Cardiovascular Systems Inc (CSII) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the 2006 fourth quarter Replidyne earnings conference call. [OPERATOR INSTRUCTIONS]

I would now like to turn the presentation over to your host for today's call, Ms. Sabrina Oei. Please precede, ma'am.

Thank you, [Menosha]. I'm Sabrina Oei, Replidyne's Director of Investor and Public Relations, and I'd like to welcome everyone to today's conference call to discuss our financial results for the full-year and fourth quarter ending December 31, 2006.

We appreciate your participation and interest in Replidyne. The press release announcing our earnings was issued this morning. The release is available on our web site, as is the web cast of today's conference call, at www.replidyne.com.

The financial section of today's call will be given by Mark Smith, Chief Financial Officer. It will be followed by a general, strategic overview given by Kenneth Collins, President and Chief Executive Officer. In addition to Mark and Ken, we are joined by Replidyne's Chief Scientific Officer, Nebojsa Janjic, and Chief Commercial Officer, Peter Letendre.

After the update we will open the lines to your questions.

As I turn the call over to Mark, I would like to remind everyone that during this call we will be making forward-looking statements that involve significant risks and uncertainties including those discussed on this call and others that can be found in the risk factors section of Replidyne's prospectus on Form S-1 dated June 28, 2006 and on Form 10-Q for the quarter ended September 30, 2006. We encourage you to review all of our SEC filings.

No forward-looking statement can be guaranteed and actual results may differ materially from those we project. Information provided during this call represents our current views as of this date. Replidyne does not undertake any obligation to update any forward-looking statements made during this call as a result of new information, future events, or otherwise.

The Safe Harbor language in today's press release regarding forward-looking statements also applies to our comments on this call.

I'll now turn the call over to Mark Smith.

Thank you, Sabrina.

The details of our financial results are contained in this morning's release. My remarks will focus on the more notable items as well as certain financial considerations related to the termination of our collaboration with Forest and future expectations.

At the year-end we had cash assets totaling $126 million. After adjusting for money raised through our IPO as well as milestone and upfront payments from our collaboration with Forest, our net cash burn in 2006 was slightly less than $40 million.

For the full-year 2006 revenue was $16 million consisting of $4 million of license revenue and $12 million of funded activity revenue.

License revenue represented amortized deferred revenue arising from upfront and milestone payments paid to Replidyne by Forest that was being recognized over 14 years.

Funded activities represents Forest's payment of the majority share of certain direct costs incurred to develop faropenem in 2006 such as direct labor and outside clinical trial costs.

On February 6th of this year, we announced the termination of our collaboration with Forest. The agreement provides for a 90-day transition period following notice of termination. During this period the terms of the original agreement remain in effect.

When we entered into the collaboration in February 2006, Replidyne received $60 million in non-refundable, upfront, and milestone payments. Upon the effective termination date of this agreement, the balance of deferred license revenue totaling $56 million will be fully reported as revenue in 2007.

Research and development costs in 2006 were $38 million compared to $29 million for 2005. During 2006 approximately 60% of our research and development spend was assigned to faropenem.

This spend included the cost of the acute otitis media or AOM study, which results will be announced by the end of this quarter, and costs to support the ongoing acute exacerbations of chronic bronchitis or AECB study as well as approximately $4 million for changes to the faropenem license and compensation to our manufacturing partners.

Of these costs the direct costs of the pediatric and AECB trials were included in the amounts we received as funded activity revenue under the collaboration with Forest.

The balance of research and development costs were incurred to complete pre-clinical testing in preparation for the REP8839 IND filed in mid year, complete three Phase I clinical trials of REP8839, and pre-clinical activities targeted to our discovery research programs, primarily C. difficile and the inhibition of DNA replication.

The increase in sales, general, and administrative expenses for 2006 to $12 million from $5 million for 2005 reflect additional personnel related costs to establish commercialization and business development capabilities, personnel and professional services to support our initial operations as a public company, the initial adoption of stock option expensing, and market research for faropenem and REP8839.

As a reminder, through July 3, 2006, Replidyne recorded dividends due to preferred shareholders of $5 million compared to $7 million in 2005. All outstanding preferred stock and accumulated dividends were converted into common stock upon closing of the initial public offering on July 3, 2006 and no preferred stock or accrued dividends were outstanding after that date. This item affects our reported EPS per common share in both 2005 and in 2006.

For the year ended December 31, 2006 Replidyne reported a net loss attributable to common shareholders of $34.6 million compared to a net loss attributable to common shareholders of $40.9 million for the full-year ended December 31, 2005.

Now looking ahead to 2007. As we entered 2007 -- we entered 2007 with a strong balance sheet including $126 million of cash assets. While we will continue to advance our development programs, we recognize that long-term plans are enabled by maintaining a strong financial position.

To date we have achieved this balance by engaging third parties to run clinical trials and develop large scale manufacturing and using consultants while establishing a streamlined internal team to oversee our program development efficiently. We intend to continue using this operating model in 2007.

As we previously mentioned, effective the termination of the Forest collaboration, we will recognize $56 million of deferred revenue in 2007. This is an accounting item only and will not impact our cash flow, as these monies were received in February 2006.

We intend to limit our clinical trial activity for the adult faropenem program to the ongoing AECB trial. The focus of our efforts will be on attaining clarity from the FDA for approval with a view to partnering this program.

We will incur costs in 2007 to finalize the pediatric Phase II study and to initiate Phase II or potentially Phase II-III testing of REP8839, for treatment of impetigo.

In addition to these activities, we intend to continue development of our C. difficile and DNA replication programs, as we believe each of these programs holds considerable promise.

From a corporate activity standpoint, we remain committed to business development. These activities will include pursuit of a collaboration partner for faropenem as well as seeking opportunities to grow our business through in licensing or acquisition.

We anticipate a total net cash burn of approximately $35 million in 2007. This projection is a base case and assumes no partner for faropenem.

One of our primary areas of strategic interest is pediatrics. As we reviewed this strategy, we believe faropenem pediatric has the potential to be a cornerstone product.

After consultation with the FDA, if we decide to initiate a Phase III clinical program on our own targeting AOM, we may increase our spending in 2007 to pursue this option, but by no more than $5 million in this year.

As we conclude our discussions with the FDA and refine plans for our clinical programs, we will keep you updated including providing more specific guidance.

I'd now like to turn the call over to Ken Collins.

Thank you, Mark.

As Mark noted, our immediate plans include the following.

We are actively engaging the FDA in discussions and meetings to gain further regulatory clarity for the future approval of faropenem in adult respiratory indications. We are pursuing multiple channels to help with this process and will update you on the direction of our discussions with the FDA by the end of this quarter.

We recently completed enrollment in a Phase II study in over 300 pediatric patients with acute otitis media. This was a double-tap dose-ranging study that included four different doses of the liquid oral suspension. We look forward to announcing top line results of this large Phase II study by the end of this quarter.

Following the release of the Phase II results in otitis media, we will meet with the FDA to discuss regulatory requirements needed for approval in pediatric indications with the intent of providing additional guidance by the end of the second quarter of this year.

After our meeting with the FDA, we will make a decision on whether to pursue the pediatric program on our own or only with a partner.

We expect to restart our Phase III trial for faropenem in acute exacerbations of chronic bronchitis, which was temporarily halted in December of last year. The study was halted to remove Ketek from the study. The FDA recently eliminated two previously approved indications, bronchitis and sinusitis, from the Ketek label and added a black box warning.

The primary endpoint for our study has always been to demonstrate superiority of faropenem over placebo. But when we commenced the study, we believed that Ketek would be our main competitor and therefore had included a comparator Ketek arm in the study.

With the FDA's recent action on Ketek, we think it is less likely that Ketek will be a significant factor in the community antibiotic market.

We expect to restart this trial under an amended protocol excluding the Ketek arm within the coming weeks.

We intend to aggressively seek a new commercial partner for faropenem adult indications and believe that can best be achieved after we receive some additional clarity from the FDA regarding clinical trial design.

We do not intend to initiate any new clinical trials for the adult indications other than the bronchitis study until we secure a new commercial partner.

We continue to believe that faropenem will be attractive to potential partners due to its product attributes and the absence of significant branded and promoted competitors in the community antibiotic space when faropenem is launched.

We appreciate your attention on this call and I'll now ask the operator to open the line for questions.

Are you ready to go to questions?

Yes.

Yes, we're ready to go to questions.

[OPERATOR INSTRUCTIONS]

Your first question will come from the line of Greg Wade of Pacific Growth.

Good morning and thanks for taking my questions this morning.

I just wondered if you might define the parameters around which the pediatric otitis media proposed study that you're discussing with the FDA range from. And what would be, in your minds, a favorable outcome in terms of the clinical trial design? And what would represent an unfavorable set of parameters that you'd have to deal with? Thanks.

Greg thanks for that question. I'm going to ask Nebojsa to address that.

Yes, Greg, that is a very important question for us. And at this point we are not providing specific guidance on the design of the Phase III program.

As you know, we are continuing to talk to the FDA on an ongoing basis. And we hope to release the results of the Phase II results by the end of the first quarter.

Great, thanks.

We'll be providing additional guidance on the design of the Phase III studies by the end of the second quarter.

Let me -- thanks, Nebojsa. I'm going to add one thing to that, Greg. That although this is not written in stone our assumption is that for otitis media that a placebo controlled study will likely be required.

I mean you're clearly familiar with the discussions around bronchitis and sinusitis. And our operating assumption right now is that a placebo study will be required. But that's yet to be determined.

Okay. And then with respect to determining the microbiological nature of the disease, is that something that the agency's also looking for?

Well, in our Phase II study, we've run this study as a double-tap-study. That is, we define microbiology on study entry as well as at a certain point during the treatment, days four to six.

And as for the requirements for the Phase III studies, this will be precisely the topic of our discussion with the FDA in the future.

Okay, great. Thanks for taking my questions.

Your next question will come from the line of [Vanessa Bark] of Morgan Stanley.

It's actually Steve Harr. How are you guys?

Just really quickly, if you could just give -- are your goals as you renegotiate your partnership with Forest to -- I'm sorry, not with Forest -- commercial partnership for faropenem to continue to retain some commercial rights or is that kind of something that now might be off the table?

Steve thanks for the question.

Our preference would be to maintain rights on, in the pediatric space. It's not something that we would consider an absolute or a deal breaker because clearly there are several big pharma companies that would be also interested in the pediatric rights.

The main reason we would like to keep the pediatric rights or at least the ability to promote to pediatricians is we've analyzed the pediatric space pretty closely. And it's an area that continues to be of interest to us.

It would be a key thing to develop a pediatric specialty sales force would be one really sizable product.

And as you probably know, Omnicef, the leading branded beta-lactam currently in -- just in the pediatrics space is doing almost $500 million a year.

That comes off patent in the next couple years. And it would certainly be nice to have kind of a wide open space in an area that is very promotion sensitive to kind of serve as a cornerstone product for a pediatric specialty sales force.

So our preference would be to keep the pediatrics. We don't consider it an absolute as we go into discussions with potential partners.

And on the AECB front, in the ongoing trial, I presume you already have enough power to show superiority versus placebo if your drug has the intended effect. So are you going to be able to continue on change with your trial except for dropping the Ketek arm? Or do you need to resize things?

I'm going to let Nebojsa to address that.

Yes, we've essentially just dropped the Ketek arm and our study is designed to demonstrate a convincing effect of the antibiotic over placebo.

So the study will overall be smaller from the original intent. And it's powered adequately in our opinion to show a convincing treatment effect.

And to reiterate what I said in the earnings statement, the primary endpoint here has always been faropenem against placebo. We added Ketek really for commercial competitive reasons.

At the time this study started earlier in '06 we thought that Ketek by far would be the main competitor in terms of share of voice out there against faropenem. That clearly has changed and with the recent FDA action it's highly unlikely that Ketek is going to be a major factor in the community marketplace.

You need that trial to work to -- before partnership?

We don't believe so. We think the faropenem story, especially when you look at the competitive environment going forward will be compelling.

Great. Thank you.

[OPERATOR INSTRUCTIONS]

You have no further questions at this time. I would like to turn the call over to management for closing comments.

Thank you.

Thank you for your time today and your interest in Replidyne. A replay of the conference call will be available approximately one hour after the completion of this call through Wednesday, March 14, 2007 at midnight.

Callers may access the replay by dialing 888-286-8010 for U.S. participants or 617-801-6888 for international participants. The audio replay passcode is 40051824.

To access a replay of the webcast, visit the investor relations section of the Company's web site at www.replidyne.com. Thanks a lot. Bye-bye.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a wonderful day.