increase was partially offset by modest decreases in spending on our other programs. Our SMA research program is funded under a grant from the SMA Foundation.

General and administrative expenses were $1.7 million for the first quarter of 2005 as compared to $1.9 million for the same period in the prior year, a decrease of $200,000. The decrease was attributable to decreases in various administrative cost categories, including reductions in personnel, occupancy and depreciation, insurance, and other expenses.

As of March 31, 2005, cash, cash equivalents, marketable securities and investments, including our long-term investments, were $46.9 million. As of March 31, 2005, there were approximately $47.9 million shares of our common stock outstanding.

I would like to wrap up my remarks by providing some financial guidance for 2005. First, we believe that exiting cash, cash equivalents, marketable securities and investments, together with contractually defined cash payments that we expect to receive from our collaborations with Genentech and Wyeth and from our research grant with the SMA Foundation will be sufficient to support our current operating plans into mid 2007. We expect to end 2005 with cash, cash equivalents, marketable securities and investments of between $36 and $39 million. As always, we plan to continue to carefully manage our cash requirements and spend rate.

Further, assuming that our current collaborations continue through the remainder of 2005, we expect that our gross revenues stemming solely from our existing collaborators and excluding any future development milestones will range from $11 to $13 million. We expect the 2005 costs for our basal cell carcinoma product candidate will be in a range of $8.5 to $9 million and that all of these costs will be recorded as contra revenue.

I would also like to reiterate earlier statements that we expect our equal share of basal cell carcinoma co-development costs to approximate $20 million through Phase II clinical trials, which we project to occur in mid 2007, assuming the successful completion of our Phase I clinical trial.

Lastly, we expect that our 2005 research and development expenses will be between $13 and $15 million and that our general and administrative expenses will range from $7.5 to $9 million.

Thanks. I’ll now turn the call over to Dan for some closing remarks. Dan?

Thanks, Mike. In closing, the accomplishments of Q1 this year are indicative of the type of progress, growth, and achievements possible for Curis. We have a deep portfolio of core assets, a well-aligned and balanced business model, and a growing revenue stream, all of which continue to position us for future success.

We’ve also taken a more robust stake in certain of our collaborations as evidenced by our election to co-develop the basal cell carcinoma product candidate with Genentech while also remaining focused on readily advancing our internal development programs.

We’re very excited about the prospects of Curis in 2005 and look forward to updating you throughout the year. I would like to thank everyone for joining us on today’s call, and we’ll now open the call up for questions. Operator, I would now like to open up the call.

Thank you, sir. [OPERATOR INSTRUCTIONS]. Our first question comes from the line of John Sullivan of Leerink Swann. Please proceed.

Hey guys. Good morning. Can you hear us?

Yes. Hi, John.

Great. I just wanted to ask you, what do you say to investors that look at the success of Genentech’s Avastin and think that maybe that sets up Genentech for the next several years regarding solid tumor when they think about your Hedgehog inhibiting small molecule? Do you think that there’s a place in cancer treatment for Genentech delivering small molecule for solid tumors, specifically as your partner, given the success that they’re currently having with another drug?

Sure. Great question. So the background for that is Avastin addresses an element of the angiogenesis pathway, VEGF, which is one element that’s downstream of the Hedgehog pathway. Avastin, I think it goes to show that the need for further development in oncology. Avastin is cutting edge, but its success is basically to extend the life of patients by several months, hopefully, longer than that, but typically tumors are able to rebound and respond by working around that blocking of the pathway ultimately. So this would be another tiered approach. It would be looking at an upstream intervention. And, frankly, a lot of these solid tumors are going to have to be hit in a multi-tiered strategy. So this is looked at as a platform approach and another member of the Genentech arsenal to fight cancer.

Okay. Thanks for that. And you have any sense of Genentech yet regarding this candidate in solid tumor cancers what sort of timeline do you think that the investors should be looking at?

In terms of the solid tumor program, what we’re focusing on now is identifying the lead candidate to bring into their development pipeline. Publicly, they’ve stated that they’re very enthused by the program, very encouraged by the data that’s been generated. Again, it represents sort of a platform approach for multiple solid tumors. We anticipate the selection of a small molecule lead candidate into their development pipeline by mid ’05 and then you can forecast approximately 12 months after that for it to go into the clinic.

Okay. Thanks very much.

Our next question comes from the line of [Jeff Putnam] of UBS [O’Connor]. Please proceed.

Hey, Dan. How are you?

Hi, Jeff. How are you doing?

Good. The estimate for cash at year end, $36 to $39 million, does that have any assumptions on a potential partner for hair growth?

No. This is Mike. I’ll take that one. That includes only contractually obligated payments from existing collaborators, no new collaborations, no milestones. It’s kind of a worst case cash position.

Okay. Excellent. Thanks a lot guys.

[OPERATOR INSTRUCTIONS]. Our next question, sir, is a follow-up question from John Sullivan. Please proceed, sir.

Hi. Sorry about that. I did have one additional question. It concerns cash burn as well. Can you talk about head count currently, what it was at year-end 2004 and what you would anticipate it to be at year-end 2005?

Yes. It has consistently been in the range of 65 to 70, and we anticipate holding it there unless we have expansion in additional programs that basically warrant additional head counts.

Specifically, regarding the self-developed hair growth program, you don’t feel as though you’re going to have to add some system clinical expertise that will raise the head count significantly?

No. As we stated, John, in the hair program we’re going to be looking for partnering that during the next 12 months. And, again, if the partner wants us to collaborate with them in doing some of the preclinical studies, we will be looking for financial support to cover those FTE’s.

Okay. Terrific. Thank you very much.

Ladies and gentlemen, this does conclude the question-and-answer portion of today’s conference call. I would like to turn the presentation back over to Mr. Dan Passeri for closing remarks.

Okay. I just want to thank everyone for participating in the conference call, and we look forward to next quarter giving you additional updates.

Ladies and gentlemen, thank you for your participation. This does conclude your presentation. You may now disconnect. Good day.