Genmab A/S (GMAB) 2010 Q3 法說會逐字稿

Welcome to the Genmab conference call on the 10th of November 2010. Throughout today's recorded presentation all participants will be in a listen-only mode. After the presentation there will be an opportunity to ask questions. (Operator Instructions)

During this telephone conference that you may be presented with forward-looking statements that include words such as believes, anticipates, plans or expects. Actual results may differ materially, for example, as a result of delayed or unsuccessful development projects. Genmab is not under any obligation to update statements regarding the future, nor to confirm such statements in relation to actual results unless this is required by law.

I will now hand the conference over to Mr. Jan van de Winkel.

Hello, and welcome to the Genmab conference call. We are delighted to talk to you today about Genmab's nine-month financial results for the period ended September 30.

I want now move forward to slide two, the forward-looking statements.

As already referred to, we will be making forward-looking statements, so please keep that in mind when we go through the call.

And moving to slide three -- summary of progress.

We have been very focused on our dominant priorities in the past few months and have made considerable progress towards our strategic goals.

We have worked diligently to maximize the value of ofatumumab by amending our agreement with GSK and initiating new Phase III trials.

We have clarified the regulatory pathway for zalutumumab and are stepping up partnership discussions.

We continue to expect value from our research and development engine and grow our pipeline by signing strategic partnerships with other companies.

Finally, we have implemented a rehabilitation plan with a view to managing our costs and cash burn.

Let's move to slide four -- ofatumumab.

We have taken a number of steps towards maximizing the value of ofatumumab by moving forwards with the subcutaneous formulation and the autoimmune implications, ofatumumab will be favorably positioned to potentially increase ease-of-use and tolerability for patients.

A Phase II study with a subcu form of ofatumumab in MS is scheduled to start next year.

We've also recently announced two new Phase III studies using the IV formulation of ofatumumab.

The first study will examine the use of ofatumumab to treat refractory NHL in combination with bendamustine versus bendamustine alone.

The second study is a head-to-head registration study investigating ofatumumab versus rituximab in the treatment of rituximab relapsed non-Hodgkin's lymphoma.

Both of these studies will be crucial in a potential expansion of the ofatumumab label.

Let's go to slide five -- zalutumumab.

We are pleased with the progress we have made on zalutumumab. Over the past few months we have held a number of discussions with regulatory authorities. Based on the feedback we have received, we believe that it will be possible for a future partner to pursue an MAA based on the currently available clinical study data. We're aggressively seeking a partner for zalutumumab, and a marketing campaign is well underway.

Will move to slide six -- Lundbeck.

Looking beyond ofatumumab and zalutumumab, we continue to search for ways to [export] the product line pipeline while taking advantage of our innovative antibody creation, screening and development capabilities. Last month we announced a new collaboration with Lundbeck to create antibodies to three central nervous system targets.

This deal really represents the best of both worlds for Genmab. We are able to [export] our preclinical pipeline, extract value from our R&D facilities, and gain another potential income source -- all without increasing our expenses.

Let's move to slide seven -- the reorganization.

Controlling our expenses has been a major focus areas for Genmab and is an integral part of our strategy to build a profitable business. To this end, we announced a reorganization plan that matches our resources with current and future workloads. We will maintain our core skills in-house while using outsourcing to our advantage for non-core skills.

I will now hand the call over to David Eatwell, Genmab's CFO, to discuss the financial impact of the reorganization, as well is the key financial results for the quarter. David?

Thank you Jan. We should now be on slide eight and the reorganization headcount.

On this slide you can see the impacts on the headcount, or FTEs, by each location.

At the end of September we had a total workforce of 210, and as you saw in the reorganization announcement, there will be 33 positions impacted by the reorganization. 27 of those will be in Copenhagen, and six of those will be in Princeton.

You can see in the blue and red box in the center there that 11 of those employees have already departed, and 22 will work for a transition period ranging from the end of December through to June 30, 2011, enabling a smooth transition of their tasks and duties.

In the other changes column on the right of the page, you can see some staff that are already departed in Copenhagen. And also in Utrecht, in that column, you can see 10 FTEs. This includes nine FTEs that we will be hiring relating to the Lundbeck collaboration.

That brings the new organization, post-transition, to 183 FTEs, or 159, excluding the Minnesota facility.

Our Utrecht group continues to be our largest group with just over 100 employees, and they will be working hard to deliver our future pipeline in INDs.

In Copenhagen we will have 43 FTEs, and this include a core, strategic development team and certain corporate services.

And finally, in New Jersey we will continue to house certain (technical difficulty) [accountants], investor relations and business development resources.

Moving on to slide nine and the cost for the reorganization.

The total cash cost of the severance and transition is approximately DKK25 million, with about DKK7 million impacting 2010.

And the P&L impact is about DKK37 million, the majority -- DKK29 million -- impacting 2010.

The P&L charge includes the acceleration of some non-cash warrant expenses and the write-off of some [unrisked] contracts, mostly small leasehold improvements.

The impact of the reorganization has been absorbed in the new guidance that I will come onto shortly.

And finally on this page, the annualized cash savings are expected to be about DKK30 million per year.

Now I would like to move on to slide 10 and review the key data for the nine months ended September 30, 2010.

First the revenue, which came out at DKK491 million, DKK98 million or some 25% above the same period for 2009.

2010 includes the DKK116 million milestone for the NHL bendamustine combination study and also is our royalty income at DKK39 million.

We also saw an improvement in the net loss by DKK165 million, or over 40%, DKK238 million compared to DKK403 million in 2009.

I'll come back and discuss the income statement in more detail in a moment.

Also on this slide is the headcount reduction of 310 FTEs from 520 in 2009 to 210 in 2010. This is of course before the reorganization impact discussed a moment ago.

Finally on this slide, the all-important cash position. It's a pleasure to talk about an increase for the year, rather than a cash burn. We started the year with just under DKK1.3 billion and ended the quarter with DKK1.7 billion. This means the cash increased over the period by just over DKK400 million, mainly due to the upfront fee associated with the amendment of the GSK agreement.

Now let's move to slide 11 and the income statement.

We've already discussed the revenue increase of 25%, so let's move to the operating expenses.

You can see that the R&D expense reduced by about one-third, from DKK639 million in 2009 to DKK434 million in 2010, a reduction of over DKK200 million.

The reduction was driven by our continued efforts to control costs and of course the impact of the amended agreement with GSK.

However, you can also see that the G&A expenses increased by DKK15 million to DKK130 million. But as discussed last quarter, the G&A expense includes one-time costs of DKK41 million related to the departure of our previous CEO, including DKK18 million related to the acceleration of warrant charges.

Without this charge, you would've seen a reduction in our G&A expense.

This brings us to the operating loss for the nine months of the DKK73 million, an 80% reduction compared to last year's loss of DKK361 million.

Next the net financial items and tax.

As I warned you last quarter, the mainly non-cash FX gain posted in Q2 has reversed, given the weaker US dollar. So we're left with a net gain of DKK7 million for 2010.

The large gain in 2009 of course was driven by the big recovery in the value of our [market] securities.

As a reminder, our current book value is a lot more conservative, and at the end of the quarter we had a market value very slightly above the cost basis.

Finally on this slide, the discontinued operations.

As you will have seen in earnings release, we've reduced the fair value of the facility after the cost of the [bell], from DKK145 million to DKK120 million, and this non-cash impairment charge of around DKK130 million is included in the DKK172 million shown on this slide.

The expense for 2009 of course included the operational costs for the facility, as it was still operating for this period last year.

The reduction in fair value of the facility by about 25 million dollars was made after taking out general market conditions, benchmark data, and advice from our agent, who is running the sales process.

You will see from the guidance that we have also moved the anticipated sale into 2011.

And that brings us back to the net loss on this page of DKK238 million, as discussed earlier.

Now let's move on to slide 12 and the revised guidance for 2010.

As we are now at the nine-months period for 2010, we thought we would include the Arzerra royalty income in this new guidance.

Of course it is very difficult to predict the royalty stream in this early stage of the launch, and therefore we've assumed that the Q4 royalties will be similar to the amount recorded in Q3. That was DKK16 million.

To be clear, the new guidance now includes DKK55 million royalty income.

We also moved the -- to the upper end of the range of our old guidance for revenues, so we now have quite a tight range of DKK575 million to DKK585 million.

In addition, the operating expense ranges will decrease by DKK50 million. This includes the -- a reduction in the anticipated charge from GSK for ofatumumab development, although it is important to remember that we have this [annual] cash [cap], [GBP17 million] a year, so this reduction doesn't impact our projected cash balance for 2010.

We've also been able to absorb the impact of the reorganization expense through our continued drive control the expense base.

The combination of the increased revenues, reduced expenses means that our projected operating loss improves from a midpoint of DKK350 million in the old guidance to a new midpoint of DKK225 million. Although to be fair, this DKK125 million improvement [does] include the inclusion of royalties in the guidance of DKK55 million.

The discontinued operations of DKK55 million related to the operated costs of our Minnesota facility, maintaining it in an validated state -- change from the old guidance is just due to FX movements.

Now, we've already discussed the non-cash impairment charge for Minnesota earlier.

That brings us back to the cash balance. We started the year with DKK1.3 billion of cash. With the upfront payment [from] GSK, we improved the projected cash balance at the end of the year, before the facility sale, to a range of DKK1,475 million to DKK1,525 million.

As discussed earlier, we've elected to move the facility sale from this year into 2011.

We continue with a very active global sales process and continue to promote this first-class facility at relevant manufacturing and biotech conferences. However, as previously discussed, it is a specialized facility, and the general economic conditions are not helping us, so it will take some patience to complete this sale.

In summary, we continue to make progress on the management of our expense base and remain very focused on preserving our cash.

Now I would like to hand back over to Jan for the last slide and take you through the upcoming news flow.

Thanks very much David.

I'm on slide 13, upcoming news flow.

You can expect a number of important news announcements from Genmab in the near future.

We're looking forward to starting a steady number of new clinical studies of ofatumumab that can be followed on clinicaltrials.gov, as well as the clinical progress with the [B selective] antibody RG1512 with our partner, Roche.

There will be five presentations on [zalutumumab] and six presentations ofatumumab at ASH in Florida in December.

We are planning an update on our pipeline, our next-generation technologies, at an R&D day in January at Utrecht.

And finally, we hope to announce partnership progress with zalutumumab in the first half of 2011.

We now look forward to answering your questions.

Operator, please open the call for questions.

(Operator Instructions) Guillaume van Renterghem, UBS.

Hi. I just have a few questions. The first one is with regards to the news flow. So I do understand that you expect zalutumumab Phase I/II dose ranging studies to be presented in 2011. But when I look at ofatumumab RA, the IV formulation is likely to be discontinued, or is discontinued. When I look at Phase III in NHL, you have two studies running out, probably end of 2012, 2013, or actually [and] beyond 2015/2016, if we believe (inaudible).

So I'm just wondering, what key driver for your (inaudible) 2011 and 2012 on zalutumumab, that could it be indeed a very nice indication, but (inaudible) has done actually a very good, very well in (inaudible). I'm just wondering whether you could plan a Phase III head-to-head study against (inaudible).

And maybe my last question on the (inaudible), while we see that you reduced the fair value of the facility again, the sale point, I'm just wondering whether you can tell us how many parties made you an offer, a firm offer, whether you refused this offer, and what was the maximum value that was offered to you, and if you could (inaudible) any issue (inaudible) potential clients (inaudible), that would be very useful. Thanks.

This is a pretty good number of questions. Let me start with the news flow.

You're right that the IV studies with RA will be stopped by our partner (inaudible) GSK, and it is very likely that we will see data from the subcu dosing study in RA next year. We have not provided further refined guidance, but that is definitely a (inaudible) plan that you will hear about in the future.

And also next year we will talk about -- we'd like to talk about daratumumab, which we're dose escalating in a Phase I/II study. And a number of Phase III studies in different NHL indications have a predefined interim analysis. We will guide the [field] towards the timing of the interims once we are getting more close to the recruitment we need for that interim, and I can assure you that will be before 2012, 2013 for some studies.

I cannot give any more specific details right now, because we want to guide on the conservative side and then possibly surprise with an earlier time for an interim. But we expect it will come absolutely before 2012 for some of the studies.

The [daratumumab] antibody is a very exciting antibody. There will be a number of very good updates on the preclinical characteristics of that antibody, including the characteristics of the antibody in new animal models. We have been testing daratumumab together with Velcade and/or (inaudible), and we saw great synergy, the different compounds.

Is too early right now to describe to you scenarios for head-to-head studies, but that is definitely a scenario we are looking at in our clinical development department, which we will update the market as we get more clinical data back from daratumumab. You would hear likely about plans for daratumumab next year.

Then finally, if I wrote down the questions correctly, with respect to the Brooklyn Park facility, we are progressing a number of discussions with potential partners. They're in different categories. And it's too early stage to talk about the specific discussions we are having with these partners. So I'm not going to comment on that any further, in order not to raise or trigger expectations which we cannot fulfill.

But we are encouraged by the progress in the discussions. However, as we have said to you before, this is a very fine facility, it's a very modern and well-equipped facility, but it is a specific asset, and these discussions tend to be very complex, and they will certainly move into next year, as we have announced today. And once we get a firmer feeling of timing and next steps, we will certainly update the market and also do that with much specific details. As you know, that we want to be very transparent and open to the market.

Brigitte de Lima, Bank of America Merrill Lynch.

Hello. Good afternoon. I've got three questions please. Just to follow up the first one on the facility and the fair value you have come to, can you just clarify whether the reduction of fair value does indeed have anything to do with the offers you have been receiving?

Does it look like people thought the fair value you had for the facility was way off the scale and no one is willing to offer you anything close to that?

The second question is on your projected royalties for Arzerra. Given the number you've indicated, 55 million, it suggests that Arzerra sales in Q4 are not going to be much higher than in Q3. I was just wondering if you can clarify why sales seem to have reached a plateau. I mean, we haven't really seen more than 15, 16 since Q2.

And following up on the Arzerra questions, have your expectations for Arzerra in refractory CLL changed now that you've got experience with the product? It has been on the market for about a year in the US. Thank you.

Thank you very much. I will start with question number one.

The facility sales fair value -- I can absolutely confirm that it has nothing to do with -- that any of the discussions we are having with the potential acquirers of the facility. This is simply the value which came up, as David has already explained, in talking with our real estate agent and also with our accountants. We believe this is actually a better value to reflect this asset. It is absolutely not related to any offers made or bids made at this moment.

With regard to the royalty question, actually I've discussed this before. It's difficult to try to read too much into the first two quarters of sales. They can actually be a bit misleading. You were referring about a plateau, and I can assure you that while Glaxo is responsible for the commercial aspects for Arzerra, we do keep in very close contact with them and have regular meetings.

And while I can't give specific details about the sales launch, I can tell you again that Glaxo is very pleased with the progress made, both in the USA and in Europe. And Genmab has also been very impressed with the level of effort and attention to detail being made by Glaxo in both regions.

And I perhaps want to ask David to share a little bit more color on the -- what you perceive as a plateau'ing value for Arzerra sales.

David, maybe you can shed a little bit more color on that?

Yes. Sure. I think we -- in future quarters we probably won't go into this sort of micro level of detail on the sales.

I did see there was some comment about European sales being flat with GBP1 million being achieved in Q2, and it being flat in Q3 at GBP 1 million.

Now, GSK report their sales numbers to the nearest rounded GBP1 million, given the size of the company. Plus, when we see the royalty, actual royalty payments come through, we see it to a finer level of detail.

This is some of the danger of looking at some of these numbers at a very early stage, because if we looked at the actual details for Q2, it was pretty close to GBP500,000, and therefore Q3 was closer to [another] half million.

So the 2 million year to date is the correct number for Europe.

And you can really look at that -- if you round it to no decimal places, then it is 1 million/1 million -- it's flat. If you go to the next decimal place, then the sales have tripled, quarter to quarter.

So they're very small numbers at this early stage and really too difficult to read much in.

As Jan said, we have regular commercial updates from GSK. They're very pleased with the number of countries that they have already entered into within Europe, and the sales levels are getting -- particularly Germany is being very strong.

So we're getting sales now in Q3. We're in about a dozen different countries that we're getting sales. More countries have now launched the product in Europe, and there is a very detailed plan to launch, not just in Europe, but in places around the rest of the globe as well, as we go forward in the rest of 2010 into 2011.

But it's very difficult to predict. In the US we've still got the reimbursement situation where it is a bit manual at this stage. We're still waiting -- or GSK is still waiting -- for that J code to come through. That should come through in 2011. It usually takes about a year to get the J code up and running. Once that is in place, it just makes it easier and more automated for physicians to get reimbursement, particularly through the Medicare channel.

And may be because -- to come back to your question -- three years, the perspective and -- with regard to pick up in refractory CLL change? I would say absolutely not. The feedback continues to be very positive, both from patients, as I understand, as well as from doctors, and from GSK, and there is an increasing number of studies being started up in CLL, as well as in other indications, so called collaborative research trials. This will further I think give doctors experience with Arzerra.

And we continue to be fairly optimistic about the sales, and what we see also as perception in the field. It is just as David and I tried to explain to you, very difficult to read into the sales so early on after the product launch.

Reimbursements will get more automated in the United States fairly soon, and also in Europe we roll out the drug in more and more countries. We're beginning to penetrate Asia, Russia, South America, etc. So we continue to be very optimistic about it.

Okay, thanks for the clarification.

Peter Welford, Jefferies.

Thanks for taking the questions. There are two, please.

Firstly, can I just have some clarity on the R&D line. If you were to exclude the reversal of accruals that you did during the third quarter, what is the sort of underlying cash R&D that you did, approximately, in third quarter?

And then secondly, you mentioned at the -- a recent analyst day in London on the sort of R&D run rate you'd anticipate in 2011. Given now the cuts you just -- [well], the realization you've just announced, can you give us some sort of idea as to what you think an operating expense run rate could be in 2011 and how whether or not that thinking has changed I guess over the last few months? Thank you.

Would you like me to take those, Jan?

I think this will be a good idea, David.

Yes. I think really looking at Genmab and R&D expense by quarter can be a bit challenging, because it can be what I'd call a bit lumpy quarter to quarter with various things like lots of CMC being paid for, etc.

We've got our R&D expense for the year. You know we have got a total op -- a midpoint of the operating expense of about DKK800 million. The split on that is going to be something around DKK640 million on R&D and about DKK160 million on the G&A expense.

That total for the year I think is a good marker for these overall sort of quarterly amount that goes through.

I think you've also -- you've got to remember we have got zalutumumab in that R&D expense, and you know for 2011 our target is to try and hand that future expense off to a partner.

In terms of the 2011 expense, we will come back with more detail on that at a later stage and talk about the guidance. But we're just going through our budgeting process at this particular point in time. We've got a lot of items to now account for in this process, such as the new Lundbeck collaboration, the out-licensing assumption around zalutumumab, and as you mentioned, Peter, the recent reorganization.

So that's going to make the comparison a little complex overall, but we will give you a very transparent explanation showing you all of the moving parts when we share the 2011 guidance with you.

Now, back of the strategic data we had with the -- at the analyst in September, we said we were targeting to reduce our expense base in 2011 by about 20% against this year, assuming that we out-license zalutumumab. And we're still sticking to our previous promise there. So we're still taking to the 20% from the old guidance.

It would be nice, but I don't think we can do 20% from the new guidance because we do expect to see an increase in the GSK costs as we go forward into 2011. More phase III trials are starting, so the GSK R&D costs will go up in 2011.

So again remember, we have got our annual cash cap of around GBP17 million or DKK150 million, so regardless of how high that expense gets from GSK next year, we will have improved clarity on the amount of cash flow and the impact on our cash burn for 2011.

We will come back to you in the new year and give you all that detail around 2011.

That's great. Thank you.

Samir Devani, Nomura Code.

Most of my questions have been answered, but I'll just ask you on zalutumumab, can you just give us an update on your partnership discussions post obviously getting more regulatory clarification on the path ahead. Should we be expecting you to partner that before filing an MAA?

This is a good question. I can tell you that we actually have a very active marketing campaign that's boosted after we got the feedback from the regulatory authorities both in the US and in Europe. We have a number of discussions that we're progressing, and they actually progress very nicely.

I cannot give you any more specific dates or timing, rather than that we firmly expect that in the first half of next year we will conclude these discussions, and then also in parallel we will probably accelerate the filing process for the European filing of zalutumumab.

So we're very pleased with what we see up to now, but these negotiations and these discussions take some time.

And maybe just one question, [the title and] the tax. The tax in the quarter was quite a lot lower than I was expecting, and I was just wondering if you could just give us some guidance for the full year?

David?

Yes. I think we haven't broken down the tax for the full year. Main part of the tax charge that we've got is related to Utrecht and to Princeton. What we've got is that the -- all of the IP of the company of course is held in Denmark, as we're a Danish company, and both Utrecht and Princeton are considered as sort of outposts, if you like, from the mother company, and both Princeton and Utrecht therefore charge back on [cost] basis to make sure we stay on the right side of transfer pricing (inaudible) countries. So there's a small tax charge in each of the countries.

Q2 tax charge was higher. That was simply -- than the normal run rate -- and that was simply a matter of factors, that we had higher charges in Princeton, and those were relating back to the departure of the CEO. So because that cost was higher, it means the cost-plus charge was higher, it means effectively that Princeton is making more profit for that particular quarter, so that is why it's come down again in Q3. So Q4 would be a probably similar level to the Q3 quarter on its own.

Guillaume van Renterghem.

Question for (inaudible) question on [zalutumumab]. In your discussion with partners, do you think you (inaudible) request from the partner to develop the product in SCLC and in MCLC? Or do you think you're going to leave that as an option for a partner to decide? Are you going to have basically an active role on whether [zalutumumab] is going to be developed in [big] indications (inaudible)? Thanks.

I think that's a very good question. It's too early stage right now. We have a very active [development] (technical difficulty) we have a development program which we have worked out in the complete detail in bladder cancer and several other indications, including non-small cell lung cancer, lung carcinoma, and (inaudible) carcinoma, as well as some other solid tumors.

In the end it will be up to the partner to decide on which indications will be pursued. The discussions we're having at this moment, the potential partners definitely want us to think with them, because we know the asset so well, we know the antibody so well and have developed [it] to this date. But it is very likely we will leave the final decision for further development to the development partner, albeit that it is not illogical that Genmab would participate in some of these developments in the near future.

Does that mean you expect to spend more money on the compound, even post partnering?

Genmab will absolutely not spend more money on this. But when these programs will be pursued, and that is absolutely possible, the partners will pay for that in entirety.

Brigitte de Lima.

Hi. I have just got a quick follow-up on zalutumumab. When you talked about how you'd got feedback from the (inaudible) European regulatory authorities, I think the understanding there was that you didn't actually approached the EMA, and I was just wondering why you didn't approach the EMA. And what makes you so confident about all the discussions you're having you can file based on current data?

Thank you for your question on zalutumumab. I'm afraid we cannot say much more than we got very encouraging feedback from a number of national authorities. This was a [specialty] that we have chosen on the recommendation of some of the regulatory advisors and some of the key opinion leaders in Europe, as well as in the United States.

I cannot describe in more detail the actual feedback we got back from the authorities, but it was encouraging, as we said before, and under a CDA we can't share those (inaudible) communications, which are confidential between the authorities and Genmab with a potential partner, and I believe that they will serve to boost the intensity of the discussions.

I cannot say anything more because I think that would be inappropriate.

Sorry. Just to follow up, why didn't Genmab approached the EMA? Would not that have been the obvious authority to approach if you were to file?

I mean, that covers one possible scenario. What we decided to do, to go do is to go for a number of national authorities that have very strong oncology expertise. The level of expertise in the oncology development varies a lot between the different EMEA participating countries, and this was the recommendation from some of our advisors with a lot of experience in this area in Europe, as well as in the US. This is also a path -- a pathway down -- approaching the EMEA directly.

Okay, thanks.

(Operator Instructions) Sir, there appear to be no further questions at this time. Please continue with any other points you wish to raise.

Thank you operator. So thank you all for calling in today to discuss Genmab's Q3 results. We look forward to speaking with you again in the near future. Thank you, and have a nice day.

That concludes the Genmab conference call. Thank you for participating. You may now disconnect.