Curis Inc (CRIS) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the fourth-quarter 2006 Curis earnings conference call. My name is Twalecia and I'll be your coordinator for today. At this time, all participants are in listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to your host for today, Mr. Mike Gray. Please proceed, sir.

Thank you. Good morning. Thanks for joining us. I am Mike Gray, COO and CFO of Curis. Welcome to the fourth-quarter 2006 and year-end 2006 conference call.

Before we begin, I would like to remind you that this conference call may contain statements about Curis' future expectations, plans, prospects that constitute forward-looking statements for purposes of the Safe Harbor provisions of 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 risks relating to both our and our collaborators' abilities to successfully research, develop, obtain regulatory approvals for and commercialize products based upon our technologies, our ability to obtain and maintain proprietary protection for our technologies and product candidates, competitive pressures, our ability to maintain strategic collaborations and licensing agreements, including with Genentech, Wyeth, P&G, and Ortho Biotech, Centocor, our ability to raise additional funds to finance our operations and those factors described in our quarterly report on Form 10-Q for the quarter ended September 30, 2006 and other reports that we file periodically with the SEC.

The forward-looking statements included in this conference call represent our views as of today, February 14, 2007. We anticipate that subsequent events and developments will cause our views to change. While we may elect to update these forward-looking statements in the future, we specifically disclaim any obligation to do so. These forward-looking statements should not be relied upon as representing our views as of any date subsequent to the date of this conference call.

A telephone replay of today's conference call will be available through February 28, 2007 at 5 p.m. Eastern Standard Time and information about how to excess the telephone replay is available on our website at www.curis.com.

Now I would like to introduce Dan Passeri, our President and CEO. Dan will begin our call with a discussion of fourth-quarter operating highlights and I will return later to review financial results for the fourth quarter and year-end 2006. Dan?

Thanks, Mike. Good morning. 2006 was a challenging yet highly productive year for Curis. We began 2006 with the decision not to advance our Phase I basal cell carcinoma topical drug candidate into Phase II testing. Since that time, we have been working diligently toward our goal of becoming a highly productive and successful drug development company, focused on cell signaling pathways, particularly in the development of small molecule drug candidates for cancer.

We took a number of deliberate strategic steps in 2006 designed to enhance our development capabilities and capacities. Most notably, we focused our business strategy on developing later stage preclinical drug development programs with a goal of ultimately advancing such programs into the clinic and deemphasized our earlier stage discovery research.

Furthermore, we launched several proprietary development programs that are principally focused upon designing multiple classes of compounds that we call multi-target inhibitors.

I would like to begin by providing more details on the status of our strategic shift from discovery research to later stage preclinical and ultimately clinical development programs. Our corporate development strategy has consisted of steps taken to systematically enhance our competencies and capacities to build a deep and robust pipeline of promising drug candidates.

The first stage of this strategy taken during the early phases of Curis' development was to seek collaborations with leading drug development companies such as Genentech, Wyeth and Procter & Gamble in order to gain valuable access and insights from collaborating with top tier drug developers.

Through this initial stage, we have successfully developed a highly professionalized preclinical drug development capacity, particularly in the area of oncology. Much of this shift is evidence to the progress of our multi-target inhibitor drug candidates under development through our Targeted Cancer Drug Development Platform.

Each multi-target inhibitor consists of dual pharmacophores. That is the active drug components that are covalently linked to one another to form single small molecule drug compounds. This approach has been used to launch multiple separate programs, each focused on a specific profile of multi-target inhibition or clinically -- of clinically or biologically validated cancer targets using individual classes of dual pharmacophore compounds. Each program represents an individual class of small molecule, multi-target inhibitors.

Each of these multi-target inhibitor programs is designed to target a diverse range of validated kinase and non-kinase cancer targets and seeks to create a single compound with improved potencies, therapeutic -- better therapeutic efficacy and reduced toxicities when compared to treatment with two separate drugs.

Our basic drug design is based on these dual pharmacophores, which we generically refer to as pharmacophore A and pharmacophore B where pharmacophore A inhibits a validated cancer target that remains constant through all the programs and pharmacophore B inhibits at least one separate validated cancer target for each drug program.

We are developing multi-target inhibitor drug programs that have combined pharmacophores that inhibit target A along with pharmacophores that inhibit various B targets, including classes of compounds that target and inhibit the following -- epidermal growth factor receptor, better known as EGFR, multiple receptor kinases, multiple protein tyrosine kinases, Bcr-Abl, as well as classes of compounds that target and inhibit other clinically or biologically validated cancer targets.

We choose not to disclose the identity of target A unless under a confidentiality agreement in order to allow us to continue to broaden and strengthen the patent position of the multi-target cancer programs.

Our Targeted Cancer Drug Development Platform uses standard medicinal chemistry approaches to synthesize drugs de novo having stable covalent linkage between the two A/B active pharmacophores.

In order to satisfy the platform's extensive medicinal chemistry requirements, we entered into a relationship with a leading medicinal chemistry provider in Shanghai, China where we currently engage approximately 25 to 30 chemists. We believe we have derived at least two principal benefits from this relationship.

First, the economics of the relationship allows us to engage chemists at a substantial cost savings of approximately 75% when compared to comparable U.S. or European chemistry providers. In addition to the cost savings, we have also seen a substantial increase in our productivity. Because of the 13 hour time difference between China and our Cambridge location, we are now effectively operating on a 24-hour work cycle allowing us to advance our multi-target inhibitors with enhanced productivity and substantial cost effectiveness.

Our Targeted Cancer Drug Development Platform takes advantage of our expertise in signaling pathways, particularly those signaling pathways involved in cancer biology and we believe that it greatly broadens our potential to create a large and diverse class of drug candidates for the treatment of both solid and hematologic, that is blood, cancers.

For the foreseeable future, we believe that a majority of our research and development efforts and spending will be focused on the development of programs within our Targeted Cancer Drug Development Platform.

Our drug development platform programs are currently at various stages of preclinical development and we expect that we will select our first lead candidate, that's clinical candidate, from these programs during the first half of 2007. We also anticipate that we will select a second lead clinical candidate during the second half of 2007 or early 2008.

The most advanced program currently being developed as a dual target inhibitor is designed to inhibit epidermal growth factor, EGFR, and target A, which is another validated and promising non-kinase cancer target. We are anticipating that we will file an IND application for this clinical candidate in late 2007 or early 2008.

Simultaneously, we are also looking at the prospects of establishing a corporate collaborator for this drug candidate and we expect to have significant involvement in at least the early stages of clinical testing and our commercialization rights in selected sales territories.

To date, we have targeted several leading pharmaceutical or biopharmaceutical companies as potential collaborators and we have presented nonconfidential data to the majority of these companies and have held confidential discussions with several of them as well. We anticipate consummating a collaborative relationship in the second half of 2007 and we will keep shareholders up to date as we make progress.

During 2006 and into 2007, we have worked hard to bolster the development structure and capacity that we believe are necessary to further advance our multi-target inhibitor programs. Namely, we have appointed Dr. Changgang Qian to the position of Vice President, Discovery and Preclinical Development. Dr. Qian joined Curis in 2001, bringing over 25 years of academic and industrial experience in drug discovery, including pharmacokinetics, drug metabolism, efficacy evaluation, experimental disease model development and drug safety assessment.

We also added three new members to our Scientific Advisory Board during the third quarter. They are Dr. Stuart Aaronson, Chairman, Department of Oncological Sciences at the Mount Sinai Medical Center in New York City; Dr. George [Vanderweit], Director of Van Andel Research Institute and formerly Deputy Director at the National Cancer Institute and Dr. Ken Pienta, Chair at the Translational Medicine Committee of the Southwest Oncology Group. These advisers bring a broad understanding of oncology to Curis and we believe that their ongoing support and guidance of our new and existing cancer programs will be of great importance.

Also we have expanded our chemistry infrastructure both through internal hiring of Curis chemists in our contract relationship with a leading Chinese medicinal chemistry provider. We have also successfully replaced certain of our discovery scientists with director level oncologists from leading pharmaceutical companies. And we are planning on adding clinical and regulatory employees in 2007.

I am pleased with the progress that we have made to date and of the efforts of Curis employees that have worked extremely hard to progress our Targeted Cancer Drug Development Platform programs in a highly effective and efficient manner. I look forward to providing future updates on our programs over the course of 2007.

I would like to now briefly update you on the status of our three Hedgehog based programs under collaboration beginning with our Hedgehog antagonist collaboration with Genentech. In January 2007, Genentech treated the first patient in a Phase I clinical trial of a systemically administered Hedgehog small molecule antagonist for the treatment of cancer.

The Phase I trial is designed as an open label study of a systemic Hedgehog antagonist and patients with locally advanced or metastatic cancers that are refractory to standard therapy or for whom no standard therapies exist. The primary objectives of the Phase I trial are to evaluate the safety and tolerability of escalating doses of the Phase I molecule and to establish the maximum tolerated dose and dose limiting toxicities.

The trial is expected to enroll approximately 50 patients spread across several dose escalating cohorts. The successful completion of the Phase I trial will be dependent upon, among other things, the patient enrollment rate, as well as the treating -- as well as treating the number of patients that will ultimately need to be treated to advance the Phase I trial objectives.

We received a $3 million payment from Genentech in October of 2006 in connection with Genentech's IND filing for the trial. We expect to meet with Genentech to discuss the progress of this trial and look forward to providing you with updates on this Phase I trial as it progresses in 2007.

I will now turn to our Hedgehog agonist program for the treatment of neurological disorders under development with Wyeth. Wyeth and Curis have been continuing to conduct preclinical research on Hedgehog agonist compounds. We had previously estimated that Wyeth would select a lead clinical candidate in early 2007, but currently expect that further preclinical testing on potential candidate compounds will be required.

During 2006, we generated substantial data showing the potential of using the agonist for therapeutic treatment of stroke. However, we also observed some unwanted systemic toxicities and as a result of the data package that we generated, including significant efficacy but the unwanted toxicity side effects, we have been expanding our efforts to find additional compounds that can preserve the desired efficacy while ameliorating the unwanted side effects and that is what we are going to be focusing on in 2007.

We believe that Wyeth remains committed to this program as evidenced by their recent election to extend their funding through February 2008 of five of our scientists to continue the preclinical development of Hedgehog agonists in neurological disorders, particularly stroke. We expect that we will be able to update our development timing estimates once we have progressed further on the new Hedgehog agonist compounds.

In addition to the Hedgehog work being done in neurological applications, Wyeth has also recently manufactured the Hedgehog protein and we expect that they will begin testing the protein in cardiovascular disease models in the very near future. If Wyeth's preclinical Hedgehog protein studies are successful and if Wyeth decides to pursue development of a systemic Hedgehog protein or agonist program for cardiovascular disease, we would be eligible to receive cash payments on the achievement of certain preclinical and clinical development objectives, as well as royalties on future product sales.

I am now going to turn to our collaboration with Procter & Gamble. Our collaboration with Procter & Gamble is currently focused on the potential development of a topical Hedgehog agonist for hair growth disorders, such as male pattern baldness. As a part of the initial agreement signed in September of 2005, Procter & Gamble agreed to pay us up to $2.8 million upon the achievement of two preclinical development objectives.

In the first quarter of 2006, we achieved the first preclinical development objective under this collaboration and received a $1 million cash payment. Procter & Gamble is currently conducting extensive preclinical studies and pending the successful completion of these studies, we continue to remain hopeful that we will achieve the second preclinical development objective in the first half of 2007 triggering the remaining $1.8 million cash payment.

Lastly, I would like to briefly comment on our research work under collaboration with Genentech for the discovery and development of small molecule compounds that modulate a signaling pathway that plays an important role in cell proliferation.

Like the Hedgehog pathway, this pathway is a regulator of tissue formation and repair and it is abnormal activation is associated with certain cancers. We are currently conducting Genentech-funded research activities on drug candidates discovered at Curis that modulate this pathway. That pursuant to our April 2005 collaboration agreement will end on March 31, 2007. After that date, we do not expect to receive additional research funding from Genentech or incur any material research costs related to this program.

Genentech has assumed all future responsibility for the remaining preclinical and clinical development of the drug candidates under this program. After March 31, 2007, we will receive cash payments from Genentech upon the achievement of certain clinical development objectives and royalties on product sales if clinical evaluations of the drug candidates discovered during the collaboration are successful and the resulting products are successfully commercialized.

I would like to now turn the call back over to Mike. Mike?

Thanks, Dan. I will begin my remarks by reviewing our financial results for the fourth quarter of '06 and then I will turn to the year-to-date period of 2006. For the fourth quarter of 2006, we reported net income of $680,000 or $0.01 per share. That's both basic and fully diluted basis as compared to net loss of $1.4 million or $0.03 per share for the same period in 2005.

Net revenues for the fourth quarter of 2006 were $6.1 million as compared to $3.5 million for the fourth quarter of 2005, an increase of $2.6 million. The increase in net revenues was primarily due to the recording of $3 million in substantive milestone revenue associated with Genentech's filing of an IND application to initiate Phase I clinical testing of a systemically-administered small molecule Hedgehog antagonist for the treatment of cancer that Dan spoke about earlier.

In addition, during the fourth quarter of 2006, we did not record any co-development costs under our basal cell carcinoma co-development arrangement with Genentech, which had ended in August of 2006. During the fourth quarter of 2005, we had recorded $1.3 million of co-development costs, which were recorded as a reduction to revenues. These increases in revenues in the fourth quarter of 2006 were partially offset by a $1.7 million decrease in our research and development and license fee revenues.

Operating expenses for the fourth quarter of 2006 were $5.8 million as compared to $5.3 million for the fourth quarter of 2005, an increase of $500,000. R&D spending for the fourth quarter of 2006 was $3.6 million as compared to $3.3 million for the prior year period, an increase of $300,000. Spending increased primarily for our Targeted Cancer Drug Development Platform. These increases were offset by decreases in spending on a majority of our other research programs.

G&A spending was $2.2 million for the fourth quarter of 2006 as compared to $1.9 million for the same period in 2005. The increase in G&A expense was primarily due to an increase of $600,000 in stock-based compensation expense during the fourth quarter of 2006 as a result of our adoption on January 1 of '06 of FAS 123(R). This increase was partially offset by decreases in certain other G&A cost categories, including a $200,000 decrease in legal costs incurred during the fourth quarter of '06 as compared to the same period in '05.

Turning to the year, net loss for the year ended December 31, '06 was $8.8 million or $0.18 per share as compared to $14.9 million or $0.31 per share for the year ended December 31, 2005. Net revenues for the year ended December 31, 2006 were $14.9 million as compared to $6 million for 2005. The increase in net revenues was primarily due to a $5.3 million decrease in contra revenues recorded in 2006 as compared to 2005 under our BCC co-development agreement with Genentech, which again ended in August 2006. In addition in 2006, we recorded $3 million in substantive milestone revenue associated with Genentech's IND filing in the Hedgehog antagonist program.

Operating expenses for the year ended December 31, 2006 were $25 million as compared to $21.9 million for the prior year, an increase of $3.1 million. Research and development spending increased by $900,000 to $14.6 million for 2006 as compared to $13.7 million for 2005. Again, spending primarily increased for our Targeted Cancer Drug Development Platform. Increases were offset by decreases in spending on a majority of our other programs.

G&A spending was $10.4 million for 2006 as compared to $8.1 million for 2005, an increase of $2.3 million. The increase in G&A expense was principally due to an increase of $2.7 million in stock-based compensation expense, which again was as a result of our adoption of FAS 123(R) at the beginning of 2006.

As of December 31, 2006, our cash, cash equivalents and marketable securities were $36.7 million and there were 49.3 million shares of our common stock outstanding. We expect that the existing cash, cash equivalents and marketable securities, together with contractually defined cash payments that we expect to receive under collaboration, principally research funding, assuming that these collaborations continue in accordance with their terms, will be sufficient to support our current operating plans into the second half of 2008. We expect that we will end 2007 with cash, cash equivalents and marketable securities of between $20 million and $23 million.

We expect that our 2007 gross revenues from existing collaborations will be in a range of $4 million to $5 million, excluding the achievement of any further development objectives, which would trigger additional cash payments and assuming that such collaborations continue in accordance with their terms. We expect that 2007 R&D expense will be between $12.5 million and $15 million and that our G&A expenses will be in a range of $10 million and $11.5 million.

I would just like to note that these expense projections include stock-based compensation expense. On the R&D expense, we project between $500,000 and $700,000 of the amount I earlier indicated will be attributed to stock-based compensation expense for awards that are outstanding as of December 31, 2006. For G&A, that number is between 1. or we believe that number will be between $1.9 million and $2.2 million.

I would also just like to note that actual 2007 stock-based comp will likely be higher than these amounts since we do expect to issue additional share-based awards in 2007 as part of our planned compensation programs, which are consistent with our past practices.

That is it for my remarks. I'll now turn the call back over to Dan for some closing remarks.

I would like to emphasize that Curis has made significant progress in its efforts to build a growing portfolio of promising oncology drug candidates and we believe that we will continue to enhance our capabilities and capacity for the creation of a highly productive and successful drug development company and ultimately aimed at the creating of a sustainable value proposition for our shareholders. I would like to thank everyone for joining us on the call today and I look forward to updating you in the future and I will now open the call up for questions.

(OPERATOR INSTRUCTIONS). John Sullivan, Leerink Swann.

Congratulations on what sounds like a pretty effective change in strategy. Can you just talk a little bit about what has to happen between now and the end of this year in order to identify a couple of lead candidates? Can you just describe -- are these more likely to be small molecule-based lead candidates or biology-based lead candidates? Can you just chat about those things please?

Yes. Thanks, John. So the first part of the question in terms of things that have to happen -- we are well on the way with a leading candidate that we have, which is a target A and EGFR inhibitor. We are in the stages now of completing a data package that we feel would warrant selection of the lead in Q1 2007 or early Q2.

All of our candidates are small molecules that are specifically designed to have this dual targeting inhibition capacity or that are modified versions of validated prototype drugs. We are expecting a second lead towards the end of '07, early '08 and that is really going to be contingent on the pace of progress we make in disease efficacy models, looking at a data package that gives us the PK, PD, drug metabolism, toxicity profile. So we are well on the way with the second of lead candidate and we are anticipating that to be selected late '07, '08.

Okay. Thanks very much. And can you just talk about a partner for one or another of these programs as a gate? Will you file an IND if you don't have a partner? Can you just give us some sense of what your thinking is in that area?

Sure. So our thinking on that is that we are currently looking at the prospects of partnering. We have identified a handful of companies that we feel meet our criteria strategically for the appropriate type of partner, both from a top tier pharmaceutical and a large biopharmaceutical company. And we have already consummated dialogue with these companies. To date, the discussions have gone quite well. We are anticipating we would be in a position to make that decision second half of '07.

If we are not able to consummate a transaction that gives us the terms and conditions that we feel are warranted with the promise of this drug candidate, we would decide to take it forward ourselves and file an IND and generate clinical data and then maybe go back looking for a more substantial stake in the upside or retain it ourselves.

(OPERATOR INSTRUCTIONS). John Sullivan, Leerink Swann.

Just a couple of more questions about this new initiative if you don't mind. What are the -- without getting into your intellectual property, what do you perceive to be the intellectual property issues around this program? Can you just talk about that for a second?

Sure. What I want to underscore is the way we have designed these drug candidates, they effectively have the active component from validated drug prototypes. So for instance, there is a component that is an EGFR inhibitor and there is a component that inhibits target A that has a covalent linkage between the two.

To date, we haven't found any IP that seems to be an issue for us on the composition of matter. Most strategies when companies file on composition of matter for targeting a specific biological target, such as an EGFR inhibitor, most of the derivatives that are enabled in the specification and claimed are around changes and modifications that increase the kinetics, the PK, the PD, to drug metabolism, solubility, etc. We haven't found anything to date that claims the addition of a different pharmacophore. So we are quite confident we have patentable subject matter on the composition of matter.

Regarding freedom to operate, we are being quite prudent on looking at this proactively. We haven't found any patents to date on for instance the target A EGFR inhibitor that gives us reason for pause.

On both the composition of matter and methods of use front -- composition of matter, we think we are patentably distinct and we don't fall under other claims because of the way the compound is designed. We are also synthesizing these de novo. So it's not that we are taking existing drugs and linking them; we are actually synthesizing components of drugs de novo to have these two active moieties on them.

The other issue on patents that are out there is there is a growing trend for companies to file on combination therapies, which are methods of using or methods of treating cancer by a combination of one or two agents. Well, typically two or more agents. We feel we are free and clear of those claims because we are not combining different chemical entities. It is one chemical entity that happens to target more than one validated target. So to date, John, we are feeling quite confident that A) we have patentable subject matter on a broad level and that we don't run afoul of any IP from a freedom to operate standpoint.

Thanks very much. And then separately, as you continue to work toward a lead candidate, is that work going on in equal parts in Cambridge and in Asia or is that work going on to a greater extent in Asia? How does that work? How do investors get comfortable with the fact that there is a significant amount of work going on half a world away in an important program?

Good question. So the way we have structured our initial launch into utilizing capabilities in China is, to date, we are solely focused on using them for medicinal chemistry, which they are quite proficient at. In fact, most of the major pharmaceutical companies have operations over there taking advantage of the cost savings and increased productivity.

But from a standpoint of control and intellectual property, we are retaining tight control over all of the relevant biological data. So our scientists are basically doing the innovation. They are designing the drugs. They are coming out with a medicinal chemistry schema or schematic for derivatizing various forms of the drug candidates, sending the instructions over to China electronically. China is then doing synthesis work.

Once the synthesis is completed and it passes QA/QC, they send the compounds back to Cambridge here at Curis and we are doing the in vitro validation work, the structure activity relationship work, which is essential for patent filings and then we are also doing all of the drug development regarding preclinical animal model efficacy data.

So we are really retaining a very tight control and we are being prudent about our exposure and our use of the capacity in China. Our future expectations are we will continue to evolve the capabilities over there, but very systematically making sure that we have the warranted controls and protections.

Okay. And then can you estimate -- given that control, can you estimate the benefit that you're getting -- the financial benefit that you are getting from moving the work to that part of the world?

That's a good question. What we are seeing to date, as I stated, is about a 75% cost savings, which you do the math, it allows us to do a substantial amount of additional work. We are able to employ more people without increasing our burn rate and just as importantly is the time difference. So we are increasing the capacity that we have in terms of the number of chemists we are able to afford and put on these programs and we are also increasing the amount of hours that are being dedicated to each of these programs on a daily basis.

So we literally have a 24/7 situation here where we have got about a 24 hour around-the-clock work schedule. So I personally have been astonished by the dramatic increase in productivity and the decrease in the amount of time required to advance programs during various stages of its development path.

Thanks very much.

I would now like to turn the call over to Dan Passeri for any closing remarks.

Again, I want to thank our listeners for joining us this morning and we look forward to continually giving you updates on our progress on both our partner programs and our new initiatives. Thank you very much.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect and have a wonderful day.