Gyre Therapeutics Inc (GYRE) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2010 Targacept, Incorporated conference call. My name is Brandi, and I will be your operator for today. At this time, all attendees are in listen-only mode. We will conduct a question-and-answer session toward the end of this conference. (Operator Instructions) As a reminder, this conference call is being recorded.

I'll hand over the call to your host for today, Mr. Alan Musso, Senior Vice President of Finance Administration and Chief Financial Officer. Please proceed, sir.

Thank you, Brandi. And good afternoon, everyone. Before we get started, I'd like to remind you that our comments today may include forward-looking statements under the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to future events, plans, expectations, objectives or financial results or conditions, including the design, timing for initiation of or availability of results from our clinical trials, timing for submission or approval of regulatory filings, target indications for development, commercial opportunities, payments to us, our cash runway, revenues or expenses or any other matter that is not a historical fact.

Actual results may differ materially from those expressed or implied by any forward-looking statement as a result of many factors, including those described under the heading "forward-looking statements" in our press release from earlier today or under the heading "risk factors" in our most recent Form 10-K or in later filings with the SEC.

We caution you not to place undue reliance on any forward-looking statement. Also, any forward-looking statement that we make speaks only as of today and should not be relied upon as representing our views as of any future date. We disclaim any obligation to update any forward-looking statement except as required by applicable law.

I will now turn the call over to Dr. Don deBethizy, our President and Chief Executive Officer.

Thanks, Alan. Good afternoon, and thank you for joining us today. Dr. David Hosford, Targacept's Vice President of Clinical Development is also here with Alan and me today.

This afternoon, we issued a press release announcing our third quarter financial results, recent highlights and program updates. We will spend a few minutes reviewing the quarter and then welcome your questions.

Let me begin with an update on our depression program. The Renaissance Program for global Phase III clinical development of our nicotinic channel blocker, TC-5214, as an adjunct treatment for major depressive disorder, or MDD, in patients who do not respond adequately to common first-line antidepressant therapies is now well underway. We are pleased to have accomplished, with AstraZeneca, the initiation of five Phase III studies in the Renaissance Program on schedule. We continue to expect AstraZeneca to file a new drug application with the FDA in the second half of 2012.

We are working closely with AstraZeneca and its contract research organization, Quintiles to ensure that the Renaissance Program is executed with a rigorous emphasis on quality, namely that we have experienced sites, subjects that meet all applicable inclusion/exclusion criteria and consistent application of the rating scales used as outcome measures. Because execution of the adjunct program continues to be a very high priority, we and AstraZeneca have decided to delay the start of a Phase II study of 5214 as a second-line switch monotherapy for patients with MDD by one quarter. That study is now anticipated to initiate in the first quarter of 2011.

In addition to the 5214 program, we have three diverse Phase II product candidates for cognitive disorders, therapeutic areas marked by a substantial unmet medical need. We continue to believe in the promise of NNR therapeutics for treating cognitive impairment and are working to identify, for each of those product candidates, the particular indications for which it may be most beneficial.

TC-5619 is a highly selective alpha7 modulator currently being studied in two separate Phase II clinical proof-of-concept trials, one in cognitive dysfunction in schizophrenia and the other in adults with ADHD. These studies represent the first time we are evaluating this NNR mechanism in cognitively impaired patients and are expected to help guide future development plans. We expect results from both studies to be available in the first quarter of 2011.

We are also continuing to execute clinical and nonclinical studies designed to enable potential additional Phase II development in Alzheimer's disease. AstraZeneca has an option to license TC-5619 that it can exercise the first time the compound achieves Phase II clinical proof of concept, whether in CDS, ADHD or Alzheimer's disease or in other specified circumstances.

Earlier this quarter, we announced results from early clinical studies of the alpha4beta2 modulator, AZD1446. AstraZeneca has now concluded three of four studies expected to inform an advancement decision, with results from the fourth study expected in the first quarter of 2011. As no drug effect was seen on the Conners' Adult ADHD Rating Scale, in a crossover study in adults with ADHD, no further development of AZD1446 in ADHD is planned. We were, however, encouraged by positive signals seen in that study in non-nicotine users on some of the tasks of the CogState test battery used as secondary outcome measures designed to assess important cognitive functions such as learning and memory.

We were similarly encouraged by procognitive signals observed on various measures at a separate learning trial that used [co-polyamine] to induce amnesia in healthy volunteers. We believe that these outcomes support further development of AZD1446 as a treatment for Alzheimer's disease.

Moving now to the third shot on goal in cognition, AZD3480, a nonstimulant that has previously been evaluated in various different cognitive disorders and produced positive results in Phase II clinical trials in adults with ADHD, which we completed in 2009, and age-associated memory impairment, which we completed in 2006. We continue to have discussions with AstraZeneca regarding potential future development of AZD3480 for ADHD. Whether AstraZeneca will decide to advance this product candidate is uncertain, and we expect a decision by the end of the year. In parallel, we are exploring the possibility of conducting additional development of AZD3480 in Alzheimer's disease.

And now finally, I'd like to take a few moments to talk about our inflammatory disorders program. There is a strong scientific rationale supported by a body of established research for the alpha7 NNR as a therapeutic target for a wide variety of conditions where inflammation is a key component. TC-6987 is an alpha7 NNR modulator that our scientists discovered utilizing Pentad, our computational drug design platform. We recently completed two Phase I studies of 6987 where it was well tolerated at doses significantly higher than those we project may have beneficial clinical effects. We are planning multiple Phase II learning trials in order to identify an optimal indication for TC-6987 and are pleased to announce that we have selected asthma for the first study which we expect to initiate before the end of the year.

In summary, I am very pleased with the breadth of opportunity in our pipeline and the execution across our programs. We continue to recognize the potential of NNR therapeutics to build health and restore independence for patients, learn from the progress in each of our programs and strive to remain at the forefront of NNR research.

Before I turn the call over to Alan, I am pleased to mention that earlier this week, we received notice from the IRS that all six of our applications under the Qualifying Therapeutic Discovery Project Tax Credit Program were approved, resulting in aggregate grants of almost $1.5 million to Targacept. This program was targeted to small companies that could demonstrate the potential of their therapeutic projects to result in new treatments in areas of unmet medical need, taking into consideration the potential to advance US competitiveness and create and sustain high-quality, high-paying jobs.

The Department of Health and Human Services was charged with identifying qualifying projects. And we believe our success with the process reflects well on the promise of our NNR therapeutics. We hope the across-the-board benefits from this program will catalyze other programs similarly designed to support innovative growth companies, accelerate the research and development of important new therapies for patients in need and stimulate much needed job growth.

And with, that I'll turn the call over to Alan to review our financial results.

Thank you, Don. We are well capitalized as we enter the final quarter of 2010, with $268 million in cash, cash equivalents and investments at September 30th. And we are updating our financial guidance that we gave earlier this year. Based on current operating plans, we now expect to have at least $240 million in cash, cash equivalents and investments at December 31, 2010. We also now expect our operating expenses for the year ending December 31, 2010, to be in the range of $70 million to $75 million, which includes both cash and non-cash expense items.

Capital efficiency and prudent management of our expenses remain priorities for us as we continue to invest in our pipeline. We continue to expect that our current cash resources will allow us to meet our operating requirements through at least the end of 2013.

Turning to our operating results, we had net income of $2.5 million for the third quarter of 2010 and $13.1 million year to date. This compares to net income of $1.3 million and a net loss of $13 million for the corresponding 2009 period. The net income positions for the 2010 period were due primarily to recognition of $18.3 million and $54.3 million in deferred revenue from the $200 million upfront payment that we received from AstraZeneca at the beginning of this year. We are recognizing that upfront payment into revenue over the estimated development period to NDA for TC-5214.

Operating expenses were $19.4 million for the third quarter of 2010 and $47.7 million year to date. This compares to $11.5 million and $35.3 million for the corresponding 2009 period. The increase in operating expenses was due primarily to higher research and development expenses of $8.1 million for the third quarter and $12.2 million year to date. We expect our research and development expenses to increase for the fourth quarter of 2010 as compared to both the third quarter and to the corresponding 2009 period, principally due to our 20% cost sharing for the TC-5214 Phase III program and third-party research and development costs for our clinical product candidates TC-5619 and TC-6987.

And now let me turn the call back over to Don.

Thanks, Alan. I want to reiterate our focus on the execution of our clinical programs to capitalize on the potential of NNR therapeutics to improve the lives of patients. Before closing, let me say that we will be hosting a Research & Development Day in New York on December 2nd at the Intercontinental New York Barclay. We've assembled an outstanding group of leaders in the field from industry and academia for the event, and we hope to see you there. And thanks very much for attending the call, and we're open to any questions now.

(Operator Instructions) And the first question will come from Joel Sendek from Lazard Capital Markets. Please proceed.

Hi, guys. Thanks for the review. I guess my first question has to do with what you mentioned about the switch study for 5214. Can you tell us again what the reasoning is for that small delay? And do you need any of that data in the registration package?

No. But we just thought that it would be best for us. We have -- on the critical path to an NDA filing is the long-term safety trial. We wanted to make sure that that trial got the proper attention for enrollment. We have four other flexible-dose and fixed-dose trials that are going on in Renaissance, all starting -- we all started the initiation of these trials back in June.

So it was just a decision that that trial could be started in the first quarter of '11 and not miss the kinds of time lines that we have been intending for it. So it'll meet all of its goals in terms of having data available when we need it. And we just gave ourselves some room. So that high-level plan had been put together back at the end of -- second half of 2009 as we had been negotiating around the deal with AstraZeneca and then as we met with the FDA in early '10. So it just became obvious to us that it wasn't as critical to get it started in fourth quarter of 2010 and could be easily shifted to first quarter. So it's nothing that is going to cause any delays in anything.

Got it. Thanks a lot. And then quickly, on 5619, what's your confidence level, given that this is a proof-of-concept study, that the data we'll see in the first quarter will be good? Is this -- how should we be thinking about that?

Well, we're excited about 5619. It's a very selective alpha7 compound. It doesn't have any of the collateral receptor activities that some of the other alpha7 compounds have had. So the Phase I went very well on that compound. We had a very nice therapeutic index. And we had picked up an essential signal in the Phase I trial in healthy normals. So with that, and with the expansion of the development opportunity with AZ into ADHD as well, I think it really increases the probability of success by having multiple shots on goal with the same compound. So we're hopeful.

And with the knowledge that schizophrenics self-medicate with tobacco and nicotine, and there's some support for the fact that they seem to be improving their ability to function, I think there's a reasonable hypothesis for an alpha7 compound working in a challenging area, which is the cognitive dysfunction in schizophrenia. So we're hopeful. We're excited about having executed both these trials in parallel, on track and reporting data out in first quarter. So we'll just have to wait and see now.

Thanks a lot.

Thanks, Joel.

And the next question will come from Bret Holley with Oppenheimer. Please proceed.

Yes, hi. Thanks for taking the questions. Don, I'm just wondering, it seems like, at least in terms of 1446, like there was an interaction with nicotine, with alpha4 modulation. I'm wondering what you're expecting the impact might be on the 5619 CDS trial and with alpha7 modulation.

Yes. That's a good question. We know that nicotine has better affinity for alpha4beta2 than it does for alpha7. So we are expect- -- we have both smokers and nonsmokers in the CDS trial, in the cognitive dysfunction trial with their -- it's powered well enough that we could separate smokers and/or nonsmokers out, and we have plans to pull those data as well, depending on what the effects look like. So we'll -- we've learned, from previous work we've done, that it's important at this point to try to understand and learn that. And that's why it was included in the ADHD trial with 1446. And you're right, those data would suggest that we're getting effects in the nicotine naive people. So it's -- but we believe that an alpha7 compound could operate in the presence of nicotine.

Okay.

(Inaudible) would be the data.

Okay. And then I was curious on your comment on the consistent execution on the rating scales. I know that in the prior Phase II for 5214, you had actually instituted retraining, I think, on MADRAS and HAMD, and is that also part of the protocol for the Renaissance trials?

Yes. We've learned a great deal by working initially with mecamylamine and then subsequently with 5214. And I'm going to let David Hosford, Dr. David Hosford, give you a little bit of color, because he's been -- he's monitored these trials. He's been actively involved in the -- in getting the Renaissance trials off the ground and traveling to the sites. So the importance of the rating scales, let David talk about that.

Yes. Thanks, Don. What we did in the investigator meetings was to do very rigorous rater training of the MADRS, the HAMD and some of the other scales that are being used in the trial. And we mandated that investigators have a very high degree of inter-rater concordance before we would certify them as raters in the trial. And we're continuing to monitor their performance in a number of ways. We have a battery of independent psychiatrists who aren't connected with the study, who are hired through a vendor to independently interview patients within just a few days of their entry into the study to verify that they truly are the type of patient who meet all of the eligibility criteria.

We have an internal group who tracks ratings for consistency during the trial. And if any inconsistencies are identified either through the panel of independent psychiatrists or through this internal rating consistency check, we go back to the investigators, question them about reasons why and intervene in order to ensure that rating consistency and quality is maintained. So we're really doing a much more rigorous quality control of this study than even what was done in the Phase II study.

Great. That's very helpful. Thanks. Thank you very much.

Thanks, Bret.

And the next question will come from Juan Sanchez at Ladenburg. Please proceed.

Good evening.

Hi, Juan.

One question about the 5619 given with Astra. Assuming that you take the option to license, I think you get $40 million. But that $40 million, assuming they take both indications or regardless of which --

I'll let Alan speak to that one.

Yes. Hey, Juan. It's actually a $30 million milestone that we'll receive if they choose to license it. And that license can be triggered on a success in either of the trials. So it's really upon a POC outcome, positive POC outcome, it triggers there licensing decision. If they choose to license it, we'll get paid $30 million, and then we receive good downstream economics in the form of milestones and step double-digit royalties.

On the 5614 on regulatory requirements, we need two positive clinical trials, but we need one -- let's say the two flex are positive, and the fixed dose are negative. Do you have a strong filing, or you have to demonstrate some sort of dose response or the minimal efficacious dose in the fixed dose for this to be a fileable NDA?

It's a good question. My understanding is that we need two positive. I also believe -- I know that we have -- we've emphasized the importance of the fixed dose trials. So I don't quite know the answer to that question, whether two flexible dose trials would qualify. David, do you have any clarity around that?

Well, I know, in a variety of indications where there is unmet need, as there is in depression, regulatory authorities have been keen to see very encouraging results, and in some cases, have gone ahead and given the approval. We'll just have to wait and see how strong these results are. As you know, regulatory authorities, when you ask them those questions, "If we have this or that result, would you give us approval?" always say, "Well, we'll wait until we can see the data." So --

Right.

I think, as Don has said about some other indications, we remain very convinced that has a very high promise of showing us some good study results. But we'll just have to wait and see.

I think the long and the short of that is that it really probably depends on the results. But it'll be probably easier if you had two, one was flexed and one was fixed. But it's not without -- it's within the realm of possibilities that you could have two flex trials, have good results, and we still be able to move forward with approval. We'll have to see.

And one last question. It's a brief one on 6987. Why do you choose asthma, just because -- any rationale behind asthma being --

Well, we went -- we did a lot of preclinical work in a variety of models. We've watched the literature and other companies work around nicotinics and inflammatory disorders. And it was that sort of body of work that led us -- and epidemiology. There's epidemiology around tobacco use and presumably nicotine in some inflammatory disorders like ulcerative colitis and farmer's lung. So it was that, and then we looked at the commercial landscape. We looked at the competitive landscape. So there was a pretty thorough analysis as we moved into inflammatory disorders. And, David, you probably want to comment on why asthma emerged as the first one we're doing.

Sure. We talked to a variety of folks who are experts in inflammation. They looked at our preclinical data, and they felt that asthma should be a strong contender for our first choice of a trial to go into. We've designed the trial in a way that's similar to those used for other approved products for asthma. So we do a number of interventional challenges and measure standard end points such as your forced expiratory volume in one second, the FEV1, your peak expiratory flow and some other measures during the course of the trial. So we're not doing anything out of the ordinary, and we think asthma does represent a good first test of anti-inflammatory properties of the compound.

When do you have results on this trial?

We haven't -- we want to get them -- right now, we're just disclosing the fact we're going to get this trial started before the end of the year. And then we'll, as we get into that, then we'll start to lay out the disclosure on when we'll get the data out. But our goal is to drive this forward, get the -- these are learning trials. We're taking the same approach that we've taken throughout the portfolio throughout the last ten years. We've looked at the low-hanging fruit around where we know nicotine has activity in a variety of patient groups. So we had a lot of data in cognition around Alzheimer's disease, ADHD, around nicotine, usually the nicotine patch, some subcutaneous nicotine studies. There's epidemiology in Alzheimer's disease.

And then we also knew that nicotine and tobacco were important in stress alleviation, mood stabilizations. So -- and [mecanomian] had been observed as a mood stabilizer. And then on the inflammatory side, there's a very strong body of work around ulcerative colitis where it's often -- ulcerative colitis is often considered a disease of nonsmokers.

Bill Sandborn at the Mayo Clinic did a lot of work with the nicotine patch showing that he could treat ulcerative colitis in nonsmokers. Went to a nicotine enema, had reasonable results. And -- but nobody really knew the subtype. We did an early ulcerative colitis trial with an alpha4beta2 compound with an enema formulation and a delayed release oral formulation with negative. And the work published by Kevin Tracey from the Feinstein Institute in [nature] led us -- led the field to alpha7 as the important subtype involved in inflammation.

So we are -- we will be moving into multiple areas. Again, we've got to have enough shots on goal. We have a very good molecule that has a very good -- it's very well tolerated, very broad therapeutic index. Doesn't have any 5-HT3 activity, no [herd] channel interaction. So we're very excited. We're -- we recognize that asthma is a large indication. It's a very large unmet need now, still. And there's opportunity there. We would -- if we have positive results. And we will have a number of secondary end points too. Remember, success is -- for us in these learning trials, is -- comes in the sort of expression of the effect. And that's -- we're embarking in a new area. We're all quite excited about the possibility, and the preclinical data has really led us to quite a few indications. And we just need to sort through the other ones now.

All right. Thank you, guys.

Thanks, Juan.

(Operator Instructions) And the next question comes from Alan Carr with Needham & Company. Please proceed.

Hi. Good afternoon. Thanks for taking my question. I don't think you explicitly said a timing for 5214 results to come. Is that still coming fourth quarter of '11?

Yes. What we've been consistently saying is the end of '11, beginning of '12, these results will read out. We're -- we make sure -- we're making sure we have the contingencies in there for keeping all these trials on track and getting all this work done. But in order for us to be able to -- for AstraZeneca to be able to file the NDA in the second half of 2012, we need to deliver the results in that kind of a timeframe.

It's the two American trials that are farthest ahead. Is that right?

They're all -- we're all -- we are just focused on getting all five trials started. We've focused on the long-term safety trial because it has the longest exposure period in it. So we wanted to make sure that we got out in front of that one. And then the other trials have all started rolling, and we're making the kind of progress that we need to deliver in the timeframe of the end of '11.

Okay. And then around 1446, as you're -- your interpretation of those results in ADHD, I wonder if that's evolved since you made the announcement a couple of months ago. There was a lot of similarities apparently between 1446 and 3480. And I'm wondering if you had a chance to think about that one some more, about why you didn't see a signal for 1446 in ADHD.

There are different molecules. They're completely different chemical frameworks. Their pharmacology is somewhat different in how they interact with alpha4beta2 and how they modulate the neurotransmitter. So as we work in these new mechanisms and work to improve cognition, the really surprising finding is that we have cognitive signals in humans. That's been elusive for companies. But this mechanism has reliably produced cognitive improvement.

We were disappointed that 1446 wasn't able to reproduce the kind of robust effect that 3480 had on adult ADHD patients. And I think just for focus reasons, no pun intended, AZ decided to focus in on Alzheimer's disease. And we had always targeted this compound towards Alzheimer's disease anyway. We were using these trials to get dosing information. And I think -- and the power of the ADHD trial was just sufficiently large enough that people felt like it -- on the coarse symptoms of ADHD, that it gave them enough of a read on that that they felt like it would be better to focus our resources in Alzheimer's disease.

And now we want to finish -- AZ wants to see the result of the final study in Alzheimer's patients which is the Evoked Related Potential Study, which is a surrogate marker which comes out in first quarter. And then we'll make a decision collectively, because we have these outcomes on the CogState end points. So I think that's encouraging. If you can produce cognitive improvement in learning and memory, that's a key feature of a molecule. It's consistent with the preclinical data. And as with everything, you need to continue to learn.

And last question I have for you is around 5619. What sort of work still needs to be done before -- why does it take a little longer to get the Alzheimer's trial started versus the other two?

Well, we had always planned for 5619 to take it into cognitive dysfunction in schizophrenia. So all of the preclinical safety assessment and all of the early Phase I work that was done in patient populations under the -- with that intention. With Alzheimer's disease, you have to have longer toxicology because the exposure is going to be longer, and you have to have Phase I work in the elderly. So that's what's -- that's what we had to slow down to be able to do.

Okay. Makes sense. Well, thanks very much. Appreciate you taking my questions.

Thank you, Allen.

And the next question comes from Kim Lee with Global Hunter Securities. Please proceed.

Good afternoon. Quick question on AZD3480. Can you remind me, are you guys going to try and run the Alzheimer's disease -- or further develop an Alzheimer's disease on your own? And has AstraZeneca planned on not working with you on that? Or can you remind us of that situation?

Sure. We continue to work with AstraZeneca on 3480. We are in the midst of debating the therapeutic index and the applicability of 3480 for both ADHD and Alzheimer's disease. But if we do move forward in Alzheimer's disease, we are confident that AstraZeneca would help us offset the cost of those trials. But we would run -- we are advocating that we run with moving in Alzheimer's disease. And we just are sorting through with them how best to do that. And we'll keep you posted on that.

But we're hopeful based on the history of activity. 3480 has been in 1,350 subjects so far. It's shown consistent cognitive improvement. Even in the inconclusive Alzheimer's trial that AZ ran, there were still positive signals on the secondary end points. And in some post hoc analysis, we had -- we saw activity on even [A-Cog]. So we believe that's a molecule worth investing in. And we believe AZ does too. We just are sort of making sure that the therapeutic index is sufficient and that we want to do that. So we'll let you know as soon as we work through that with AstraZeneca.

Okay. And the -- now, should they decide not to advance AZ3480 in ADHD, would you guys consider advancing it on your own as well?

I think that will be determined by -- that's unlikely. But it'll be determined on how the discussions around the therapeutic index work out and our understanding of that. So right now, we've got more data and more history around working in Alzheimer's disease. So that's where we've been focused. With this outcome on 1446 around ADHD, it's added another dynamic to the discussion. The outcome -- the outcomes coming forward with 5619 will also play into whether we subsequently advocate going back into ADHD with 3480 or not. So that's an open question right now.

Okay. Thanks for the clarity. And just a quick question for Alan. How are you realizing the $1.5 million in grant money? Is it going to be in revenue, or is it going to be amortized? How does that work?

Yes. We expect it will be recognized as grant revenue, and there won't be a deferral period because it is for work that has already been performed.

Okay. So when should we see that hit?

We expect the majority of it to be fourth quarter.

Okay. Perfect. Thank you.

Thanks, Kim.

And that concludes today's question-and-answer session. I'll turn the call back over to Dr. Don deBethizy for closing remarks.

Thank you very much. Thanks, everybody. Really enjoyed the call today, and I look forward to our next call and updating you on some of the promising results that are coming forward. Thank you. Bye.

Thank you for joining today's conference call. That concludes the presentation. You may now disconnect and have a great day.